The impact of volatile commodity prices, exchange rates & interest rates: reflections of a former business economist. SARB Biennial Conference: October 2016 Gavin Keeton Department of Economics & Economic History Rhodes University 1
Corporate South Africa in 1990 Dominated by large, diversified groups Almost all had a mining component Diversification: Within mining e.g. gold, coal, base metals In Anglo American s case, also diamonds & platinum Across products i.e. industrial interests & financial services Conglomerates 2
Corporate South Africa in 1990 Corporate structure the result of: Association with apartheid made it very difficult for SA companies to operate globally SA exchange controls meant SA companies could not use retained earnings or domestic balance sheet to expand globally 3
Corporate South Africa in 1990 Some examples of international diversification Rembrandt/Richemont Liberty International Anglo & Minorco Focus of this presentation is on the implications for monetary policy & exchange rates of product & global diversification 4
5 Natural commodity price hedge
Product diversification 1.0 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0 Copper v Zinc 1994 1995 1996 1997 1998 1999 2000 2001 2002 1.0 0.8 0.6 0.4 0.2 0.0-0.2-0.4 Copper v Oil 1994 1995 1996 1997 1998 1999 2000 2001 2002 6
7 Exchange rates
Geographic diversification - Anglo American Operating profit * 2006 Net Assets 2006 S America 37% Australia & Asia 4% South Africa 42% N America 1% S America 14% Australia & Asia 9% South Africa 42% N America 1% Europe 10% Rest of Africa 6% Europe 32% Rest of Africa 2% ($9 832m) ($28 342m) * Before special items & remeasurements 8
Geographic diversification - Anglo American v Rio Tinto Net Assets Rio Tinto Australia & NZ 57% 2006 Indonesia 2% Africa 4% S America 0.5% Europe 3% N America 34% N America 1% Net Assets - Anglo S America 14% Australia & Asia 9% Europe 32% 2006 South Africa 42% Rest of Africa 2% ($30 372m) ($28 342m) 9
Geographic diversification - Exchange rate hedge ZAR/USD & DJ/AIG Commodity Price Index PESO/USD vs Copper Price 100.0 40.0 30.0 Commodity prices 80.0 % change 20.0 10.0 0.0-10.0-20.0-30.0-40.0-50.0-60.0 ZAR/USD 96 97 98 99 00 01 02 03 04 05 % change 60.0 40.0 20.0 0.0-20.0-40.0 Copper Price CLP/USD 95 96 97 98 99 00 01 02 03 04 05 10
Geographic diversification - Exchange rate hedge AUD/USD & DJ/AIG Commodity Price Index Euro/USD & DJ/AIG Commodity Price Index 40.0 30.0 Commodity prices 40.0 30.0 Commodity prices 20.0 20.0 % change 10.0 0.0-10.0 % change 10.0 0.0-10.0-20.0-20.0-30.0-40.0 AUD/USD 96 97 98 99 00 01 02 03 04 05-30.0-40.0 Euro/USD 96 97 98 99 00 01 02 03 04 05 11
Impact of the exchange rate on an individual project 1600 3.20 1000 3.00 630 2.80 400 2.60 250 2.40 160 2.20 2.00 100 1.80 65 1.60 40 Effective exchange rate of the Rand - Log scale (trade weighted against 20 currencies - 2010=100) 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 Nominal (left axis) equilibrium (old) ----------------------------------------- Real (right axis) equilibrium (new) 200 2.30 160 2.20 125 2.10 100 2.00 80 1.90 65 1.80 50 1.70 40 1.60 12
Geographic diversification - Exchange rate hedge 1600 3.20 1000 3.00 630 2.80 400 2.60 250 2.40 160 2.20 2.00 100 1.80 65 1.60 40 Effective exchange rate of the Rand - Log scale (trade weighted against 20 currencies - 2010=100) 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 Nominal (left axis) equilibrium (old) Real (right axis) equilibrium (new) 200 2.30 160 2.20 125 2.10 100 2.00 80 1.90 65 1.80 50 1.70 40 1.60 13
Geographic diversification - Exchange rate hedge 1600 3.20 1000 3.00 630 2.80 400 2.60 250 2.40 160 2.20 2.00 100 1.80 65 1.60 40 Effective exchange rate of the Rand - Log scale (trade weighted against 20 currencies - 2010=100) 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 Nominal (left axis) equilibrium (old) Real (right axis) equilibrium (new) 200 2.30 160 2.20 125 2.10 100 2.00 80 1.90 65 1.80 50 1.70 40 1.60 14
Merits of forward cover on USD/ZAR 300 9.00 200 8.50 100 8.00-7.50 (100) 7.00 (200) (300) 6.50 (400) 6.00 1 15 2 3 4 5 6 Total Profit/Loss 7 8 9 10 11 12 Spot USD/ZAR USD/ZAR Profit/Loss (ZAR) Cumulative Profit and Loss Year 2011
Merits of forward cover on USD/ZAR US $ per ounce 2000 1750 1500 1250 1000 750 500 250 81% Negative Correlation 18 16 14 12 10 8 6 4 2 USD/ZAR US $ per dry metric ton 200 180 160 140 120 100 80 60 40 20 71% Negative Correlation 18 16 14 12 10 8 6 4 2 USD/ZAR 0 08 09 10 11 12 13 14 15 0 0 08 09 10 11 12 13 14 15 0 Platinum USDZAR Iron Ore USDZAR 16
17 Interest rates
ZAR Interest rates - when to fix or float? 5yr Fixed Swap Rates vs Comparable (Certain) Floating Rates at Reset Dates Fixed is preferable 17% of the time 14 12 10 8 6 4 Dec/00 Dec/02 Dec/04 Dec/06 Dec/08 Dec/10 Dec/12 3m Floating 5yr Swaps Known Rates Known/Fwd Rates Dec/14 18
19 Are SA companies as cash flush as is claimed?
SA corporates are SA s principal savers 40 Composition of savings (% of GDP) 35 30 25 20 15 10 5 0-5 -10 55 60 65 70 75 80 85 90 95 00 05 10 15 Total Corporate Depreciation Households Government 20
Borrowing has increased 21 3500 3000 2500 2000 1500 1000 500 0 SA: credit extension to private sector 92 94 96 98 00 02 04 06 08 10 12 14 16 R billions (left axis) % GDP (right axis) 90.0 85.0 80.0 75.0 70.0 65.0 60.0 55.0 50.0 45.0 40.0
So, apparently, has cash in the bank 22 1800 1600 1400 1200 1000 800 600 400 200 0 SA: bank deposits - "other companies & closed corporations" 92 94 96 98 00 02 04 06 08 10 12 14 16 R billions (left axis) % GDP (right axis) 50.0 45.0 40.0 35.0 30.0 25.0 20.0 15.0 10.0
SA corporates are SA s principal savers 40 Composition of savings (% of GDP) 35 30 25 20 15 10 5 0-5 -10 55 60 65 70 75 80 85 90 95 00 05 10 15 Total Corporate Depreciation Households Government 23
Whose cash is it? 17 Cash of JSE Top 40 as % of reported bank deposits 16 15 14 13 12 11 24 10 2005 2006 2007 2008 2009 2010 2011 2012 2013