Coffee Table Economics (CTE) with Anchor by Casey Sprake is distributed intermittently. It is a collection of Casey’s thoughts and perspectives on key economic factors, socio-political events, and the multiple dynamics shaping markets globally and in South Africa (SA).
Executive summary
In this week’s edition, we highlight the following:
- Powering the future – the crucial role of lithium in the global economy: Lithium, the lightest metal on the periodic table, has become an indispensable element in the global economy, primarily due to its critical role in energy storage and various industrial applications. As the world continues to transition towards greener energy solutions and more sophisticated technological innovations, lithium’s significance is set to grow, cementing its status as a vital resource for economic development and sustainability.
- The lender of last resort – the IMF’s top-10 biggest debtors: As we progress into 2024, the International Monetary Fund (IMF) continues to stand as a cornerstone of global economic stability and growth. Founded on principles of cooperation and assistance, the IMF has been instrumental in fostering economic resilience and prosperity worldwide since its establishment in 1944. The recent expansion of its loan portfolio, marked by a significant increase in outstanding debt, underscores the IMF’s proactive role in supporting struggling economies amidst complex global challenges.
- Steady as she goes – SA inflation unchanged in May at 5.2% YoY: Overall inflationary pressure was modest, given that May is a relatively low survey month. Looking ahead, we expect inflation to remain subdued, albeit at levels higher than initially envisioned at the start of this year. Core inflation (particularly that of goods) will likely be muted as consumer demand continues to be constrained by the pressures of elevated interest rates.
Powering the future – the crucial role of lithium in the global economy
Lithium, the lightest metal on the periodic table, has become an indispensable element in the global economy, primarily due to its critical role in energy storage and various industrial applications. This soft, silvery-white alkali metal is central to many modern technological advancements and sustainability efforts. At the forefront of lithium’s importance is its use in lithium-ion batteries. These batteries, known for their high energy density, long life cycles, and superior performance, are ubiquitous in portable electronics like smartphones, laptops, and tablets. As our dependence on these devices has grown, so has the demand for lithium. Moreover, lithium-ion batteries are pivotal in the burgeoning electric vehicle (EV) market. The efficiency and reliability of lithium-ion batteries are crucial for the adoption and success of EVs, which in turn have become an essential component in the global drive to reduce our reliance on fossil fuels and mitigate environmental impact.
Beyond consumer electronics and EVs, lithium-ion batteries are fundamental to renewable energy integration. Renewable energy sources like solar and wind are intermittent by nature; they do not produce energy consistently throughout the day or in all weather conditions. Lithium-ion batteries enable the storage of energy generated during peak production times, which can be used when production is low. This energy storage capability is vital for stabilising the grid and ensuring a consistent and reliable electricity supply from renewable sources. Thus, lithium-ion batteries are critical to the global transition towards a more sustainable and resilient energy infrastructure. In addition to its critical role in energy storage, lithium is used in various industrial applications. It enhances the strength and thermal resistance of glass and ceramics, making them more durable and versatile. Lithium compounds are also used to produce high-temperature lubricating greases, essential in numerous industrial processes. Furthermore, in the pharmaceutical industry, lithium salts like lithium carbonate are used as mood stabilisers in the treatment of bipolar disorder and other mental health conditions, highlighting the metal’s diverse applications.
Consequently, the strategic importance of lithium extends far into the geopolitical and economic developmental discourse. Countries with significant lithium reserves, such as Australia, Chile, China, and Argentina, are gaining increased geopolitical importance. The ability to mine and process lithium efficiently can bolster a nation’s economic standing and influence in the global market. As the demand for lithium continues to rise, these countries are positioned to play crucial roles in the worldwide supply chain, impacting everything from mining practices to battery manufacturing. Moreover, the global supply chain for lithium is complex, involving extraction, processing, and battery production. Any disruptions in this chain can affect the availability and cost of lithium, thereby influencing various industries dependent on this metal. As a result, there is a growing emphasis on securing and diversifying lithium supply chains to ensure stability and resilience against potential shortages or geopolitical tensions.
