All that Glitters

With commodity prices continuing their unrelenting surge in 2006, South Africa is in poll position to capitalise on the ongoing boom.

The South African resource sector comprises 33.35% of the Johannesburg Stock Exchange (JSE), and stocks have been reaching record highs this year. But with such an abundance of resource stocks to choose from, the question for many is which resources will be the best bet in the coming months.

The last few years have seen significant price hikes for many of South Africa’s commodities. Three of the most important are coal, gold and platinum, with the headline-grabbing commodity being gold, which has bounced back from a 20-year bear market. The metal reached a 25-year high of $710 an ounce last week, from a low of $250 in 2001. In historical terms this is still quite cheap, however, as gold spiked in 1980 at $870 an ounce – suggesting that it could have a long way to go yet, especially when inflation is accounted for.

Once again, Asia is the key driver in commodity demand, with India the largest gold market and China the second. Analysts believe that China has the potential to be as big a market for gold as India, particularly since Beijing recently liberalised previously tight restrictions on the ownership and trading of gold, even opening a gold exchange in Shanghai.

However, currently there is no shortage of gold in the world – which gives rise to a level of uncertainty. Gavin Keeton, senior vice-president at Anglo American, succinctly explained the vulnerability to OBG.

“The big unknown, always in gold, is the amount of gold sitting in central bank vaults. Above ground there are huge stocks available. I don’t think one ever faces the risk in gold of there being a shortage. Certainly, demand can exceed new production, but not exceeding stocks,” he said.

At the same time, South Africa is the world’s sixth-largest producer of coal and the world’s second-largest exporter. With the Global Coal RB Index rising 26% in the last year, South Africa is already reaping rewards. There is a strong demand for coal worldwide, and once again China is the driving force.

Although the Chinese are not big importers of South African coal, China is sourcing more coal from its neighbours, such as Indonesia – a big exporter to Europe – allowing South African exporters to pick up slack in the European market.

Meanwhile, with many in Europe still refusing to turn to nuclear energy and with new coal cleaning techniques and cleaner coal burning technologies, coal-fired powered stations are losing their dirty image.

However, with a growing energy deficit in South Africa, there is also an increasing demand for coal in the domestic market. The government is investing R84bn ($13.45bn) in the state energy giant Eskom over the next five years in a bid to increase capacity to a level where it can keep pace with the country’s economic expansion. Eskom also has three mothballed coal-fired stations, with a potential capacity of 3800 MW.

However, coal remains a tricky commodity to gauge because there is so much of it.

“The question is how quickly is supply going to come on stream?” said Keeton. “Historically, what has happened in the past is that when new mines come on stream the price has collapsed. There is lots of coal – even China has lots of coal – and so I think it’s not surprising that the price of coal started to fall last year, because very quickly the industry was able to bring brownfield sites on line.”

Meanwhile, platinum is the metal everyone seems to be talking about in South Africa. This has more than doubled in value over the last four years. In April 2006, the price of platinum reached more than $1100 an ounce from $472 in January 2002.

Platinum is used in cutting edge growth industries, from catalytic converters in car exhaust systems to LCD screen casting dyes for computers. It is found in very few places in the world, with South Africa holding 90% of the world’s known reserves of the metal, with estimated reserves good for 200 years. Add to this the growing demand for platinum jewellery in Asia and things are looking good indeed. Platinum group metals currently represent the county’s largest mineral export – and with current demand, this looks set to grow.

That said, the principle investment concern is that platinum has a rival – palladium, of which Russia has the largest known reserves.

Palladium can also be used in catalytic converters and indeed was for a long time, before the price of the metal outstripped platinum.

However, it seems that rising oil prices have come to the rescue. While palladium is now cheaper than platinum – at under $300 an ounce – it cannot be used in vehicles with diesel engines. As long as the price of oil keeps going up, so will demand for the more economical diesel vehicles.

The main concern therefore is that the price of platinum could go too high, which could encourage palladium substitution in the jewellery sector. However, South African producer Anglo Platinum’s strategy aims to increase output by 5% a year to prevent any shortage. The future looks good, whether written in gold or platinum.