Africa Trade Magazine

The potential return of Iranian oil exports to South Africa threatens to displace barrels from Saudi Arabia and Nigeria that plugged the supply gap when sanctions were imposed on OPEC’s fifth-biggest producer. 628w, 750w, 1200w" alt="South Africa’s Crude Oil Imports" style="box-sizing:border-box;-webkit-font-smoothing:antialiased;max-width:1200px;display:block;position:relative;margin:0px auto;z-index:1;width:740px">
South Africa’s Crude Oil Imports


Source: SAPIA

"The re-emergence of Iranian crude oil provide options for those willing to buy from Iran," Avhapfani Tshifularo, executive director of the South African Petroleum Industry Association, said in an e-mail response to questions. "Iranian imports are likely to displace the Nigerian and Saudi Arabian crudes, since they seem to have filled the gap since South Africa stopped importing Iranian crude oil."

SAPIA compiled the nation’s crude import data from its member refiners and the South African Revenue Service.

The commodity meltdown that pushed oil to a 12-year low and copper to the cheapest since 2009 isn’t over yet. At least, that’s how hedge funds see it.

Money managers increased their combined net-bearish position across 18 raw materials to the biggest ever, doubling the negative bets in just two weeks. A measure of returns on commodities last week slid to the lowest in at least 25 years. Metals, crops and energy futures all slumped amid supply gluts and an anemic outlook for the global economy. 628w, 750w, 1200w" style="box-sizing:border-box;-webkit-font-smoothing:antialiased;max-width:1200px;display:block;position:relative;margin:0px auto;z-index:1;width:740px">

Market turmoil in China, the biggest commodity buyer, is adding to worries over consumption. A stronger dollar is also eroding the appeal of raw materials as alternative investments. While Goldman Sachs Group Inc. predicts that the prolonged slump will start to spur more supply cuts, the bank doesn’t expect prices to rebound until later this year.


“There’s fear in the marketplace,” said Lara Magnusen, a La Jolla, California-based portfolio manager at Altegris Investments Inc., which oversees $2.5 billion. People are “very concerned about slower economic growth and what’s going on with China and the contagion effect,” she said.

With a strong U.S. dollar and the Federal Reserve considering more interest-rate increases, “there’s not a lot of places where you can put your money right now," she said. "Short commodities is a pretty good place.”

The net-short position across 18 U.S.-traded commodities expanded to 202,534 futures and options as of Jan. 12, according to U.S. Commodity Futures Trading Commission figures published three days later. That’s the largest since the government data begins in 2006 and compares with 164,203 contracts a week earlier.

Prolonged Slump

The Bloomberg Commodity Index fell 4.2 percent last week and touched the lowest level since its inception in 1991. Last year was the fifth straight year the index has fallen, a prolonged price slump that is a reversal of the previous decade, when growth in Asia fueled a surge in prices, dubbed the commodity super cycle.


Farmers, miners and oil drillers expanded supplies, encouraged by prices that were at record highs in 2008. Now, that output is coming to the market just as global growth is slowing. The World Bank this month lowered its growth forecast for the globaleconomy, warning that the slowdown in China will mean more weakness for raw materials.

Excess supplies are the main driver for the bear markets across commodities, Goldman analysts led by Jeffrey Currie said in a report on Jan. 15. Prices will likely have to fall further to spur the production cuts needed to end gluts, but markets will start to rebound later in the year, creating “the birth of a new bull market,” the analysts said. 628w, 750w, 1200w" style="box-sizing:border-box;-webkit-font-smoothing:antialiased;max-width:1200px;display:block;position:relative;margin:0px auto;z-index:1;width:740px">

With plunging prices taking a toll on commodity producers, more significant supply cuts may not be far off. BHP Billiton Ltd. said last week it expects to take a writedown of $4.9 billion on the value of its U.S. shale assets due to the tumble in oil prices. Shares of Freeport-McMoRan Inc., the biggest publicly traded copper producer, are approaching a record low, and analysts at firms including BB&T Capital Markets predict the company will probably need to step up its asset sales to bolster its balance sheet. Explorers have idled more than 150 drilling rigs in U.S. oilfields since August, according to Baker Hughes Inc.

