US president Donald Trump’s decision to pull the US out of the Iran nuclear deal and reimpose sanctions has pushed oil prices above US$79/bbl for the first time since November 2014.
Though Trump’s move will not affect supplies of oil to SA (SA stopped importing oil from Iran in 2012), higher rand oil prices are likely to have an effect on domestic inflation.
It also means that companies worldwide must stop doing business with Iran or risk the ire of the US government.
The net impact on corporate SA is hard to quantify.
"For many companies, particularly in financial services, Iran is already a sanctioned country, which limits significant dealings with the country," says BNP Paribas economist Jeffrey Schultz.
"On the other hand, some diversified industrial companies like Sasol should stand to benefit from higher global oil prices which have a direct impact on their bottom line."
Airbus and Boeing are among the international companies that at first glance appear to be most negatively affected. However, Aerosud, the Centurion-based aeronautical engineering and manufacturing company which supplies both companies, doesn’t expect any negative impact on its sale volumes.
In fact, Aerosud MD Jaco Olivier says Airbus and Boeing have notified their global supply chains of plans to increase rates to support their current order books.
Olivier says recent orders by Iran to purchase around 200 aircraft, though sizeable in US dollar terms, are tiny compared to Airbus and Boeing’s total order books and eight-to nine-year production backlog. They should have little difficulty reshuffling their deliveries to other buyers.
On the other hand, Trump’s move is a major blow to MTN. The mobile operator has about €200m of legacy cash stuck in Iran. MTN typically converts Iranian rials to euros and then to rands, says CFO Ralph Mupita.
Britain, France and Germany have indicated that they remain committed to the Iran nuclear deal, so MTN should still be able to extract funds from MTN Irancell. MTN also managed to get about €60m out of Iran prior to Trump’s announcement.
But analysts note that the liquidity issues in Iran are weighing heavily on MTN’s share price.
"If the market was not concerned about Iran then MTN would probably be trading in the R140s or R150s now. So the market has already been sceptical on that," says Mergence Investment Managers portfolio manager Peter Takaendesa.
In addition to the direct impact on certain SA companies, Trump’s move is likely to have a negative macroeconomic impact on the SA economy. The higher oil price will push up inflation and take interest rate cuts off the table. It could also dent consumer confidence and spending.
Higher oil prices will scupper further rate cuts; small open economies like SA will be the biggest losers from Trump’s isolationism
— What it means
Schultz expects higher rand oil prices to be a headache for domestic inflation over the coming months given that fuel prices have a 4.6% weighting in the domestic inflation basket and indirectly affect food prices, which have a 15.5% weighting.
Already the latest underrecovery in the domestic petrol price stands at around 75c/l.
If sustained, fuel prices are likely to increase another 5% in June, which will bring the cumulative increase in fuel prices to nearly 14% in just three months.
Coming on top of the recent Vat increase, this could cause a significant correction in consumer confidence.
It could also force the Reserve Bank to view the risks to the inflation outlook as having shifted to the upside, which would make further rate cuts unlikely for now.
Schultz thinks the bank has, however, done enough to anchor inflation expectations for the moment.
"At worst we think the bank has to stay on hold for the remainder of this year," he says.
"Certainly the market pricing in modest rate hikes over the next 18-24 months seems overdone."
For Sanlam Investment Management economist Arthur Kamp, the real risk lies in greater US protectionism.
In addition to pulling out of the Iran nuclear deal, the Paris climate change agreement and the Trans-Pacific Partnership, Trump has imposed import tariff hikes, tightened immigration policy and changed tax policy to encourage domestic US production and the repatriation of foreign profits.
"It seems the former global champion of free trade and global integration is disengaging with the world," says Kamp. "At least many countries, including in Europe and Africa, continue to support the idea of free trade and global integration. But this may not be a sufficient counterweight."
Ultimately, increased isolationism and protectionism can be expected to reduce efficiency, implying softer global growth and higher inflation. Small open economies like SA are likely to be the biggest losers.
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