Jozi, Jozi. 26o 12' 16" S, 28o 2' 44" E. It was a pretty dire day on Friday, mostly the resource stocks took a caning, and in particular the single commodity stocks. Both the platinum (-3.81 percent) and the gold stocks (-3.76 percent) bore the brunt of the selling. Not too much better with the parent index, the collective resource space, the Resi 10 which sold off 2.8 percent, and that meant it was over for the broader market, down 1.2 percent or 415 points to end the day at 34119. There is a complete lack of company news around at this time of the year, the March fellows are for all intents and purposes done and dusted, although there are two big ones this week, Naspers and SABMiller, two global companies, well represented in emerging markets. And then the whole of next month, July, there is very little to look forward to from hard results, but there will be a whole lot more action as the temperature starts to hot up here. We are over the hump that is the winter solstice (or is it a dip), at least the days start getting longer. At least we have the Alcoa results and the traditional start of US 2nd quarter earnings season in about two weeks today. So, until then all the focus will be on Europe, and locally the ANC policy conference meeting.
That European policy conference that is set to take place this week, from what I can read on the wires is that French President Hollande is going to run head first into German Chancellor Merkel with the idea of Euro bonds, but that is likely to be rebuffed for the time being. Expectations are very low for any solutions from the summit, with the most likely outcome being stronger commentary around the eventual proposal, and maybe even a time horizon on greater fiscal integration. It is coming, just in a very slow and with European bureaucratic precision. Chug, chug, too slow for Mr. Market's liking is all I can say, we like breakneck speed around here, not public servants talking and seemingly dithering. Although there is a realisation that not all Europeans are the same, there are political agendas that are trumping full union integration, but as the European commission website points out:
"The EU budget was around € 140 billion in 2011, which is very small compared to the sum of national budgets of all 27 EU Member states, which amount to more than € 6,300 billion. In other words, total government expenditure by the 27 Member States is almost 50 times bigger than the EU budget!"
But you kind of knew that, the organisation that sits in Brussels is work in progress, the individual member countries still have the largest say over their budgets. And this is the strange part for me, because we were led to believe that austerity was gripping the area: "In 2012, 24 national budgets out of 27 are due to increase according to the latest estimations." Huh? Does that sound like austerity to you? Or is there austerity that exists in some places in Europe, but the vast majority of governments have social obligations, and those are growing. There is no other way, we are going to have to work longer in order to meet our ever expanding obligations. Austerity? Well, context I guess is needed. Just this morning there is the news that Spain has formally requested the funding to recapitalise their banks.
And then this week of course we have the ANC policy conference, running from tomorrow all the way through to Friday. According to the ANC website 3554 delegates are expected to attend. Phew, that sounds like a lot of people to manage and put across their views one way or another. These would be all branch members that are active in their respective areas that would be attending, that is how I understand it. I read Chris Gibbons counter revolutionary thoughts, to borrow a phrase from an ex vocal member of the organisation, and was kind of left deflated by it, check it out: ANC Policy Conference? Why? Good piece, I like Chris, he is of course writing for the Daily Maverick here, but is better known as the presenter of the Midday Report on Talk Radio 702 and 567 Cape Talk.
The actual document up for discussion is a rather lengthy piece titled THE SECOND TRANSITION? Building a national democratic society and the balance of forces in 2012. It has been documented last week that the deputy president was not too fond of the piece, the Mail & Guardian reports that the president himself has lashed back to the comments that Deputy President Motlanthe made. From the same publication: Mangaung Part 1: Motlanthe flexes his muscles.
OK, go back the discussion document, the main points are as follows:
- "Part A: Reflections on the last 18 years
Part B: Characterisation of the National Democratic Society
Part C: The balance of forces in 2012 and the motive forces
Part D: The global balance of forces
Part E: Thoughts on the content and form of the Second transition
Part F: The pillars of national democratic revolution in the current phase"
Obviously much of this document contains socialist type jargon, the word revolution appears 19 times, less I will have you know than the word education, which appears 31 times. The word teachers does not appear once. Capitalism appears 22 times, the word nationalisation not a single time. Not once. So anxiety levels should be lower, but until we see a more business friendly landscape, expect the business types to be continually scratching around for excuses, which exist in reality. Ask the poor fellows over at Aquarius Platinum.
