One step forward, two steps back for South Africa
Economists say that despite a drop in mining production figures in June, South Africa will likely dodge a recession in the second quarter.
But this will likely be a very close call, with both the manufacturing and mining sectors showing declines despite the positive development of the country not experiencing any load shedding over the quarter.
According to Stats SA, mining production decreased by 3.5% year over year in June 2024—far below the Bloomberg consensus of a 0.1% year-over-year decline.
The largest negative contributors were:
- Gold (-12.6% and contributing -1.8 percentage points);
- PGMs (-5.8% and contributing -17 percentage points);
- Coal (-3.3% and contributing -0.8 of a percentage point); and
- ‘Other’ metallic minerals (-21.3% and contributing -0.6 of a percentage point).
Seasonally adjusted mining production dropped by 1.6% in June 2024 compared with May 2024, following month-on-month increases of 0.1% in May and 0.8% in April.
Notably, seasonally adjusted mining production decreased by 0.9% in Q2 2024 compared to Q1 2024.
Investec Chief Economist Annabel Bishop noted that global metals prices fell by 2.1% month-on-month in June. The GEP Global Supply Chain Volatility report highlighted excess capacity across global supply chains, weak global demand conditions, and continued warehouse destocking.
The GEP report also showed high stock levels at commodity and critical raw material vendors, increasing calls for the US Federal Reserve to cut interest rates to increase demand.
“While load shedding was suspended in Q2, the contraction in mining production aided this outcome, while delays at the ports and rail lines continued to be reported, weakening mining production of bulk commodities such as iron ore and coal,” said Bishop.
“In addition, manufacturing production in SA contracted by 5.2% y/y in Q2, adding to weakness in demand for metals and minerals products, as did lower demand for coal from surplus electricity capacity.”
“Stronger demand for commodities is anticipated once the US interest rate cutting cycle becomes entrenched. Its delay has added to the malaise in South Africa’s mining sector, with global metal prices down 5.0% since April.”
The US Federal Reserve is expected to cut interest rates in September, following poor job numbers in the world’s largest economy, sparking fears of a recession.
Thanda Sithole, FNB Senior Economist, said that the mining figures for Q2 cloud the bank’s expectations of a GDP rebound following a 0.1% contraction in Q1.
“However, given the relatively smaller contribution of the mining sector to GDP compared to the manufacturing sector, our outlook remains intact at this stage,” said Sithole.
“We will continue to monitor the remaining high-frequency data for June to obtain a clearer picture of how the economy performed in Q2.”
A recession is characterised by two consecutive quarters of negative growth, meaning that for the country to avoid such a situation, Q2 GDP must be positive.
Outlook
Despite the unexpected weakness at the end of Q2, mining production still rose marginally by 0.3% in the first half of 2024 compared to the same period in 2023.
“This aligns with our view of a moderate recovery in the sector’s economic activity. Easing energy constraints and a stable global growth environment should support activity over the medium term,” said Sithole.
“However, despite some improvements in freight rail, persistent inefficiencies in the ports and rail network continue to constrain productivity and profitability in the sector.”
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