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Blog: 4 May 2016 (Cost of Crude)
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A while ago we questioned whether the economic theory of a weaker currency leading to better trade balances. This is a follow up to that article, which can be found here. In our original article we stated that a stronger currency might in fact be better for South Africa's trade balances than a weaker currency, due to the fact that South Africa's demand for certain imports are inelastic (I.e. demand for a good or service is not affected by price). Think about crude oil. South Africa will keep importing crude oil irrespective of the price. And in this blog post we will focus on the quantity, value and price per unit of crude being imported over the last four months, to show the impact a stronger Rand has on the value of our crude imports (which made up around 7.7% of South Africa's total imports for March 2016).
The graphic below shows the following: Gray column - Number of kilograms of crude imported for the month Blue column - Rand value of crude imports for the month Green line - Shows the Rand price per kilogram of crude being imported for the month |
From the graphic above its clear to see from the green line that the price per kilo of crude being imported has dropped substantially from January 2016 to March 2016, in fact the price per kilogram of crude being imported in March 2016 was 13.4% lower than the price paid in January 2016. Put a little differently, in January 2016 we paid R6.7billion to import 1.58billion kilograms of crude oil, while in March 2016 we paid just R400million more for 400million kilograms more of crude oil being imported.
During the same time period the Rand recovered after "Nenegate" from an average price to the US dollar in January 2016 of R16.38 to R15.43 (an appreciation of 5.8%). Crude petroleum over the same period (based on data from the World Bank) moved from an average price of $29.78 a barrel in January 2016 to an average price of $37.34 in March 2016 (reflecting a price increase of 25.4% from January 2016 to March 2016).
During the same time period the Rand recovered after "Nenegate" from an average price to the US dollar in January 2016 of R16.38 to R15.43 (an appreciation of 5.8%). Crude petroleum over the same period (based on data from the World Bank) moved from an average price of $29.78 a barrel in January 2016 to an average price of $37.34 in March 2016 (reflecting a price increase of 25.4% from January 2016 to March 2016).
So while the average $ price of crude has increased from January 2016 to March 2016, the Rand has appreciated against the dollar and the price we paid per kilogram of crude oil being imported has dropped significantly over the same period. Making the value of one of South Africa's largest imports substantially cheaper (even though the international price of crude oil has increased during this period). This just shows again the importance of a stronger exchange rate for countries whose demand for imported goods are extremely inelastic (as South Africa's is for crude oil. Stronger exchange rates will make these imported commodities cheaper and could assist in improving trade balances.
*Note due to timing of payments and shipping and customs processing procedures there are some lags between international commodity price movements, exchange rate movements and values paid per the invoices cleared by customs.
Just as a refresher the graph below shows the latest Rand/Dollar exchange rate and South Africa's trade balances graph.
*Note due to timing of payments and shipping and customs processing procedures there are some lags between international commodity price movements, exchange rate movements and values paid per the invoices cleared by customs.
Just as a refresher the graph below shows the latest Rand/Dollar exchange rate and South Africa's trade balances graph.