World gross domestic product (GDP) growth continued to slow during 2008, reaching 2,3% after declining to 4,0% in 2007 from 4,1% the previous year. The slowdown was particularly pronounced in the second half of the year, with growth of only 2,2% and 0,3% recorded in the third and fourth quarters respectively. The major factor in this decline was the sub-prime meltdown and associated credit crunch which originated in the USA, but then spread to the rest of the world. This was followed by a loss of confidence from businesses and consumers which, in turn, resulted in tight credit, declining demand, reduced spending and investment, job losses, declining property prices and collapsing stock markets all over the world.

The impact on the with negative economic growth recorded in all regions in the fourth quarter. Respective government efforts to curtail adverse economic developments through significant monetary easing and massive fiscal stimulus measures were not successful in the short term and an economic recession in the developed world in 2009 is a foregone conclusion. This recession is described globally as probably the worst since the Great Depression of the 1930s.

Previous arguments about a decoupling between the economies of developed and emerging nations proved erroneous. The travails of the developed world spilled over to the rest of the world following the collapse in commodity prices, leading to the drying up of capital flows to and capital flight from developing economies, and sharp falls in world trade. Emerging-market GDP growth rates fell from 7,3% in the first quarter of 2008 to 3,1% in the fourth quarter.

Economic growth in China remained the main driver of commodity demand in 2008, but expansion in that country slowed from 10,6% in the first quarter to 6,8% in the fourth, taking annual growth to 9,0% compared to 13,0% in 2007. This was mainly the result of sharply decreasing international trade. In line with developed countries, China also instituted major monetary easing and infrastructure investment measures to arrest the decline in economic activity. GDP growth in 2009 is expected to decline further to an average of 5,9%.

The key risks to the global economy are believed to be an unduly timid response to the crisis from governments globally as well as further deterioration in confidence from businesses and consumers alike. On the positive side, the precipitous fall in energy prices would boost economic recovery.

The South African economy was not immune to the economic problems that affected the rest of the world, with GDP growth declining in 2008 to 3,1% from 5,1% in 2007. On a year-on-year basis, growth decreased from 3,8% in the first quarter to an estimated 1,6% in the fourth. Consumer price inflation rose significantly above the Reserve Bank’s for the year at 11,5%, almost double the upper range of the target. However, due to the deteriorating economic outlook globally and locally, the reversed towards the end of the year. Falling oil prices will assist in easing inflation in 2009, but strong increases in electricity prices will counteract this. Inflation is expected to drop to within the Reserve Bank target range in the second half of 2009. A flight from risk by investors resulted in a weakening of the rand exchange rate against the US dollar and this trend is expected to continue in 2009. This will have a positive impact on the export earnings of the mining and manufacturing industries, even though the mining industry is now operating in an environment of weak and volatile commodity prices.

Comparative GDP growth rates

Due to declining economic activity, infrastructure bottlenecks – electricity supplies and transport and harbour capacities, as well as the shortage of skilled and experienced human resources – will probably ease temporarily, although the situation remains tight. Coal rail capacity to Richards Bay remains a serious constraint.

Real GDP growth of only 1,0% is expected in 2009, but further negative developments internationally will continue having an adverse impact on economic expansion in South Africa.

Commodity review

In 2008, continuing robust materials-intensive economic growth in China and other emerging economies in the first half pushed oil and other bulk commodity prices to record levels. This was the fifth consecutive year of increasing prices for these commodities, and supply bottlenecks supported these price levels. Base metal prices, on the other hand, peaked in 2007 and declined in the first part of 2008 due to easing market fundamentals. The situation changed dramatically in the second half of the year, following the economic crises in developed economies. This resulted in a collapse in prices for oil and bulk commodities trading on a spot basis, with base metal prices following suit. The impact on contract prices will also be keenly felt once these come up for renegotiation.

Projections of global steel production indicate that crude output decreased by 14Mt ( 1,2%) to 1 330Mt in 2008. Again, it was a tale of two halves, with output increasing in the first five months of the year and then declining. Production increased by some 13Mt, or 2,7%, in China, with output starting to fall in July, resulting in a collapse in spot steel prices in that country, similar to the experience in the rest of the world. China was responsible for some 36% of world raw steel production in 2008, somewhat higher than in 2007.

Due to continuing favourable demand conditions in the first half of 2008, strengthened by unresolved supply bottlenecks, an increase of over 200% in the benchmark hard coking coal price was negotiated for 2008. However, decreasing steel production and the collapse in steel prices in the second half have put pressure on coking coal producers, with several having production cutbacks announced by the end of 2008. The outlook for contract prices in 2009 seems bleak and expectations are that the benchmark price could fall by more than 50%. Contract semi-soft coking and low-volatile PCI benchmark coal prices increased by more than 250% in 2008, but the outlook for 2009 is similar to that of hard coking coal, with respective settlements again expected to be more than 50% lower.

The average Richards Bay spot steam coal price for 2008, at US$120,88/tonne, was 92% higher than the average for 2007. The price pattern displayed by other commodities was also evident for steam coal, with the RBCT price reaching a high of US$177,45/tonne in August and then collapsing to US$78,50/tonne at the end of the year. The outlook for 2009 is cloudy, with the prospect of lower demand due to the global economic recession further dampened by the possibility of greater Chinese exports due to lower offtake in that country. The impact of restricted logistical capacity will thus also not be as pronounced as in 2008. All in all, prices could stabilise around the US$65/tonne level, but further weakness in the oil price could have a negative impact on this view.

