South African rand drops on geopolitics

News Analysis

18

May

2023

South African rand drops on geopolitics

  • Nils Backeberg

After weak employment numbers, crippling energy issues, and recent allegations of supplying arms to Russia, the South African rand dropped to record lows against the US dollar.

The South African currency has been trailing downwards against the dollar for over a decade. Weighing on the currency and local economy are several engrained issues including the mismanagement of state utilities by the government.

While domestic impacts of a depreciating rand are deflating purchasing power, the country is also a significant exporter of raw materials, including manganese and chromium. For ores, the recent exchange rate movement will see South African resources being targeted for restocking along the supply chain outside of the country.

On the alloy side, South Africa remains a key supplier of ferrochrome to the global market. While Europe’s stainless steel industry still struggles from its energy crisis, its imports from South Africa are below pre-pandemic levels. Meanwhile, China’s stainless steel industry is on a path to recovery following strict COVID lockdowns and is supplementing domestic ferrochrome production with elevated imports from South Africa.

Despite the energy cost increases in South Africa eroding the cost competitiveness in the country, recent energy cost rises in China together with a depreciating rand have allowed the South African ferrochrome plants to move firmly back into the lower-cost half of the industry cost curve over 2022 and into 2023. The cost structure in China will require ferrochrome prices to move upward once demand recovery materialises in earnest. However, the rand exchange rate will keep prices at bay or in a modest decline for a little while longer.


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