Business confidence tanks as oil goes to $124 per barrel

Business confidence tanks as oil goes to $124 per barrel

If you ever want a clear picture of what’s occupying a nation’s collective thoughts you need look no further than the headlines displayed on the daily newspapers and prominent Internet news sites. “Oil prices burning up” shouts an article on iafrica.com. “US markets take a beating,” proclaims Fin24.co.za. What we’re seeing at the moment is massive concern over spiralling food prices and disbelief over oil’s march beyond $120 per barrel.

And despite finance minister Trevor Manuel’s plea to “Stop food price panic!” there’s a general sense of disbelief at the co-existence of high inflation and steady economic growth. Local consumers believe that everything should be great when an economy is growing. But that’s not the case.

Inflation and growth often go hand in hand

One reason is that inflation and growth often go hand in hand. As an economy grows so does employment and wages. The result is more people with more money to spend. And as these individuals set about improving their living standards their demand for goods pushes prices higher. In a way the higher domestic price inflation is simply a product of South Africa’s consistent economic growth over a number of years.

Another reason is that spiralling food and fuel prices are global rather than national phenomena. It wouldn’t matter if South Africa was growing at 5%, 10% or -2% per annum because price levels are set on the global stage. South Africa’s fuel price has long been a product of the oil price and foreign exchange crosses. So nothing that the country does internally will bring fuel prices down. Even doing away with government fuel taxes will only bring temporary relief. As far as agriculture is concerned most of the country’s major crop producers are striving for a form of ‘import parity’ pricing. In other words they want to earn the rand equivalent of the best US dollar price their crops could fetch on the export market. In the absence of fair prices local growers could export their entire production leaving South Africa with massive food shortages.

Global food supplies have come under increasing pressure in recent times. A number of reasons are being bandied about including the impact of climate change, the move to bio-fuels, bizarre trading activity on futures markets, the impact of global trade tariffs and a general decline in investment in agriculture. Whatever the reason, the prices of staple crops like wheat, maize, rice and now potatoes look set to rocket. To confirm, Fin24 recently ran a story titled “Potato price crisis looms!”

Business confidence falls slightly in April

With so many crises looming the latest business confidence numbers come as no surprise. The South African Chamber of Commerce and Industry’s Business Confidence Index (BCI) shows a slight decline from 93.9 in March to 93.4 in April. This is 8.7% lower than the BCI in April 2007. “The BCI appears to have become somewhat sticky around the level of 94. With no clear direction from the global economy, uncertainty surrounding the Zimbabwe outcome as well as lost domestic economic momentum, the BCI tends to reflect strains in the economy and uncertainty on direction,” said the Chamber.

The first quarter of 2008 has presented numerous challenges for local businesses. But it’s not Eskom that’s doing the most damage. A series of nine interest rate hikes over the last 22 months has created an environment in which interest rate sensitive shares and businesses are struggling to cope. Worst hit include furniture retailers (JD Group), clothing retailers (Foschini), general retailers (Woolworths), motor retailers and companies in the banking and financial sectors.

There is not a single South African bank that’s going to emerge from the current high inflation environment totally unscathed. Provisions for bad debts have increased steadily in recent times. And although ABSA, Standard, FNB, Nedbank and Investec all look cheap at today’s prices only the bravest investors will be piling in before the interest rate cycle turns.

$200 Oil is a potential disaster

What really concerns FAnews Online is the oft repeated line that oil could reach $200 per barrel in the next six to 24 months. It sounds like a doomsday scenario; but just two years ago analysts who suggested $100 per barrel oil were accused of scare mongering. With the world’s oil resources tightly held by 13 OPEC members we are in for some difficult times. Petrol is already close to R10 per litre and any consolidation in the oil price at over $120 per barrel will simply add more upward price pressure. Who knows what June, July and August will bring? We just know we’d hate to see where petrol prices go if oil gets to the threatened $200 mark!

Editor’s thoughts: On 6 May 2008 the petrol price went up another 55cpl. A litre of 93Octane petrol at Gauteng’s pumps now costs 35% more than just 12 months ago. Will the South African consumer survive if oil goes to $200 per barrel? Send your comments to [email protected] or add them below.

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