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The SA Daily 05 February 2019

Iron ore and the rand

  • The rand’s recent gains come arguably partly from iron ore prices rising in the wake of the Vale Dam collapse in Brazil.
  • This recent rise in iron ore may not last, especially as growth slows in China and the world — but we nonetheless contemplate the correlation between ore prices and the rand.
  • Iron ore accounts for 12.44% of total SA mining production, 17.89% of base minerals exports, and 10.4% of total mining commodities. SA ore is high grade, and we are in the top 10 ore-producing countries in the world. The rand therefore naturally has a correlation with iron ore prices.
  • Our bi-linear regression equation shows that 76% of the variation in the USDZAR exchange rate is attributable to iron ore price movements. The equation shows an elasticity of -0.48 on the USDZAR exchange rate, which implies that a 1% increase in ore prices is associated with a 0.48% appreciation in the USDZAR. So, a US$0.66 per ton increase in iron ore prices is associated with a R0.06 appreciation in the rand, using ore prices and USDZAR as at last week.
  • However, this relationship is not static and may therefore vary, depending on model specification, particulary when using a multivariate regression model. Also, iron ore prices may well come down again. We forecast the rand at R14.00 by the end of this quarter (Q1), then recovering to R13.40 by end-2019.

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