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South Africa: Resources at Top of Cycle - Prudential
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Business Day (Johannesburg)
17 July 2008
Posted to the web 17 July 2008
Loyiso Sibali
Johannesburg
THE resources sector still held value even though evidence of "demand destruction" in precious metals such as platinum and gold had started to emerge, said Gary Quinn, portfolio manager at Prudential Portfolio Manager, at a presentation in Johannesburg yesterday.
This was especially evident in gold, with jewellery sales at a 14-year low worldwide, Quinn said.
However, the gold price was influenced by investment orders, which remained firm.
Quinn said although Prudential was slightly underweight in resources, it still saw value in the sector and had a preference for the two largest JSE-listed mining groups, BHP Billiton and Anglo American .
Quinn advised investors to avoid small-cap mining shares and start-up mining ventures, as he said the commodities boom was at the top of the cycle and there was minimal upside in investing in the sector . "Demand has begun shrinking in some countries for some commodities," he said .
This was most evident in the US, where sales of small cars had risen from 0,3% of the market last year to 6% this year as the oil price had risen.
Sales of sport utility vehicles and large cars had dropped significantly this year - evidence that consumers' appetite for fuel-guzzlers had waned.
Quinn said the decline in commodities in the 1980s and 1990s had led to a dramatic underinvestment in this sector . Combined with sharp economic growth in China and India, this had led to supply constraints .
Quinn said more consumers were now spending less , and that a slow supply build-up would eventually balance the market.
"The normal supply response to high prices, which emerged in 2004, did not happen, so the past three years have been more about supply shocks than demand surprises," he said .
Quinn said there was not much evidence that speculators were driving the commodities market. He said the one commodity where supply was responding to demand was iron ore.
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The percentage change year on year in iron ore exports had risen considerably. SA was now exporting 15,9% more than it did the previous year.
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