GBR talks to South African Chamber of Mines COO, Roger Baxter.
RB: South Africa has one of the most developed mining sectors in the world. It is the world’s fifth largest mining economy from a GDP perspective. China has the world’s largest mining sector, followed by the United States, Australia and Canada. South Africa mines some 60 minerals and exports to over 100 countries in the world. The sector creates 1,4 million jobs in South Africa (500 000 directly and about 900 000 jobs through the multiplier and induced effects) and earns more than 50% of the country’s merchandise exports.
The industry has played a significant role in the economic development of South Africa over the past 140 years and is the primary reason that South Africa is by far the most industrialized country in Africa. The mining sector had the critical mass that led to the development of an industrialized society. In South Africa’s history of 126 years of gold mining, the country has mined more than 51,000 tonnes of gold, which is just about 30% of all the gold that has ever been known to have been produced by humankind. Gold mining production in South Africa peaked in 1970 at 1000 tonnes, contrasted to the production of 167 tonnes in 2012. Gold was once again the biggest South African export in 2012, because of the strike crisis that has been affecting platinum production that used to be the biggest export up until that year. In the last 20 years, the mining sector has seen growth in the non-gold mining side, especially in the area of platinum group metals, iron ore, chrome and manganese. Coal production has also grown, albeit at a slower pace than the other bulk commodities.. As the contribution of gold mining diminished, these other minerals have helped compensate for the fall in production.
What is the most exciting commodity to watch in South Africa?
RB: In 2012, in order of size, the largest minerals by sales value was coal at R96 billion followed by gold at R78 billion, platinum at R68 billion, and iron ore at R51 billion. While it requires nurturing, gold will remain an important part of South Africa’s economy as the sector still employs 135,000 people and continues to generate a large amount of foreign currency. South Africa is home to 87% of the world’s known platinum reserves and is the world’s largest primary producer of platinum for supply to global markets. South Africa is also the fourth largest exporter of iron ore in the world. Another interesting feature is that South Africa holds 80% of the world’s high-grade manganese and could become a much bigger global manganese player.
How has South Africa’s mining sector performed over the last 10 years and what are some of the greatest challenges that sector has to come to face?
RB: Over the last decade the mining sector contracted by 0,3% per year in real GDP terms. During the same time the South African economy grew at 3,5% per year. If mining had grown at the same momentum the country’s overall growth rate would probably be at around 4% instead of 3,5%.
In the mature gold mining sector production has fallen off quicker than people had anticipated partially because of the electricity crisis of 2008, which prematurely downscaled the older shafts. Over the past few years the electricity situation has remained a challenge with large industrial customers continually being requested to cut demand during tight periods. The mining sector has faced a set of global and local headwinds. Globally, it was adversely affected by the 2008 financial crisis and the large fall off in commodity prices. The local headwinds have been uncertainty in the regulatory environment because of the nationalization discussion. Since 2011, the sector has faced a challenging labour market with large scale unprotected strike action in 2012 and the Marikana tragedy which negatively affected investor perceptions of the country. Rapidly escalating input costs such as the three-fold increase in electricity prices over the last five years has added to a difficult operating environment as well as a number of infrastructural constraints especially pertaining to rail and electricity. This however does not mean that the future for mining in South Africa is bleak. The South African mining sector has a crucial role to play in the country’s further economic development. South Africa’s current growth rate of 3,5% per year, with the mining sector not performing at all, means that the economy only doubles in size every 21 years and that is simply too slow to tackle the poverty and unemployment challenges that the country faces. The existing growth rate is a credit fuelled, consumer driven, import intensive, imbalance creating growth and there is recognition from the government that we need to get the tradable export sectors, such as mining, growing at a much faster pace.
What is the target growth rate for the mining sector and what constraints need to be removed in order to achieve this target?
RB: We believe that growth rates of between 3% and 5% are possible, if the constraints can be resolved. On infrastructure if we just look at the bulk commodities, we could add another 30 to 40 million tonnes of coal exports through Richards Bay Coal Terminal, if through collaborative partnership the rail infrastructure is properly developed. The same applies to iron ore where exports can be taken up from 60 million tonnes to 85 million tonnes. The size of the manganese market can be trebled if there were access to heavy haul rail. While South Africa hosts 80% of the world’s high-grade manganese, the sector only accounts for 15% of global supply because of inefficient and costly rail. Looking just the three bulk commodities; coal, iron ore and manganese, we could add another R80-100 billion worth of export revenue in a three to five year period if the collaborative partnerships develop the necessary efficient infrastructure.. Electricity is also a binding constraint for the sector and has been since 2007 and while Eskom has to deliver Medupi and Kusile, private participation in this sector to supplement existing players is crucial to break the short and medium term logjam in supply.
On the regulatory side, there has been a lot of work to promote certainty and nationalization of the mines has been taken off the table. The government has put the MPRDA amendment bill together and the industry has worked hard with the government to address a number of different constraints through this bill. The Davis-tax review that is coming up is also an important issue and industry will be able to give their input as far as that is concerned. Treasury is also in the process of putting carbon taxes in place and we would like to see that certain sectors such as mining are not unduly prejudiced by that. Our view on the regulatory side is that we are emerging with greater certainty. South Africa has a legal framework, which is congruent with global practices. This year the industry will be assessed on where it is at a transformation level and the audit process is currently underway. The mining sector has done more for transformation than any other private sector in the economy and more than R150 billion worth of BEE transactions have been agreed to over the last decade. We believe the regulatory front is pointing in the right direction.
How has South Africa progressed in terms of stabilising the mining labour market?
RB: In February 2013 the mining companies collectively signed a peace accord with all unions driven by Minister of Mineral Resources, Susan Shabangu. In July we signed the Deputy President’s Framework Agreement for a Sustainable Mining Industry. The focus was to stabilize the labour market and to encourage stakeholders to work within the labour laws to air their grievances. In 2013 illegal strike activity has diminished. There has also been a lot of emphasis on reducing the level of violence and intimidation and progress has been made. There are expectations from the unions on what the mining companies can afford to pay, and at the same time there are companies who have been struggling especially in the platinum and gold sectors where prices have fallen off significantly while costs have risen. Companies are working with the unions and government to find solutions to restructure because of the viability of these businesses.
Why does South Africa remain a competitive mining destination?
RB: South Africa has a number of ratings that are excellent even at the global level. Just looking at the World Economic Freedom report highlights the efficiency of South Africa’s capital markets, the sophistication of the banks and the protection of investors. On auditing standards, South Africa is ranked number one in the world and is amongst the top 10 countries from an investor protection perspective. The nationalization debate over the last three years has been the dark shadow that has been cast over mining in South Africa, but the right decisions have been made. We are moving out of that shadow to place where the regulatory environment is more certain. We have a globally competitive taxation system and the royalty act is at the forefront of global best practice. We have a lot more work to do and there are challenges, but we are making progress. Collaborative partnership and joint problem solving is key. Mining will play a crucial role in getting South Africa to the next level and we are working through a collaborative effort with government and other key stakeholders. From the Chamber of Mines perspective we are “Putting South Africa First” And working with the key stakeholders to help realise the large potential the South African mining sector has.