index averaged US$98
per tonne (2017: US$84/t) but
will soften slightly in 2019
per dry metric tonne (CFR) China (2017: US$71/dmt)
but challenging environment
GDP growth rates
Solid global economic growth rate but higher oil prices, elevated level of trade tension and surge in financial volatility started to weigh on world economic activity; South Africa growth positive
Globally, 2018 started with strong, synchronised growth. The momentum faded as the year progressed and growth trends diverged. The economies of the euro zone, United Kingdom, Japan and China began to weaken. In contrast, the US economy accelerated, thanks to fiscal stimulus. As a result, world real GDP growth for 2018 declined marginally to 3.2% compared to 3.3% in 2017. Global growth is slowing – barring a policy or other type of shock, the world economy is likely to muddle along in 2019.
Real GDP growth rate (%)
South Africa's 2018 economic growth was disappointing, but is expected to regain some growth momentum from 2019. For the full year, GDP growth was 0.8%.
Inflationary pressures; central bank targets
In 2018, key drivers of inflation were rising – a surge in oil prices, increased import tariffs, accelerating wage inflation in key developed economies (including the United States, euro zone and Japan). However, average annual inflation in developed economies was at or close to central bank targets. South Africa's consumer price index for 2018 was 4.7%, close to the midpoint of the Reserve Bank policy of between 3% and 6%, with 2019 expected to be similar, barring any major shocks to the rand and fuel prices.
The Chinese renminbi and US dollar
The Chinese renminbi (currency code CNY) has depreciated 8.5% against the US dollar since April 2018 and came close to testing the psychological barrier of CNY7.0/US$1.0 for the first time since the financial crisis of 2008. Its weakness is closely correlated with slower growth in China's economy and monetary easing by the central bank. The 2018 movements in foreign exchange markets have as much to do with dollar strength against most emerging-market currencies as with the weakness of just the Chinese currency.
In South Africa, extreme currency volatility continued throughout the year, driven mainly by weak economic growth, political noise and negative emerging-market sentiment. However, investors' continued search for yield supported the rand at times. Further local event risks in the first half of 2019, notably the lead-up to national elections and the outcome, remain critical for the currency.
Optimism as South Africa's political and policy environment improves
A significant uptick in sentiment was evident in the first half of 2018 after the ANC's elective conference of December 2017 and subsequent positive political developments. This started to wane as the risk-off sentiment affected most emerging markets, including South Africa. Welcome efforts to improve the policy environment included the promulgation of the new mining charter 2018.
2018 has been another solid year for commodity markets
In the main, Exxaro's commodity markets performed strongly in 2018. The themes of supply reforms, the campaign against pollution and infrastructure stimulus in China continued throughout the year. In addition, from April 2018, the intensifying China-US trade dispute limited potential upside for key commodity markets. In the global oil market, easing fears of significant losses in Iran, higher supplies from the US, Saudi and Russia as well as concerns for weaker demand triggered the sell-off towards the end of 2018. For 2019, the correction in the oil price is expected to be short-lived, given lower inventories and still-elevated supply risks.
Commodity prices (US$/t)
|Thermal coal (RB1)||84.35||98.04||80.00|
|Thermal coal (RB3)||69.32||78.09||61.00|
|Hard coking coal (prime)||188.57||207.10||178.00|
|Iron ore fines||71.39||69.70||75.00|
|TiO2 pigment||2 624||2 862||2 602|
|Zircon||1 075||1 470||1 570|
Strong Asian demand, supply constraints and coal policy (thermal); supply disruptions and China's steel-making margins (metallurgical)
In 2018, seaborne thermal coal markets were buoyed by strong Asian demand, supply constraints and coal policy implementation in China. Benchmark coal prices reacted positively to these factors by trading well above average costs throughout the year. Although demand for coal has been strong worldwide, the immediate supply response has been muted – limited by circumspect investor sentiment, selected infrastructure constraints and weather events. However, towards the end of 2018, modest relief came in the form of new Chinese import restrictions, which artificially lowered demand and caused prices to ease moderately. Together with relaxation of the Indonesian domestic market obligation policy, seaborne thermal coal price differentials for lower-quality coals widened significantly in the last quarter of 2018. Anticipated muted supply response in 2019, specifically for higher-energy coals, will support thermal coal prices although Chinese and Indonesian coal policies pose a downside and/or volatility risk.
The metallurgical coal market remained resilient in 2018, supported by robust steel production worldwide, particularly in China. For most of the year, steel prices and steel-making margins in China were healthy. However, steel prices came under pressure late in 2018. These weaker prices have led to lower margins for steelmakers, with focus shifting from maximising blast-furnace productivity to minimising production costs. As in previous years, the metallurgical coal market remains prone to supply-related disruptions in North Queensland, Australia - a wet season and cyclones caused torrential rain and high winds, interrupting production and shipments. Barring any such significant disruptions in 2019, the market is expected to soften somewhat to reflect underlying fundamentals.
Robust Chinese steel output; strong demand for high-grade iron ore products; high lump premium
In 2018, key support for the steel market came from increased production, together with curtailed production capacity in China and stronger industrial growth in multiple global markets. It was also an exceptional year for high-grade iron ore producers, with the premium for 65% Fe iron ore above the 62% Fe benchmark reaching as high as 45% in July. However, towards the end of 2018, due to changes in the supply-demand balance in China, the preference for high-grade iron ore has reduced significantly as has the premium. Lump also had a remarkable year, with an average premium of US$16/t recorded. The second half was particularly strong as the lump premium averaged US$20/t (the premium typically falls at the end of each year as supply from Australia improves, but this did not happen in 2018). As a result, the average lump premium for 2019 is expected to be above the norm.
Mixed results for feedstocks and pigment
The TiO2 feedstock and pigment sectors had mixed results in 2018. Pricing momentum for titanium feedstocks picked up, particularly for high-grade feedstocks. In contrast, pricing momentum for TiO2 pigment came off for many reasons, including waning demand growth in Europe and destocking in Asia and Europe. The zircon market tightened in 2018, especially for premium zircon, with strong demand growth in Europe and India, while demand in China slowed towards the end of the year. These different price momentums are expected to continue into 2019.