External demand developments and the minerals industry

This paper analyses the reaction of the minerals industry to external demand developments in South Africa. This is achieved by augmenting a Taylor1993 rule type central bank monetary policy reaction function with an indicator of external demand. The empirical results provide evidence of a statistically significant effect of an increase in external demand on output of the minerals industry, which increases slightly and peaks out after 2 months following which it decreases and bottoms out after 5 months. The effect of the surprise increase in external demand on mining and quarrying output is statistically significant between 7 and 10 months. Output of the minerals industry, thus, does not conform to the classical theories of international trade, at least at business cycle frequencies, such as the Heckscher-Ohlin, or factor endowment, theory which emphasises specialisation in production of the most abundant factors. External demand is important for economic activity, hence policymakers should monitor the developments in external demand conditions to support economic growth and the minerals industry.