Anchor’s Coffee Table Economics note by Casey Sprake will be distributed intermittently. It is a collection of Casey’s opinions on key economic factors and events shaping markets globally and in South Africa (SA). It is essentially Casey’s thoughts and perspectives on the multiple dynamics at play in the global and local economies.
Executive summary
In this week’s edition, we highlight the following:
- Unearthing vital wealth: Exploring the crucial role of critical minerals. Dependence on a limited number of countries for the supply of critical minerals can pose risks to global supply chains, especially if geopolitical tensions or trade disputes disrupt the flow of these resources. The importance of critical minerals to the global economy stems from their indispensable role in powering technological advancements, ensuring national security, enhancing supply chain resilience, facilitating the transition to clean energy, and fostering economic prosperity. Efforts to secure sustainable and reliable access to these minerals are crucial for supporting future growth and development.
- The US’ Russian-backed nuclear puzzle: Unbeknown to some, the US remains incredibly reliant on Russia- at least in terms of helping keep the lights on. Currently, Russia is the largest foreign supplier of nuclear power fuel to the US. The US dependency on Russian uranium presents significant challenges regarding security, geopolitics, strategic autonomy, and economic stability. Addressing this dependency through diversifying supply sources or revitalising the domestic uranium industry is becoming increasingly necessary to mitigate these risks.
- SARB holds firm with a steady hand: With risks to the inflation outlook skewing increasingly to the upside, it was not surprising that the South African Reserve Bank (SARB) cautiously kept the repo rate on hold at 8.25% at its second Monetary Policy Committee (MPC) meeting for this year, with the prime rate remaining at 11.75%. Given that the market all but priced in the decision to hold, the key to the MPC’s March statement was the overall tone, which was closely watched by market participants across the board to better understand the conditions under which the SARB may consider easing monetary policy.
- Food prices remain a point of anxiety for local consumers: Despite recent declines in food prices (both locally and abroad), unfortunately for local consumers, we view food prices as a critical upside risk given the various ongoing supply shocks. This is particularly so ahead of the forecast El Niño weather pattern and amid relatively large swings in crucial commodity prices (including oil) and the rand exchange rate.
Unearthing vital wealth: Exploring the crucial role of critical minerals
Critical minerals are natural resources essential for various industrial processes, technologies, and manufacturing of key products. These minerals are deemed crucial due to their essential role in modern economies and limited availability or potential supply chain risks. Some examples of critical minerals include rare earth elements (REE), lithium, cobalt, and platinum group metals (PGMs). Governments formulate lists of critical minerals according to their industrial requirements and strategic evaluations of supply risks. Over the past decade, minerals such as nickel, copper, and lithium have been on these lists and deemed essential for clean technologies like electric vehicle (EV) batteries and solar and wind power. Interestingly, there is no universally accepted definition of critical minerals. Across the globe, countries and regions regularly update lists reflecting evolving technology needs and supply-demand dynamics, among other considerations. For example, the EU’s inaugural critical minerals list in 2011 included just 14 raw materials, whereas the 2023 iteration identified 34 as critical. Despite variations, a common worry persists that the potential for mineral shortages will impede energy transition. With many nations dedicated to cutting greenhouse gas emissions, demand for minerals in clean energy technologies is forecasted to double by 2040.
Unsurprisingly, the US and the EU are actively seeking to reduce their reliance on critical minerals for imports. Currently, ten materials feature on critical material lists in the US, the EU, and China, including cobalt, lithium, graphite, and REEs. While sharing many materials with the US and China, the European list stands out by including phosphate rock, a resource crucial for fertiliser production but limited in the region and primarily sourced from Finland. Additionally, coking coal, essential for pig iron and steel manufacturing, is uniquely featured on the EU list. Currently, China dominates coking coal production (58%), with Australia, Russia, and the US also contributing. The US aims to reduce import dependence yet remains entirely reliant on imports of manganese and graphite and 76% dependent on cobalt. US raw material production is severely limited, with only one operating nickel mine (Eagle Mine in Michigan) and one lithium source (Silver Peak mine in Nevada) despite decades of foreign sourcing.
Despite being the world’s largest carbon emitter, China is dominant in producing critical minerals vital for the green revolution. The nation accounts for 60% of global REE production, crucial for high-tech devices such as smartphones and computers, and it holds a 13% share of the global lithium market. Moreover, China refines c. 35% of the world’s nickel, 58% of lithium, and 70% of cobalt. Notably, gold, although used on a smaller scale in technology, features on China’s list, driven by economic and geopolitical motives to diversify foreign exchange reserves, primarily denominated in US dollars. Analysts estimate China has acquired a record 400 tonnes of gold in recent years. Additionally, uranium is slated as a critical mineral, aligning with China’s ambition for self-sufficiency in nuclear power generation and fuel production. According to the World Nuclear Association, the Chinese government aims to produce one-third of its uranium domestically.
