For 2H21, the progress of vaccination campaigns will be pivotal to global economic activity and recovery, says Exxaro. Consumer spending is expected to be resilient as economies reopen, travel picks up, and social activities resume. The shift in energy transition policy will continue to intensify towards a global move for carbon neutrality/Net Zero by 2050 in the run-up to COP26 scheduled for November 2021.
The South African economy has been hit hard by the pandemic as it further exposed the growing lack of fiscal capacity, reinforced by a worsening debt trajectory, rising gross borrowing requirements, and a high level of contingent liabilities granted by the government. These fiscal imbalances will have a knock-on effect on the economic reconstruction and recovery path for South Africa into 2H21.
During 1H21, the South African rand (ZAR) strengthened remarkably on the back of strong global appetite for risky assets, a weaker US dollar, robust commodity prices, better-than-expected domestic fiscal outcomes and encouraging signs that the governing political party started to act decisively against corruption allegations within its ranks.
The rand/dollar exchange rate is expected to hold within current fair value levels, but to remainvolatile, during 2H21.
COMMODITY MARKETS AND PRICE
The API4 index price is expected to be supported into the early part of 2H21 by strong demand from the northern hemisphere summer and rising gas prices, together with the slow recovery of supply. However, towards the latter part of 2H21, prices are expected to soften as supply is anticipated to recover whilst demand weakens as temperatures cool. The possibility exists that China could relax restrictions on imports during 2H21.
Turning to the iron ore market, tight market conditions are expected to persist during 2H21. Strong steel mill profitability, ongoing stimulus, and multi-year highs on leading indicators such as PMI reinforce the likelihood of further acceleration in steel production and iron ore demand.
Exxaro anticipates the demand and pricing for sized coal domestically to remain relatively stable, as economic activity improves from levels observed in 2020 because of the pandemic. The domestic unsized market will continue to experience tremendous pressure on the back of TFR’s performance, as domestic mining operations continue to struggle with the evacuation of coal destined for export. On the international front, Exxaro expects that the impacts of the pandemic on coal markets will continue into 3Q21 as the second and third waves grip different parts of the world.
TFR’s poor performance on domestic and export flows is most concerning and Exxaro expects this situation to continue to impact very negatively on our ability to move coal to customers and ports, resulting in lower than previously guided sales volumes. Further impacts on production and sales will be reviewed and communicated during our next market guidance in August.
The changes in product demand and TFR performance has put a strain on our ability to produce coal at optimal levels, putting pressure on our unit cost in the Mpumalanga region.
This has compelled us to think innovatively about how we can respond quickly to the value chain interruptions. Our integrated operations centers (IOC’s), coupled with our Market to Resource (M2R) optimisation programme, have enabled speedy decision making in our business, enabling quick responses to fluctuations in the value chain, whether resulting from rail performance or product demand.
Exxaro’s Operational Excellence and digital programmes are now focusing on specific projects to manage stock levels and production costs. This will allow the company to continue with its efforts to land our product competitively across various markets.
The pre-feasibility study on determining the way forward for the Moranbah South hard coking coal project is on track to commence in 2H21.