Byron's beats has a look at the recent Sasol movements, which of course will interest you as the oil price hits an 18 month low.
- On Thursday Sasol slumped over 4% then on Friday it was down again, nearly 2%. One of the reasons for the drop was a forced clearance of the Sasolburg plant after spilled sulphur set off alarms. It doesn't sound like the spill was serious but of course there are very strict safety standards and anything remotely threatening will result in stoppages. According to this Bloomberg article a statement from Sasol suggests that production was in no way affected.
Sasol is a tough share to analyze because it is so heavily swayed by the Rand and the oil price. You would probably find that these variables were why the share price dropped at the end of last week. You see, Sasol's sales are dependent on the petrol price which is completely out of their hands. The petrol price is determined by the oil price and the South African Rand. When the Rand weakens South Africa's buying power decreases and the petrol price will have to increase. When the oil price increases inevitably the petrol price will also have to increase.
Therefore when we complain about petrol prices increasing, Sasol shareholders are rewarded. To get a perspective, analysts reckon that a 10% change in the Rand could affect Sasol's earnings by 25%. Historically the oil price has less of an affect but this is growing. A 10% change in the oil price would affect earnings by around 18%. Of late the Rand and the oil price have been positively correlated. When risk is on, the oil price increases and the Rand strengthens. When the world is about to end the Rand weakens and so does the oil price. This is a good thing for Sasol because it mitigates what could be a very volatile situation.
Another variable which impacts earnings is the gas vs oil price. This is not a big part of Sasol's earnings yet but Sasol's future plans are heavily weighted toward Gas to Liquids expansion. In the last few years improved technologies and massive deposit discoveries have caused the gas price to consistently fall. Lack of big discoveries and unrest in many oil producing nations have caused oil prices to increase. This is a very good situation for Sasol as their input price decreases while there finished goods price increases.
Over the last few weeks however gas has increased while the oil price has decreased, a double negative for Sasol. The gap is still huge historically and still very economically sufficient. We continue to like Sasol. The long term global demand as far as energy is concerned will remain strong. Although these moving parts have a big impact, if markets pick up, like we foresee, the natural stabiliser of the Rand strengthening along with the oil price will help mitigate the volatility while Sasol use their unique technology to carry on supplying oil.
Currencies and commodities corner. There is a severe weather system in the Gulf of Mexico, which is sending the oil price higher. I saw on Facebook, my uncle who lives in Florida posted the satellite picture, and it looked pretty hectic. Is it that time of the year already? It certainly seems a little early for that. Well, I must have missed it, because this is the fourth in the cycle already, named Debby. And then I did a little exploring, and according to the authorities, the National Hurricane Centre, Debby was just a tropical storm. And, Hurricane season starts on the first of June and ends on the last day of November, in the Atlantic. So I guess I am late, four down already in 25 days. Debby is currently in the Northern gulf. The oil price is higher, last at 79.90 Dollars per barrel for NYMEX WTI, whilst Brent crude is trading flat at 90.94 Dollars per barrel.
The gold price is slightly higher on the session, last at 1572 Dollars per fine ounce, the platinum price is up a little more in percentage terms, last at 1438 Dollars per fine ounce. Dr. Copper is slightly better at 332 US cents per pound. I could also tell you what lean hogs traded at, but that might not mean too much. Coffee and Cocoa maybe. Cocoa is priced in Dollars per ton, whereas the Coffee contract is priced in US Dollars per pound. OK, you want to know on this pretty chilly morning, so here goes, the Cocoa contract price was last at 21.02 Dollars per ton, the coffee price at 155.9 US cents per pound. The Rand is weaker today, 8.45 to the US Dollar, 13.15 to the Pound Sterling and 10.60 to the Euro. We have started lower here today, but have been marginally higher for some parts during the day.
Sasha Naryshkine and Byron Lotter
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