Not Waiting

Investors aren’t waiting patiently for the supply cuts to come. Speculators are betting on declines for half of the 18 commodities tracked by the combined measure. The corn net-short position is at a record, and money managers are the most negative on coffee since November. The funds held a bearish outlook in copper for the 11th straight week, the longest streak since September.

Oil extended losses on Monday, with Brent crude dipping below $28 to the lowest price since November 2003. Industrial metals rebounded, and gold was little changed.

An economic report scheduled for Tuesday is forecast to show China’s economy slowed to the weakest pace since 1990. The country’s Lunar New Year break follows in February, when industrial activity typically slows. Tepid economies across emerging markets are keeping investors negative on the outlook for commodities, said Frank Holmes, the chief executive officer and chief investment officer at San Antonio, Texas-based U.S. Global Investors, which oversees $724 million.

“The fact is there’s no major fiscal stimulus to ignite global growth,” Holmes said. “Everyone is extremely bearish.”

South Africa’s worst drought on record, a plunging currency and debt-burdened consumers are weighing on the country’s biggest food producers, who may sacrifice profits in order to keep prices affordable and preserve market share.

The shares of food producers including Pioneer Food Group Ltd. and RCL Foods Ltd. have this month fallen to the lowest in more than a year as local prices of key staples such as white corn doubled over the same period while wheat rose 25 percent. As the worst drought since records started in 1904 decimates food crops, import costs are surging, with the rand losing 30 percent against the dollar since the start of last year, the worst performer among 16 major currencies tracked by Bloomberg after Brazil’s real.

“The prices of soft commodities have gone through the roof,” Ron Klipin, an analyst at Cratos Capital (Pty) Ltd. in Johannesburg, said by phone, referring to the grains. “It’s very difficult to pass on and claw back those prices, so the companies are going to have to absorb it.” 628w, 750w, 1200w" style="box-sizing:border-box;-webkit-font-smoothing:antialiased;max-width:1200px;display:block;position:relative;margin:0px auto;z-index:1;width:740px">

Apart from rising food prices, consumers’ spending power will be curbed by probable rate increases in a country where debt exceeds 78 percent of households’ disposable income, Lullu Krugel, an economist at KPMG LLP in Johannesburg, said by phone. Forward-rate agreements starting in six months, used to speculate on borrowing costs, show investors are pricing in 100 basis points of increases by the South African Reserve Bank in the first half of the year.

Tiger Brands Ltd., the largest producer of foods by market value, last week declined to the lowest level since June while on Monday, Pioneer Food, the second-biggest, dropped to the lowest since November 2014. RCL Foods, which makes chicken, fell to its weakest level since November 2012.

“We will probably see a significant pickup in food inflation,” Jiten Bechoo, an analyst at Avior Capital Markets (Pty) Ltd. in Cape Town, said by phone. “Even then, it may still mean margin pressure because it is going to be insufficient to cover costs.”

Food Inflation

Food inflation will probably exceed 10 percent by the middle of this year, Krugel said. It was 4.8 percent in November, Statistics South Africa data show. Food prices are expected to increase by as much as 25 percent in the year ending April 2017, Ronald Ramabulana, chief executive officer of the National Agricultural Marketing Council, told reporters.


Higher input costs doesn’t necessarily imply sacrificing margins, Phil Roux, CEO of Pioneer Food, said in an e-mailed response to questions. The company is the largest seller of maize meal, derived from white corn and used to cook a staple porridge known as pap.

While the price movements of grains have been extreme, the company has a wide product portfolio, “which in times like this goes some way to preserving profitability,” Roux said.

Tiger Brands, based in Johannesburg, is investing in its operations to reduce the cost of manufacturing food, which will help offset the effect of pricier ingredients, said Nikki Catrakilis-Wagner, the head of investor relations. This year “will be tough,” she said by e-mail. RCL Foods didn’t respond to e-mailed questions.

Smaller food producers such as Rhodes Food Group Pty Ltd., which produces canned goods and supplies prepared meals to retailer Woolworths Holdings Ltd., may perform better than their peers because they’re not as dependent on drought-hit grains such as corn or wheat as their larger peers, Klipin said.

“You can’t put these price increases through, not relative to how exorbitant the increases have been,” Bechoo said. “Everybody will try and protect their margins but it is going to be difficult.”




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