WHILE the outlook for SA's mining sector looks bleak, mining analysts say the long-term picture might not be quite so gloomy, leading to potential buying opportunities at current cheaper prices.
Spot gold and platinum fell more than $10 in morning trade yesterday , with the mood of international investors, according to Dow Jones Newswires, being "dented" by signs that the US Federal Reserve is not about to launch a third round of quantitative easing.
Stanlib head of resources Sholto Dolamo concedes that while the resources sector has taken a serious knock, and finding resources optimists is not dissimilar to finding a needle in the proverbial haystack, he says the current panic has created buying opportunities.
"Share prices are certainly pricing in a much more severe demand- destructive situation than what is likely to happen. We believe the current panic creates opportunities to buy some of these companies at depressed prices," Mr Dolamo said.
Steve Meintjes, a strategist at Imara SP Reid, does not think there is "panic" yet , but agrees the recent sell- off creates opportunities that "investors should look at closely".
Jono Remington-Hobbs, a commodities analyst at Fast Markets in London, says policy makers are behind the curve at the moment, but decisions will need to be taken soon. "We're in a cross-current where monetary policy is too far behind the curve to support prices for the time being. You can't be particularly positive in the short term," he said.
"We have been more negative than others on markets after a corner was turned in February/March - we felt that something was happening in the global economy that was not being translated into asset prices at the time. The recent price falls reflect the fact that markets have finally caught on to - and caught up with - that change," Mr Remington-Hobbs said.
"I think we have seen a couple of months of a co-ordinated slowdown in the global economy. The question is: will the policy response be strong enough to support commodities prices later in the year ? In order to see this support you will need another round of quantitative easing in the US and further policy and stimulus in China. This sort of policy response would be positive for commodities, especially gold.
"Policy uncertainty is clearly depressing demand confidence at the moment," he said.
"The gold market bulls are fading and need to show fresh power soon," said Jim Wyckoff, a contributor to Kitco News , yesterday. The reason for intraday losses of more than $20 in precious metals prices on Wednesday was that no fresh clues on US monetary policy actions appeared in the Federal Open Market Committee minutes . According to Mr Wyckoff, most market bulls want the Fed to embark on another (third) round of quantitative easing of monetary policy - nicknamed QE3 - and were hoping to find hints in the minutes that such action is coming soon.
Mining production in SA has been a major problem following 10 months of contraction. Total production was up just 0,8% annually in May, according to data released yesterday.
"The outlook for the mining sector remains bleak in the short term," said Nedbank economists Dennis Dykes and Isaac Matshego yesterday.
Weakening global growth prospects, with manufacturing conditions having deteriorated in recent months, coupled with difficult operating conditions in the domestic mining sector, will continue to undermine the performance of mining production in the months ahead, they said.
Mr Dolamo says investors need to have a clear understanding of the long- term demand drivers and whether supply will either exceed demand given the announced company supply response and available resources. This may require "filtering out the current noise" and thinking clearly about these drivers for each commodity.
Stanlib believes commodities demand will continue to be driven by emerging economies led by China for at least the next decade.
China's economic growth has been primarily infrastructure-led as it has been on a drive to urbanise and move more people into the middle class. As a result, China has been the main demand drive of infrastructure-based commodities and steel-based materials . Also, China has increased its global share of demand in metals like copper, which goes into power generation .
"As a resources investor, one has to take a view on how much longer this theme has to run. Our view is although there might be a slowdown in the growth rates (that is from double-digit to perhaps single-digit) this trend is still likely to continue in the next few years," said Mr Dolamo.
Once the urbanisation drive has been achieved and a mass of people in the developing economies has been moved into the middle class, these economies will transcend into growth biased to "consumer consumption".
"For example, Anglo's diamond division (De Beers) and its platinum division could be the beneficiary of increased jewellery expenditure."