Mboweni shows signs of strain

From Gareth Stokes, MoneyWeek editor, SA

Dear Money Morning reader

Is Reserve Bank governor Tito Mboweni bowing to trade union pressure? While you may be tired of hearing this question, it’s worth asking after recent sabre-rattling by the unions regarding the bank’s interest rate policy. Often a stickler for zero intervention in setting currency crosses, the governor recently told Business Day the bank could “lean against the wind” in a bid to stabilise the country’s volatile currency. And if he bends on that “rule” he might throw other obsessions to the wolves too. Clearly the Reserve Bank’s policy isn’t set in stone.

But there are bigger issues for you to wrestle with this week – like which market view you should believe? The steel industry is upbeat. Major players in the country’s stainless steel sector reckon the worst is over. “We have seen the bottom of this slowdown,” said Southern Africa Stainless Steel Development Association chairperson Sampie van Rooyen recently. He says demand for stainless steel is underpinned by lower costs. Input costs – largely a product of nickel – are finally under control. Nickel surged to $53 000 per tonne in 2007 before tanking to $9 000 in 2008. The metal changes hands at around $12 650 today. But analysts warn you cannot predict the turnaround in the steel industry without predicting an end to the global economic contagion. They point to continued soft demand for finished steel products from the automotive industry. And they note that much of the buoyancy in hard commodity markets is thanks to non-demand related stockpiling by China. If this buying activity falls away, then prices could quickly reverse recent gains. We’ll leave you to choose a side in this debate.

You might recall a similar rollercoaster ride in oil prices. The commodity surged to $140 per barrel (for Brent crude) before plummeting to less than $40 in 2008 and clawing back to the mid-$60s today. Under these conditions, you’d expect airlines to have enjoyed some respite. The problem is, high commodity prices ravage the private sector in much the same way high interest rates hit an economy. You only discover the true impact of high prices six to nine months down the line. Besides, the brief respite was short-lived.

That’s why the International Air Transport Association (IATA) last week announced the global airline business will lose approximately $9bn this year. Apart from the cost overhang already mentioned, demand for flights is under pressure too. IATA’s chief executive Giovanni Bisignani told the media: “This is the most difficult situation the industry has faced!” The market for airplanes is another perfect opportunity to study supply and demand against the backdrop of the economic environment. The more than 4 000 airplanes marked for delivery between 2009 and 2010 were ordered during the boom times and will be delivered during recession! What surprises will South African Airways have in store for the country’s long-suffering taxpayers we wonder? And what will higher oil prices mean to the domestic economy in general?

Oil has recovered so strongly of late, the oil bulls are back on their podium. The short-term price correction cannot be sustained, says Eoin Gleason. But that doesn’t mean you won’t make money from oil in the longer-term.
 
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Turning to the markets...

The JSE all share index closed 0.62% on Friday. The gold mining index lost 1.24%. Resources shed 0.94%. Banks gained 0.86% and financials tumbled 0.04% respectively. Industrials plunged 0.44% and the platinum mining index rallied 2.45%.

London’s FTSE100 closed down 0.45%. The Dow Jones gained 0.32% and the Nasdaq lost 0.19%.

Tokyo’s Nikkei closed 0.89% down. Hong Kong’s Hang Seng plummeted 1.50%.

Brent crude is currently trading at $70.15 per barrel.

Spot gold’s trading at $936.59 and platinum was last quoted at $1,239.50.

And here’s how the rand is performing against the major currencies:
R/$ 8.06
R/£ 13.20
R/€ 11.24