South African Mining: Where is it Headed?

African continent remains the hotbed for mining bauxite, cobalt, industrial diamonds, manganese, phosphate rock, gold, platinum group of metals and zirconium. Extractive industries are essential for the much-needed development and growth strategies for the African countries.

Looking back, African mining reached a new high in the years between 2001 and 2008 that saw a sustained commodity boom, famously called the Commodity Super Cycle that was driven mainly by Chinese demand (China imported $100-bn worth of minerals recently in 2012).

South Africa’s mining industry, during the same time, conspicuously contracted 1% a year. Employment in the country decreased while in other mining jurisdictions it increased. Remember South Africa is the nation that is endowed with the most in situ mineral reserves in the world (valued at $2.5 trillion).

South Africa holds great potential to drive rapid economic growth by utilising the great mineral wealth it sits on. But the question is, will it?

Here are the issues bogging South African Mining at the present time.

Depressed Commodity Prices

Mining industry as a whole has been suffering from depressed commodity prices. Dwindling demand, strong US dollar and uninspiring Chinese economy have been the cause of poor performance of commodities in the global market.

Oil has crashed due to oversupply, iron has hit a five-year low on low demand and surging supply, copper has fallen 12% in last one year and the price of thermal coal has tumbled 25% and in December 2014, it hit a five-year low.

The resource-rich countries have cut the investment in mining due to the continued bad performance of commodities. This, in turn, has forced mining companies to undertake substantive cost reductions, and now they are moving forward with more streamlined cost structures.

Unreliable commodity prices have made sustainable productivity improvements to be a key focus for mines across the world. This is a key lesson that should not be forgotten in the hay days of the future.

Regulatory Regime

Predictability in tax structure is one of the key influencer of investments in any country and South African government wanting to derive greater benefit from its minerals, ever increasing royalties and taxes are worries for investors.

A transparent, taxation policy is a prime consideration for investors to invest their money in any country, and investors are worried about South African government’s constant push for greater benefit from its minerals by its move to ever increasing royalties and taxes.

Last month, Ngoako Ramatlhodi, the new Minister of Mineral Resources hinted of minerals used in fuel cells, catalytic converters and jewellery, even coal and iron to be declared as “Strategic” for purposes of boosting industrialisation in South Africa. This move will curtail exports and force the mining companies to sell all their yield to local companies at prices set by the government. President Jacob Zuma has refused to sign it into law citing concerns about its compliance with Constitution and international laws. Mineral Minister is now working to have the revised law finalised in six months.

Trade and Industry Ministry is bent on developmental pricing for the sake of beneficiation. It believes input pricing is the bottleneck for industrialisation and hence the necessity of developmental pricing. On the contrary, many experts believe that there is a range of other factors that actually are affecting South African growth such as unreliable electricity supply, soaring transport and port charges, labour instability and poor labour productivity.

At a time when prices globally have fallen by 40% for iron, the push for developmental prices is going to bring coal and iron ore companies under a lot of pressure. This might even tick the companies to reduce or in the worst case, stop their operations altogether.

All these concerns have influenced those with the money to adopt a “wait-and-see” approach to investing until the legislations on these contentious issues are clearly defined.

Mine Workers Unrest

Labour costs in South African mining sector amount to 45-50% of the total cost while global average of 30 to 40% of the total cost with worker efficiency 10 times greater.

Regular workers strikes are also affecting the industry. The tragic events at Marikana strikes in August 2012 resulted in 44 people losing their lives. It was the most violent strike in South Africa.

In early 2014, a wave of devastating strikes along with a great degree of violence brought a big part of the country’s vital Platinum sector to a halt for nearly six months, as the new union (Association of Mines and Construction Union) successfully established itself.

The three platinum producers, Impala Platinum, Anglo American Platinum and Lonmin Platinum Mines together lost about 40 percent of platinum production and a revenue loss of about R24.1 billion as a result of the strike. GDP for the first quarter reduced by 1.3 percent.

The same union is now making efforts to do the same in the diminishing, but still very large, gold mining sector, which has to be troubling.

Energy Crisis

Tony Blair at the recently concluded 2015 Mining Indaba said, “For a developing country today, access to electricity is the single most critical element of success, not just for business, but for the country to be connected to the world”.

South Africa is facing crippling short supply of electricity. The South African Finance Minister, Nhlanhla Nene acknowledged recently that the current low and unreliable levels of electricity supply are the biggest constraints to economic growth in South Africa and there is a risk that it could dampen the 2% projected GDP growth even further.

The government is slapping a temporary extra levy on electricity on intensive users which is over and above the higher tariff increase planned from 2016. A small respite is, this is going to be withdrawn when the carbon tax is implemented soon.

What does this all mean?

The general view about the industry seems to be a little less encouraging. The depressed commodity prices, an unresolved regulatory regime, the looming labour disputes and an energy crisis are dampeners for investment in mining at the present time.

Fraser Institute Survey 2014 placed South Africa at 64th of the 122 global mining jurisdictions it surveyed for “Mining Exploration Investment Attractiveness”. Compare that to Namibia (25), Botswana at (26) and Burkina Faso at (50).

This was further evidenced by the sentiment at 2015 Mining Indaba, the biggest mining investment conference in Africa. Of the 7000 people attending the conference in Cape Town, not a lot of them seemed to be interested in investing in South Africa.

It is not all gloomy, though. A small ray of hope now seems to be the increased demand for minor metals due to uptake in tech products around the world. The metals like coltan, uranium and magnesium are used in smartphones, laptops and other mobile devices. This has been identified as one of the most important trends for 2015.

With the volatility as the new norm, embracing uncertainty and finding ways to manage it will be key to success in the coming days. Investments in minor metals do seem likely in the short term.