Eskom can’t pull the plug on resource boom – STANLIB

It will take more than Eskom to pull the plug on the resource boom and the mining sector’s resilient JSE performance, says STANLIB, the country’s top asset management company.

Despite well publicised fears of falling production during South Africa’s power crisis, resource counters continue to put in a sterling performance, with the prospect in some cases that lower output might actually harden prices.

Ryan Hill, head of STANLIB’s resource franchise, points out: “The power situation might limit production and could aggravate pressure on mining costs, but these very same factors support high metal prices.

“In categories where South Africa is the dominant supplier – for example, platinum group metals and ferro-chrome – any cuts in production because of power constraints will have an immediate and significant effect on world supply.

“As underlying demand remains strong, the net effect may be to push world prices higher. So, what the mines lose in output they could make up in the form of higher prices.”

Eskom’s desperate need for higher coal stocks has already helped rather than hindered the performance of standalone coal producers. One company’s share price has risen by 20%.

However, the key factors driving investor sentiment remain the stubborn gap between high international demand for commodities and lagging supply.

According to Hill, delays in bringing new mines into production, infrastructure and labour issues, rising mining costs and delays in sourcing equipment make it difficult for producers to keep pace.

Hill explains: “Global growth estimates may have been falling and fears may be mounting of a US recession, but Chinese demand in particular remains robust. For instance, the US these days accounts for 12% of world copper demand. Chinese demand is nearly twice that.”

Another factor supporting local market sentiment is renewed rand weakness. As most commodity prices are denominated in US dollars, the local resource sector becomes a rand hedge as soon the unit looks vulnerable.

Analysts have unearthed one potential challenge for the mining sector, however – speculative position-taking.

Speculative money has definitely flowed into the commodity space in the last few years and this has contributed to increased volatility.

“If the speculative element grows, it might ultimately create a disconnect between prices and the supply-and-demand realities that have traditionally governed the market.

At the moment it’s not a major concern for local investors … nor is Eskom.”