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Falling commodity prices and the South African economy

By Babatunde Omilola - posted Thursday, 19 February 2015

South Africa's economy was hard hit by the 2008-09 global recession. After growing at an average of 3.6% per year between 1994 and 2008, the economy contracted by 1.5% in 2009, representing its first recession since the end of apartheid. Since the recession, growth has been uneven, slipping from 3.5% in 2011 to 2.5% in 2012, 1.9% in 2013 and 1.4% in 2014, primarily because of persistent structural constraints, including high inequality, high unemployment and sluggish demand, especially in export-led sectors. Over the last three years, South Africa's key export commodities have underperformed as a result of falling prices, lower international commodity demand and internal socio-economic constraints namely; low wages leading to strike action, poor energy supply and high unemployment.

South Africa's major foreign exchange earning commodities are Gold and Platinum (PGM-Platinum group metals). While the exact figures of their contribution to the economy vary, it is uncontested that they have traditionally been the driving forces of South Africa's export sector and formed much of the nation's wealth at present.

Today, they continue to hold the leader position in terms of percentage of mining revenue per commodity and volume of commodity exports. Between 2012 and 2013, gold revenue fell by a total of R8 billion while real rand prices have remained consistently low since the wake of the global financial crisis.


Recent global economic challenges have prevented South Africa from dealing with a lot of external complexities. The implications of falling commodity prices for macroeconomic policy management are thus beyond the government's grasp of influence. In 2013, platinum demand of 8.4 million ounces managed to get back to the previous peak of 8.3 million ounces that was recorded in 2007. In the intervening period, platinum demand had fallen off precipitously especially in the wake of the global financial crisis. Between 2009 and 2011, more than 1 million ounces of reserves of platinum were accumulated as supply exceeded demand, with the concomitant impact of pushing prices down.

The slowdown in global economic growth, with a recession in Europe and a "soft-landing" in China had negatively impacted on PGM demand, the result being an excess supply of PGMs in the market, and a concomitant drop in PGM prices.

While global platinum demand is now back to pre-global financial crisis levels, the weak recovery in Europe and the surge in scrap supply have served to depress prices. Given that Europe accounted for 25.1% of global platinum consumption in 2012, and 43% of global platinum auto catalysts, platinum demand is highly dependent on the recovery of the economies in this region. Germany's recent slowdown in industrial productivity coupled with political instability over the Russia-Ukraine conflict has further lowered investor confidence and suppressed prices; all of which have maintained stagnant foreign demand.

Equally important, China is the world's largest consumer of platinum with a 27.9% share but the slowdown in the country's economic growth rate has impacted on demand growth for platinum across China. Over 78.7% of platinum demand in China is for platinum in the jewelry industry. China alone accounts for 67.5% of the world's demand for platinum in jewelry and remains one of South Africa's largest platinum importers.

While dwindling global demand continues to hurt South Africa's top commodity exports, socio-economic challenges (strike action due to low wages and high unemployment) coupled with poor energy supply remain central to the underperforming mineral sector in the country. In terms of macro-economic policy responses, the main responses of the government have focused on tightening by dealing with demand factors with different degrees of intervention.

The policy responses are exhibiting mixed levels of progress. Of significant importance, the government has identified the export sector as a key driver for accelerating and sustaining growth. South Africa's National Development Plan targets export volume growth of 6% per year.


Given that South Africa has its own unique geographic context and with drastic transformations occurring due to multiple factors, South Africa needs to strengthen its trade ties with partners in emerging markets. A number of studies have increasingly revealed positive trends between South African exports and developing country importers.

South Africa's encouraging performance within Sub-Saharan Africa in particular is a further testament to a unique opportunity in improving regional integration, boosting local supply-chain coordination and lowering trade barriers on the continent.

South Africaneedsto diversify into non-mineral production and service sectors. This can be done by increasing exports, particularly in manufacturing, which may be crucial for low-skilled job creation needed to substantially reduce high youth unemployment. South Africa's export goods are also mainly highly sophisticated, capital intensive goods that are produced by highly skilled workers. While this offers opportunities for upgrading and moving up the value chain ladder, trading in these products means that the dominant export companies are underutilizing South Africa's large pool of low-skilled labour, thus failing to create enough jobs to make the export sector a major contributor to employment growth and poverty reduction.

Further opportunities exist for the development of small and medium enterprises (SMEs) in the country. First is the youth dividend and second is the women dividend. The youth dividend stems from the sheer demographic weight of youth and the fact that the current generation of young people in South Africa is undoubtedly the most educated in the country's history. The women or gender dividend takes its root from the full participation, even leadership in some instances, of women in the struggle for political liberation and freedom in the country. To this day, South African women are fully engaged in the political and social domains. However, this is not the case in the SME sector, unlike other countries in Africa where this sector is largely dominated by women. The energies of South African women need to be properly channeled into small business development.

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About the Author

Dr. Babatunde Omilola is the Regional Practice Leader for Poverty Reduction and the achievement of the Millennium Development Goals (MDGs) with the United Nations Development Programme (UNDP) Regional Service Centre for Eastern and Southern Africa.

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Creative Commons LicenseThis work is licensed under a Creative Commons License.

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