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THE DIG ON MINING

                                                  The Global Economy
                                                  keeps turning…

                                                  Contributing writer, Mohammed Yaseen Nalla (CFA), Head of Strategic
                                                  Research and Global Markets at Nedbank Capital shares valuable economic
                                                  insights for the mining industry.

    The beginning of a new year always            from primary activities toward greater        and largely unable to fully capitalise on any
               arrives with some trepidation      beneficiation and value added industries      material uptick in global demand.
               accompanied by a need to take      in order to establish and exploit new trade   	 The wildcard in the mix remains the
               stock and assess the way forward.  linkages.                                     oil price. At the time of writing, Brent
    More so, in financial markets, geared toward  	 It is in this context that we assume        remains around $46/bbl, having fallen by
    shorter reporting periods and financial year  that the outlook for metals and for SA        around 60% from its June 2014 level of
    ends, this tends to dominate the horizon      mining more broadly will largely be           around $115/bbl. This is largely due to
    as the toughest year in business is always    dependent on what happens in China over       massive overcapacity in supply but is also
    the one ahead of us. This will resonate       the coming year. Slowing Chinese growth       a reflection on the outlook for lower global
    especially with those in the commodity        remains a concern although of greater         demand and growth. While declining oil
    markets as the precipitous decline in         consequence will be a change in the nature    prices will hurt producers, it can be seen
    resource prices over the last year has posed  of the Chinese economy, away from an          as a reprieve for energy importers. SA oil
    ever increasing challenges to an industry     investment and property led boom toward       imports are currently around 5% of GDP
    which, while in decline in South Africa       a more consumption based model. This          and SA consumers currently spend the
    (now less than 10% of GDP) is still a         would impact structurally on demand for       highest proportion of their income on petrol
    material contributor to our export earnings   base metals in the long term. Most metals     compared to our global peers. As such, the
    base.                                         ended marginally positive for the year with   decline will not only be welcome but will
    	 Despite recent developments that            the exception of Copper but recent (and       likely increase disposable incomes in the
    have seen the prominence of the resource      continued) downgrades of the World Bank’s     near term. However, the lower oil price will
    sector on the JSE wither down to around       global growth outlook have started to weigh   not singlehandedly presage a rebound in
    20% of market capitalisation from above       on prices in 2015.                            global growth.
    50% in 2003, South Africa’s moniker as        	 Furthermore, given that commodities         	 For now, given the early sharp decline in
    a ‘resource economy’ still sticks as mining   are priced in US dollars and traded           commodities in 2015, the outlook remains
    and associated industries remain material     internationally, SA remains a price taker     relatively benign if not marginally negative
    employers and a significant contributor       despite being a producer of scale in some     in the short term. There has not been an
    to the country’s export earnings. While a     of these markets. A stronger US dollar        adequate supply side response globally and
    boon during the commodity super cycle,        correlates with weaker commodity prices       even where operations have been curtailed,
    this has become the proverbial albatross in   and given the current upside surprises        these should take some time before working
    the context of sluggish Chinese demand        in the US economy, is likely to remain        through to the market. As such, some
    and as the US economy attempts to be the      structurally stronger, acting as a headwind   further downside in metals prices are likely
    sole locomotive pulling the global economy    to commodity prices. Lower investment         in the near term before stability is found,
    along. A global supply glut and bloated       flows into commodity based ETFs               perhaps later in the year. The scenario
    inventory levels in China mean that SA        (exchange traded funds) globally will also    would suggest that hunkering down and
    cannot solely rely on primary resource        constrain investment demand in the near       focussing on core operations and cost
    extraction but will need to diversify the     term. Superimpose on these global factors     containment may well dictate strategy in the
    building blocks of our economy away           the rising domestic cost pressures primarily  near term. And remember that should global
                                                  from labour, energy and environmental         growth eventually rear its head, it is always
                                                  regulation as well as considerable energy     darkest before the dawn, but only those that
                                                  supply constraints; and we see the SA         survive the night will see it.
                                                  mining sector likely to remain pressured

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