Tight market conditions in the first half of 2008 resulted in Australian benchmark iron ore prices for the Asian basin increasing by 96,5%. The impact of world economic conditions is, however, best illustrated by the spot iron ore price in China. This collapsed from over US$170/tonne at the end of July to less than US$60/tonne towards the end of October. Prices subsequently recovered to US$75/tonne by December. The second half of 2008 was also characterised by consumers defaulting on offtake agreements and announcements of production cutbacks and postponed expansion projects by iron ore producers. Consensus forecasts of Australian benchmark prices for 2009 indicate a 30% decline.

The 2008 average London Metals Exchange (LME) cash zinc price was US$1 875/tonne, some 42% lower than the average for 2007. The decrease was driven by worsening market fundamentals, reflected in a refined zinc surplus of about 190kt developing during the year, compared to the surplus of 245kt in 2007. The zinc price declined steadily in the first nine months of the year from about US$2 400/tonne to US$1 700/tonne. In October the price started dropping precipitously to US$1 063/tonne, followed by a period of extreme price volatility in a band between US$1 250/tonne and $1 040/tonne, ending the year at US$1 120/tonne. Low prices since October were driven by expectations of declining demand due to the global economic crisis, increasing zinc stocks and divestment from commodity investment funds. In 2008 LME zinc stocks increased from 88kt to 253kt, primarily due to expanding zinc production in the first part of the year and stagnant demand in the second part. Low zinc prices and the dismal demand outlook led to western-world smelter capacity cutbacks of more than 500kt being announced by the end of the year.

This trend was also evident in the concentrate market, where western-world closures and cutbacks amounting to a production loss of almost 800kt in 2009 were announced by the end of 2008. Treatment charges favoured the refining industry in 2008 due to oversupply in the concentrate market. Contract treatment charges were around US$300/tonne at a zinc basis price of US$2 000/tonne. Spot treatment charges declined in 2008 to under realised contract treatment charges due to a decreasing concentrate surplus. A concentrate deficit is expected in 2009, resulting in significantly lower treatment charges being realised. Due to the concentrate and refined zinc production cutbacks, the surplus in the zinc market in 2009 is expected to be much lower than originally envisaged. This could result in zinc prices actually increasing somewhat from end-2008 levels to a forecast average of about US$1 250/tonne.

A small supply deficit was recorded in the titanium dioxide pigment industry in 2008, resulting in a rising price trend for most of the year. However, the increasing production trend of the first half was reversed once the ramifications of the economic crisis, in terms of pigment demand, became clear. This resulted in slightly negative output growth for the year. The extremely adverse impact of the worldwide economic slump on some major demand sectors for pigment products, namely the auto industry and housing sector, bodes poorly for pigment demand in 2009.

Titanium dioxide feedstock prices generally improved moderately in 2008. In particular, the market for chloride feedstock was tight, primarily due to supply disruptions such as the KZN Sands furnace shutdown, gas and electricity supply disruptions, the sinking of the Sierra Rutile dredge, closure of several smaller mining operations and slow production ramp-up from new producers. During the year, no new feedstock projects were approved. In view of the muted demand outlook for the pigment industry in 2009, the feedstock industry will also probably face a period of market surplus, with prices expected to generally move sideways.

Zircon prices declined in the first five months of 2008, primarily against expectations of an oversupplied market. However, the market turned out to be tight, leading to concerns about supply availability. This led to some precautionary buying and increasing prices in the second half. The global economic slowdown is, however, expected to lead to the tightness in the market reducing and prices moving sideways.

While the dollar generally continued to weaken against the currencies of commodity-exporting countries in the first half of 2008, the sub-prime crisis in the US and subsequent events precipitated a flight from risk, leading to capital outflows from most commodity-producing countries and significant weakening of the relevant currencies against the US dollar from August. This should bring some relief to commodity producers struggling with declining prices in terms of their local currency receipts from commodity exports.

The significant increases in mining costs and mining project capital costs since 2005 continued into 2008, but the economic crisis arrested this trend and the outlook is for mining costs to decline in 2009, with falling energy prices being a major factor. Capacity shortages in terms of contractors, machinery, equipment and mining professionals worldwide also abated and significant retrenchments in the mining industry in the last quarter of 2008 are expected to persist into 2009.

Global bulk freight rates reflected commodity prices in 2008. The Baltic Dry Index rose by more than 100% from January to June, but started tumbling as demand for ships dried up, ending the year some 90% lower than its high in June. It was estimated in late November that about 20% of the ‘Cape-size’ eet was at anchor because of low demand. The bulk freight market is expected to remain depressed in 2009, but with freight rates improving from the extremely low levels at the end of 2008.

Planned global exploration expenditure in 2008 indicated a sixth consecutive annual increase, or some 26% over 2007. However, the crash in global commodity markets resulted in significant cutbacks in the last quarter of the year. This will cause the average increase for the year to be lower than planned. Exploration expenditure in 2009 will be significantly lower than in 2008. In time, this will lead to capacity shortages when demand shows a sustained upturn.