International rating agencies had already downgraded South Africa to junk status even before the global pandemic. The three main commodities being gold, platinum and crude oil, are good indicators as to the speed that the economy can recover. Let’s look at the current status of these commodities and how they will affect South Africa’s economic recovery.
At this time, while many people remain out of work in South Africa and money has become a precious resource, how will South Africa recover from the financial crisis that is a direct result of the Covid-19 pandemic?
The South African economy was already in dire straights prior to the global pandemic, with all three major rating agencies (Fitch, Standard and Poors and Moody’s) having downgraded South Africa below investment level (junk status).
Industry throughout the world has slowed to the extent that most crude oil being produced is being stored and not sold. This also means that workers, from drillers and riggers right through to petrol attendants could and have found themselves without work.
This has led to a worldwide glut in crude oil reserves and a slow-down in production. At this time crude oil is trading between US$20 and US$35 per barrel where most of the oil producers only begin to cover external break-even points at around US$55 per barrel, some even higher.
The world’s top oil-producing nations are the United States of America with approximately 18 million barrels per day followed by Saudi Arabia with 12.5 million b/d, Russia with 11.5 million b/d, Canada with just over 5 million b/d, China and Iran each producing almost 5 million b/d and the United Arab Emirates with 3.7 million b/d.
This problem of stored crude oil will mean that, even when the lockdown restrictions are lifted and industry picks up again, it may take some time for the industry to pick up and resume operations and the stocked oil will first need to be cracked down into useful products.
As far as gold is concerned, South Africa is only the eighth largest producer with China being the country that produces the most gold at almost 400 tonnes per annum. This is followed by Australia (312), Russia (280), USA at 250, Canada (193), Indonesia (190). Peru (155) and South Africa (123).
Again, the time to bring mining operations back on-line will take time, and some repair and remedial work will need to be carried out to ensure mine safety before full operation can commence.
As for platinum, South Africa is by far the biggest producer of the precious metal with an output of around 161,000kg per year (2015 estimate). Russia produces around 25,000kg/annum and Zimbabwe around 11,000kg/annum. As with the gold mines, it will take time to get the mines back in full operation, and this is also dependent upon the world’s requirement for platinum (and gold).
The conclusion is that many businesses throughout the world are feeling the pinch as the Covid-19 infection rate continues to prevent normal operation. However, it will take considerable time for the South African economy to pick up and, even when it does, we will be left in recession and this will restrict our ability to loan funding and restrict imports of much-needed commodities into the country.