If one considers the top global lithium producers in more detail, according to the latest statistics from the US Geological Survey (USGS), three countries—Australia, Chile, and China—accounted for 88% of global lithium production in 2023. Australia, the world’s leading lithium producer, extracts the metal directly from hard-rock mines, specifically from the mineral spodumene. Over the past decade, the country has seen a significant increase in output. In 2013, Australia produced 13,000 metric tonnes of lithium, which soared to 86,000 by 2023. In contrast, Chile, the second-largest producer, experienced more modest growth. Chilean production increased from 13,500 metric tonnes in 2013 to 44,000 in 2023. Unlike Australia, Chile extracts lithium from brine, a method also used by China. Chinese production has rapidly caught up with Chile, rising from 4,000 metric tonnes in 2013 to 33,000 in 2023. Additionally, Chinese companies have expanded their global influence, with three of them among the top lithium mining companies worldwide. The largest, Tianqi Lithium, holds a significant stake in Australia’s Greenbushes, the world’s biggest hard-rock lithium mine. Argentina, the fourth-largest producer, has more than tripled its output over the past decade and has attracted international investments to boost production further. With all the top producers ramping up output to meet the demand from the clean energy industry, particularly for EV batteries, the lithium market has experienced a recent surplus. Ironically, this surplus, has led to a price collapse of over 80% from lithium’s record-high price level in December 2022 to May 2024, highlighting the volatility and sensitivity of the lithium market to supply-demand dynamics.
The bottom line
Lithium is a cornerstone of the modern global economy regardless of current price trends, driving technological advancements, renewable energy, and sustainable transportation. Its role in lithium-ion batteries alone underscores its critical importance, as these batteries power a vast array of devices and systems that are integral to daily life and future technological progress. As the world continues to transition towards greener energy solutions and more sophisticated technological innovations, lithium’s significance is set to grow, cementing its status as a vital resource for economic development and sustainability.
The lender of last resort – the IMF’s top-10 biggest debtors
Founded in 1944, the IMF fosters economic growth in countries through financial assistance and policy advice to enhance stability, productivity, and job creation. Nations turn to the IMF for loans during economic crises to stabilise their currencies, implement structural reforms, and address balance of payments challenges. As a result, the IMF plays a crucial role in the global economy by promoting international monetary cooperation, financial stability, and economic growth. It provides policy advice, financial assistance, and technical expertise to its member countries. The IMF helps countries facing economic difficulties by offering financial support and facilitating economic reforms to restore stability and growth. Additionally, it monitors global economic trends and provides a platform for dialogue and collaboration among nations. By supporting economic stability and growth, the IMF contributes to a more stable and prosperous global economy.
As of 2 April 2024, the total global outstanding debt owed to the IMF amounted to US$149bn, or US$112.9bn in special drawing rights (SDRs). This increase reflects the IMF’s expanded loan portfolio, driven by recent bailouts for struggling developing economies. The US dollar equivalent was calculated using the IMF’s valuation of an SDR at US$1.321 on 2 April 2024. The SDR serves as the IMF’s unit of account for assessing the value of assistance provided to its member countries.
Despite 94 countries owing money to the IMF, the top 10 debtors account for over two-thirds (68.8%) of the outstanding balance. Argentina holds the largest debt, totalling US$42.9bn, reflecting its turbulent financial history marked by significant IMF interventions. Following a US$50bnn bailout in 2018, Argentina returned to the IMF in 2022 for an additional US$44bn loan. Under President Javier Milei, the current administration has pursued a robust economic reform agenda, garnering IMF praise and securing a recent US$4.7bn loan. Egypt ranks as the second-largest debtor with an outstanding balance of US$14.9bn, exacerbated by economic pressures amplified by regional conflicts and global events like Russia’s war on Ukraine. Ukraine follows closely with c. US$12bn in debt, with recent disbursements aimed at mitigating the economic impact of the ongoing conflict. Pakistan holds the fourth-largest debt position at US$7.72bn, receiving a US$3bn loan in 2023 to address its balance of payments challenges. Ecuador and Colombia, alongside several sub-Saharan African (SSA) economies, including Angola, Kenya, SA, and Ghana, complete the top-10 debtors list, each receiving IMF support for various economic challenges, including the COVID-19 pandemic. However, it is important to note that the IMF’s financial packages are dispersed incrementally, contingent on countries’ implementation of necessary economic reforms, which may not always be fully reflected in reported outstanding debt figures.
The bottom line
As we move further into 2024, the IMF continues to stand as a cornerstone of global economic stability and growth, founded on the principles of cooperation and assistance. Since its establishment in 1944, the IMF has been pivotal in fostering economic resilience and prosperity worldwide. By providing crucial financial aid, policy advice, and technical expertise to member countries during economic distress, the IMF stabilises currencies and facilitates structural reforms and enhances productivity and job creation. The recent expansion of its loan portfolio, evidenced by a significant increase in outstanding debt, underscores the IMF’s proactive response to support struggling economies amidst complex global challenges. Despite varying degrees of debt among member nations, the IMF’s strategic interventions continue reinforcing international monetary cooperation and promoting a more resilient and prosperous global economy.
