Although the Russia-Ukraine war is partially to blame, the truth is that inflation over the past two years has been fed by excessive offshore monetary and fiscal stimuli and a phenomenal rise in central bank balance sheets and money supply.

The bonus of the commodity success story is that South Africa’s trade balance has soared, as national exports exceed imports owing to the robust prices of commodities like platinum.

This allowed South Africa’s current account to reach a record-high surplus of 5.2% of GDP in 2021. Strong commodity prices also provided some fiscal relief to the government via a bumper season of corporate income tax collections from South African miners and exporters.

South Africa’s total exports registered R1.8-trillion last year, up 40% from 2019.

Within the broader export basket, there was an 80% increase in key commodity exports — including rhodium, iron ore, gold, palladium, coal, platinum, manganese and diamonds in 2021.

However, while the demand side is booming, Thalia Petousis, portfolio manager at Allan Gray, points out that production and export volumes tell a different tale. Rolling blackouts, strikes and weak port and rail infrastructure have taken their toll on mining production, raising the barriers to getting contracted volumes offshore.

Investment analyst Jithen Pillay says mining companies haven’t invested in maintaining production profiles. “The capex spend has come down significantly in response to lower prices since 2015. The reality is that if you want to create new production in the next five years, you should have started building five years ago. Because of that lag, and historic reduced capex spending, we see real supply headwinds beyond five years.”

Pillay says commodity prices remain materially above what he would consider normal levels, citing the example of iron ore, which was more than $200 a ton “not that long ago”, and has now come back to less than $100 a ton.

“The market got ahead of itself in terms of demand, and prices failed to factor in the supply coming on in the next few years. If you map demand, even if you are bullish on the rise of electric vehicles and the transition to renewable energy, several base metals enter balanced or surplus markets. Beyond that, however, there are likely to be deficits,” he says.

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Pillay notes that electric vehicles use about four times the amount of copper of a combustion engine, while solar energy uses about three times the copper than conventional baseload.

“When you model copper demand from these technologies, you can see that demand could be twice what it is today in 30 years. Cobalt and nickel could be three times what they are today. Producers have responded to the demand tailwinds, but there may be problems beyond the next five years,” he says. 

Looking ahead, mining producers seem to be more willing to return capital to investors, which bodes well for shareholders over the next five years.

“If commodity prices hold for the next two or three years, miners will continue generating abnormally high cash flows. If these companies return excess cash to shareholders, you could receive a large portion of their current share prices back in dividends. For some miners, such as Glencore, this ratio could be as high as two-thirds, which is very attractive,” says Pillay. BM/DM