Dependence on a limited number of countries for the supply of critical minerals can pose risks to global supply chains, especially if geopolitical tensions or trade disputes disrupt the flow of these resources. Diversifying sources and securing access to critical minerals help mitigate supply chain vulnerabilities. Critical minerals are essential components in the production of advanced technologies such as smartphones, EVs, renewable energy systems, and high-performance batteries. Without these minerals, the development and advancement of such technologies would be severely hindered. Any critical minerals are vital for manufacturing military equipment, including missiles, aircraft, and communication systems. Ensuring a stable and secure supply of these minerals is crucial for national defence and security strategies. Furthermore, critical minerals are pivotal in transitioning to clean energy technologies such as solar panels, wind turbines, and EV batteries. Meeting global climate goals and reducing carbon emissions heavily relies on the availability of these minerals.
The bottom line
Overall, the importance of critical minerals to the global economy stems from their indispensable role in powering technological advancements, ensuring national security, enhancing supply chain resilience, facilitating the transition to clean energy, and fostering economic prosperity. Efforts to secure sustainable and reliable access to these minerals are crucial for supporting future growth and development.
The US’ Russian-backed nuclear puzzle
Unbeknown to some, the US remains incredibly reliant on Russia – at least in terms of helping keep the lights on. Currently, Russia is the largest foreign supplier of nuclear power fuel to the US. In 2022, Russia supplied almost one-quarter of the enriched uranium to fuel the US fleet of more than 90 commercial reactors. Amid increasingly fragmented geopolitical relations, concerns across the US are mounting. As a result, the US House of Representatives recently passed a ban on imports of Russian uranium. The bill must still, however, pass the Senate before becoming law. After Russia invaded Ukraine, the US imposed sanctions on Russian-produced oil and gas, but Russian enriched uranium is still being imported. Most of the remaining uranium is imported from European countries, while another portion is produced by a British-Dutch-German consortium operating in the US called Urenco. Similarly, nearly a dozen countries around the world depend on Russia for more than half of their enriched uranium, and many of them are NATO-allied members and allies of Ukraine. In 2023 alone, the US nuclear industry paid over US$800mn to Russia’s state-owned nuclear energy corporation, Rosatom, and its fuel subsidiaries. Moreover, it is important to note that nuclear plants power 19% of electricity in the US.
US uranium production has declined significantly over the past few decades due to various factors, including lower uranium prices, competition from foreign producers, and regulatory challenges. As a result, the US has increasingly relied on imports to meet its uranium needs. The dependency on Russian fuels, in particular, dates back to the 1990s when the US turned away from its own enrichment capabilities in favour of using down-blended stocks of Soviet-era, weapons-grade uranium. As such, US dependency on Russian uranium has become a severe headache for the US government. Relying heavily on a single foreign supplier, especially one with whom diplomatic relations may be uncertain or strained, like Russia, raises concerns about the security and stability of uranium supply. Any disruption in the supply chain could have significant implications for the functioning of nuclear power plants in the US, which, as mentioned, provide a substantial portion of the country’s electricity. Furthermore, over-reliance on imported uranium undermines the US’ strategic autonomy regarding energy supply. Having a diverse and robust domestic supply chain for critical resources like uranium is essential for national security and economic resilience.
The bottom line
As part of the new uranium ban bill, the Biden administration plans to allocate US$2.2bn to expand uranium enrichment facilities in the US. Overall, US dependency on Russian uranium presents significant challenges regarding security, geopolitics, strategic autonomy, and economic stability. Addressing this dependency through diversifying supply sources or revitalising the domestic uranium industry is becoming increasingly necessary to mitigate these risks.
March MPC recap: SARB holds firm with a steady hand
With risks to the inflation outlook skewing increasingly to the upside, it was not surprising that the SARB cautiously kept the repo rate on hold at 8.25% at its second MPC meeting for this year, with the prime rate remaining at 11.75%. The drift higher in headline inflation, as measured by the Consumer Price Index (CPI), from 5.1% in December to 5.3% in January and 5.6% in February, continues to cause concern for the MPC as upside inflation risks linger. Given that the market all but priced in the decision to hold, the key to the March statement was the overall tone, which was closely watched by market participants across the board to better understand the conditions under which the SARB may consider easing monetary policy.
