09 Dec Economic overview: November 2014
Our Macro theme discussion this month focuses on major commodities, some of their drivers and the impact on the domestic market.
The slower growth of the Chinese economy and an aggressive iron ore supply expansion over the past year has pushed iron ore (62% ferrous content) down from $134 per metric ton on 31 December 2013 to the current $71 per metric ton (close to 47% down). The impact on the expected earnings of Kumba is big, consensus expected R34 headline earnings per share (HEPS) for the 2015 financial year on 31 December 2013 and the current expectation is R23. The share price of Kumba dropped from R443 to R246. By applying a PE of 11 to the expected HEPS implied a fair value of R374 during December 2013 (very expensive) and R253 currently (just below fair value). This illustrates how much of an impact a sudden swing in commodity prices has on the underlying shares. As iron ore is a sizable export component of South Africa, the drop in price also affects the Rand via the effect on the trade account.
A second commodity shock evolved from July 2014 as oil prices peaked on a year to date basis. Initially driven by softer demand as Europe and Asian growth expectations softened, and then in November the speculation on whether or not the Organization of the Petroleum Exporting Countries (OPEC) would implement production cuts to support oil prices escalated. The market was surprised by OPEC deciding to defend its turf by effectively starting a price war, hoping to squeeze out some of the higher cost oil producers. The global impact should be net positive as the cost of energy plummets. The domestic effect should be welcomed. The consumer will experience some relief due to the aggressive price cuts in fuel. Sasol will have a high level impact due to the drop in the oil price, HEPS is expected to drop to around R45 for 2015 financial year (consensus forecast in June 2014 was around R60). The market is expecting a structurally lower oil price over the medium term that will impact the likes of Nigeria. This will have some impact on the earnings of MTN, driven by a weaker Naira. The stock retraced from a high of R260 to around R220, HEPS has been revised down from R17 to around R16.6.
Real GDP expectations (using IMF forecasts) are set out below:
Have a great festive season!