Steady as she goes – SA inflation unchanged in May at 5.2% YoY
May SA headline inflation, as measured by the Consumer Price Index (CPI), came in at 5.2% YoY, unchanged from April’s print. Annual rates for four of the twelve product groups remained steady between April and May, including food & non-alcoholic beverages (NAB). Higher rates were recorded for transport, alcoholic beverages & tobacco, and recreation & culture. Inflation was softer, however, for miscellaneous goods & services, communication, clothing & footwear, health and restaurants & hotels. May saw only a slight petrol price increase of ZAc37/litre, contributing a mere 0.1% to the overall CPI inflation outcome. Overall inflationary pressure was modest, given that May is a relatively low survey month.
Core inflation (excluding the more volatile price categories of food, fuel, and electricity) remained at 4.6% YoY, as underlying inflationary pressures stayed close to the 4.5% midpoint of the SA Reserve Bank’s (SARB’s) target band of 3% to 6%, where the SARB prefers to anchor expectations. While personal care and restaurant and hotel prices showed a slight downward trend, other categories experienced price increases. Notably, inflation for books, newspapers, and stationery accelerated to 9.1% YoY, and public transport costs rose by 2.0% YoY. Clothing and footwear inflation continued to soften for a second consecutive month. This stability in demand-driven prices aligns with the dampening effect of higher interest rates on consumer demand and the limited exchange rate pass-through. Overall, the headline inflation rate has held its ground between 5% and 6% since September 2023.
Notably, food inflation was lower than anticipated in May, easing marginally to 4.3% YoY from 4.4% YoY in April and 6% YoY in February – a significant drop from its peak of 14.4% YoY in March 2023. Most food types became more expensive: grain prices increased by 0.8% MoM, fish prices rose by 0.8% MoM, sugar, sweets, and desserts went up by 1.1% MoM, dairy and eggs advanced by 0.4% MoM, fats and oils also increased by 0.4% MoM, and vegetable prices rose by 0.3% MoM. These increases were counteracted by a 6.6% MoM plunge in fruit prices and a 0.2% MoM decline in meat prices. Meat prices were mixed, with some beef products increasing while others remained steady, some chicken products increasing while others fell, pork prices rising, and lamb prices holding steady. Looking ahead, there could still be a modest easing in YoY food inflation, assuming global food prices remain stable and the forecasted La Niña weather pattern materialises. The rise in the probability of La Niña occurrence to over 50% from August 2024 throughout the remainder of the year is a source of optimism for local food producers. The 2024/25 summer crop season will start in October, and if the current La Niña forecasts hold, SA is set to receive early rains during that period to support the growing season. Collectively, food and & NAB inflation were unchanged from April at 4.7% in May.
Other notable price changes in May include the price for cold & flu medication; as the usual flu season begins to settle in, the price for cold & flu medication witnessed an annual rise of 11.1% YoY. Moreover, fuel costs exerted upward pressure on May headline inflation, increasing to 9.3% YoY compared to 9.0% YoY in April. However, fuel price growth moderated to 0.6% MoM, down from 1.9% in April. This deceleration reflects a stronger rand and a significant decline in global oil prices. We project an even sharper monthly decrease in fuel prices for June. Fuel prices have declined markedly in June (petrol prices decreased by R1.24/litre while diesel prices fell R1.09-R1.19/litre), and a further steep drop is likely in July given the average over-recovery of R0.37-R1.08/litre so far in June (to 19 June).
The bottom line
Overall, the May CPI print did not form a particularly important dataset. The upcoming June CPI data (set to be released in July) holds greater significance as it will include the quarterly survey of rental inflation, a substantial component in the basket. This category carries significant weight and is a crucial barometer for assessing demand-driven inflation pressures. We expect inflation to remain subdued, albeit at levels higher than initially envisioned at the start of this year. Core inflation (particularly that of goods) will likely be muted as consumer demand continues to be constrained by the pressures of elevated interest rates. While this latest CPI print is a largely positive move for the average South African consumer’s increasingly strained wallet, the figure is still far from the SARB’s target of 4.5%, with inflation proving itself particularly sticky. This will likely keep the SARB’s tone hawkish in any near-term remarks. The central bank has remained steadfast in communicating that it will not move the policy rate lower (and thus essentially usher in a rate-cutting cycle) until inflation is under control and sustainably hitting that target.