Developments since the previous MPC meeting in January have been somewhat mixed. Whilst headline inflation increased to a four-month high in February, survey-based inflation expectations for the next three years improved in the 1Q24 Bureau for Economic Research (BER) survey. However, the MPC continues to be concerned that these remain well above the mid-point of the target range. Food prices are a particular point of anxiety. While they are continuing to moderate since the highs of last year, risks to the upside are increasing given the various ongoing supply shocks, particularly ahead of the forecast El Niño weather pattern (as already witnessed with large dry spells across the country) and amid relatively large swings in crucial commodity prices (including oil) and the rand exchange rate. White maize futures have risen 9.8% since the start of March, with increasing signs that the dry weather conditions may cause more damage to the summer crop than initially expected. Brent crude oil prices have also edged higher since the January MPC meeting.
Whilst SA had a more gradual acceleration in inflation than many peer countries (with a lower peak) since COVID-19, the return to the 4.5% midpoint of the SARB’s target band has been slow and remains at a distance. On a more positive note, the SARB’s latest GDP forecasts indicate a modest acceleration in growth from this year as various supply-side constraints (particularly loadshedding) relax. The SARB estimates that while electricity shortages took 1.5 ppts off GDP last year, it will moderate to 0.6 ppts this year and 0.2 ppts in 2025. Overall, the central bank forecasts growth at 1.2% this year, improving to 1.6% by 2026. These projections are better than the 2023 outcome but below longer-run averages of around 2%.
The bottom line
Overall, at the current level of rates, the policy stance is considered restrictive, consistent with the inflation outlook and the need to address elevated inflation expectations. Subsequently, we maintain that the SARB’s MPC will not rush to cut the repo rate. Any possible interest rate cuts will likely only materialise towards the end of 2024 and depend on the inflation outlook (locally and abroad) and global interest rate developments as we progress further into this year. Current market sentiment suggests only one interest rate cut of 25 bps this year in SA, possibly two, with the second cut almost fully priced out per our expectations. Over the longer term, we expect the SARB to gradually cut rates from 8.25% to 7.5% through three 0.25% cuts, reflecting the theme of higher interest rates globally.
Food prices remain a point of anxiety for local consumers
In January, the UN Food and Agricultural Organization (FAO) Global Food Price Index (FFPI), which measures the monthly change in the international prices of a basket of food commodities, fell for a seventh month in a row – declining by 0.7% from its revised January level. This is as decreases in the price indices for cereals and vegetable oils slightly more than offset increases in sugar, meat, and dairy products. The index was also down 10.5% YoY. The February 2024 reading marks the lowest level since February 2021. According to the FAO, maize export prices dropped the most amid expectations of large harvests in South America and competitive prices offered by Ukraine. In contrast, international wheat prices declined primarily due to a strong export pace from the Russian Federation. International rice prices also fell by 1.6% MoM in February. Conversely, the FAO Sugar Price Index rose by 3.2% MoM in February, while the FAO Meat Price Index advanced 1.8% MoM, with poultry meat quotations rising the most, followed by those for bovine meat, impacted by heavy rains disrupting cattle transportation in Australia.
Unfortunately, for SA consumers, February headline inflation climbed to a four-month high – printing at 5.6% YoY from 5.3% YoY in January. Product categories that drove much of the upward momentum include housing & utilities, miscellaneous goods & services (most notably, insurance), food and non-alcoholic beverages (NAB) and transport. More positively, however, food & NAB inflation slowed to 6.1% in February, with most food price categories recording lower annual rates. Notably, meat and egg prices are recovering from the impact of avian influenza (AI, bird flu), while the fruit and vegetable segment is rebounding from past challenges with harvests and quality, exacerbated by irrigation difficulties linked to power outages. Nonetheless, food prices continue to cause anxiety for the SARB. While prices are continuing to moderate since the highs of last year, risks to the upside are increasing given the various ongoing supply shocks, particularly ahead of the forecast El Niño weather pattern (as already witnessed with large dry spells across the country) and amid relatively large swings in crucial commodity prices (including oil) and the rand exchange rate. White maize futures have risen 9.8% since the start of March, with increasing signs that the dry weather conditions may cause more damage to the summer crop than initially expected. Brent crude oil prices have also edged higher since the January MPC meeting. Whilst SA had a more gradual acceleration in inflation than many peer countries (with a lower peak) since COVID-19, the return to the 4.5% midpoint of the SARB’s target band has been slow and remains at a distance.
The bottom line
Unfortunately for local consumers, we continue to view food prices as a critical upside risk given the various ongoing supply shocks, particularly ahead of the forecast El Niño weather pattern and amid relatively large swings in crucial commodity prices (including oil) and the rand exchange rate. Overall, risks to the SA food inflation outlook, in particular, have deteriorated as geopolitical tensions have worsened, and the deteriorating performance at our key ports adds uncertainty to the future inflation path.
