Beneficiation adding value to mining in South Africa.
Across Africa governments are looking to their geology as a path to socio-economic development. The continent’s relatively untapped mineral resources have, for some time now, brought vital foreign exchange into states seeking to raise their living standards and the productivity of their economies, and become more significant players in the global market. To date, in the vast majority of resource-rich African states, benefits from mineral exploitation have been limited to direct monetary gain from taxes and royalties on mining activity. However, there is a growing realization that far greater and more sustainable benefits can be obtained from every gram, ounce or metric ton of mined minerals through development of value-adding industrial linkages.
Beneficiation is the transformation of a mineral, or a combination of minerals, into a higher-value product, which can either be consumed locally or exported. The majority of Africa’s mineral-rich states are not only earning the minimum from their resources, via the export of unprocessed ore, but are also limiting employment benefits, wealth diversification and leaving themselves vulnerable to the fluctuations of the global resource markets. A lack of integration between the extraction of minerals and the wider economy – integration that can be achieved by utilizing these minerals for downstream processing – leads to the creation of rentier states, where the concentration of wealth in a sector unreflective of an economy’s true capabilities opens opportunity for corruption and threatens Dutch Disease.
This topic is coming to the fore in Southern Africa, as governments keen
on stimulating economic development look to their mining industries – among the most established on the continent – as a foundation. Those governments are now, through policy and direct intervention, seeking the local beneficiation of their mineral resources. In 2011 Zimbabwe banned the export of chrome in an effort to develop internal refining capacity. Zambia allows companies to deduct the costs of refining and smelting from the 6% mineral royalty and only applies its 15% export tax to cop￼￼￼￼￼￼￼￼per and cobalt concentrates, not more refined products. South Africa, the continent’s largest and most mature mining market, has made beneficiation policies a central pillar of its “New Growth Path” economic development policy: in 2011’s state of the nation address, President Jacob Zuma of South Africa said: “one of government’s priorities this year is also to finalize and adopt the beneficiation strategy as the official policy of government, so that we can start reaping the full benefits of our commodities.” These measure have met with mixed results. In Zimbabwe the government relaxed its ban on chrome exports after it was estimated to have cost the country millions of dollars in revenue and thousands of jobs: a lack of capacity meant that those miners who could not access smelters were forced to shut down. Seemingly undaunted, the government has recently proposed a ban on platinum exports in a move that analysts have described as potentially disastrous. In South Africa amendments to the Mineral and Petroleum Resources Development Act (MPRDA), which followed the “New Growth Path” in 2013 and gave the government further control over its post-extraction resources, have brought the government to loggerheads with the mining industry. The Chamber of Mines has called the provision “unconstitutional” and South Africa’s legal sector supports this claim, stating that the clause would create legal uncertainty around established and historical rights, transfer of rights, designated minerals, penalties, and the extent of the state’s free carried investment in the oil and gas sector. Moreover, the bill promotes “unguided administrative discretion” which runs counter to the constitution’s requirement that legislation be administered in a predictable fashion.
Beyond the legal debates or practical application of these policies, however, lies a very simple reality: the mining sector deals in mineral extraction, while mineral beneficiation crosses into the realm of the manufacturing sector. “In mining we know very little about the resources we mine and we have to make large capital decisions on limited knowledge. If we then have to be the supporter of downstream inefficiency, we are setting ourselves up for failure. The possibility that the mining industry will provide effective subsidies to support inefficient industries beggars belief in a modern country trying to assert its regional economic credentials,” suggests Mark Cutifani, CEO of Anglo American. The mining industries of Southern Africa can compete with the best in the world: Botswana ranks in the top 20 of the Fraser Institute’s 2012/2013 Annual Survey of Mining Companies; Namibia in the top 30. Yet their manufacturing sectors, for the most part, remain inefficient and underdeveloped compared to the powerhouses of Asia or elsewhere.
Shortages of skilled labor, inadequate infrastructure, and regulatory hurdles are challenging enough to solve in one sector: making mining operations dependent on two would appear to be both unfair and rather futile. Late in 2013, African Rainbow Minerals (ARM) ferrous division chief executive Jan Steenkamp outlined the reasons why the JSE-listed ARM and its joint venture partner Assmang would be beneficiating South African-mined manganese in Malaysia and not South Africa.
Steenkamp said that an attractive 15year electricity supply agreement, at a fixed 2.5% escalation clause, has been concluded in Malaysia, where the electricity is already 12% to 15% cheaper than in South Africa. The 160,000 mt/y, $328-million manganese alloy smelting project in Sarawak, Malaysia, which will be built in partnership with China Steel Corporation and Sumitomo Corporation, had also managed to clinch the last distribution capacity from the first phase of a new hydro power station. The project would enable the South African company to hold on to the advantage of integrated production knowhow boosted by high-grade South African manganese while it continued to search for a longer-term South African beneficiation solution, possibly closer to the source of the manganese in the Northern Cape. “Our commitment to local beneficiation continues,” ARM executive chairperson Patrice Motsepe said, yet the understanding is that this commitment depends on South African beneficiation being economically feasible.
The situation is even more extreme in the rest of Sub-Saharan Africa, where in many states associated manufacturing activities remain at a restrictively early stage of development: evidenced by the fact that foreign investment in manufacturing only surpassed that in extractive industries in 2012. In response to the federal ban on copper and cobalt ore exports in the DRC, for example, Governor Moise Katumbi of mineral-rich Katanga province simply rejected the order, claiming the province has insufficient electricity for processing plants. “If you do not have enough electricity you cannot process the concentrates, and as the state we need to furnish electricity to miners. They will continue to export concentrates until there is enough electricity,” stated Katumbi, underlining the African beneficiation challenge.
We need only look across the Indian Ocean to see how “beneficiation” polices can backfire. In 2009 resource-rich Indonesia introduced legislation preventing the export of raw materials without certain downstream investment criteria being met. Originally set to be enforced on January 1st 2014, the policy sought to encourage investment into processing facilities and smelters. After five years, and on the dawn of the law’s enforcement, only one of the 19 smelters originally conceived is prepared to begin operations and few are prepared for what implications this ban might have on Indonesia’s economy. Speaking in 2013 Syahrir Abubakar, executive director of the Indonesian Mining Association predicted “were the government to proceed with a full export ban, Freeport McMoRan anticipates a loss of 30,000 laborers: for Newmont, 60,000”.
Resource-dependent African nations can ill afford such consequences in their own mining sectors. During this extended downturn in global mining markets and with mining labor disputes still rife in South Africa, it seems an inopportune moment for this style of resource nationalism to surface in African economic policy.
This is not to say that beneficiation should not be encouraged, or that governments cannot play a role in encouraging it. Yet policies must attempt to make it economically viable to engage in local beneficiation, rather than force mining companies to work with a manufacturing sector that, in many cases, is simply not there. One could argue that Zimbabwe’s chrome ban had a positive outcome – Chinese company Afrochine Smelting completed a $25 million chrome smelter in Selous in November, no doubt motivated by local demand – but it came at a heavy price. The same outcome could have been achieved by the type of policy implemented by Zambia, who early in 2013 did not ban First Quantum Minerals from exporting 60,000 mt of copper concentrates, but told them they would have to exhaust all local processing options first. The financial benefits mining companies operating in Zambia accrue from engaging in local beneficiation may still draw complaints from some in the industry – viewing them more as penalties for those who do not rather than rewards for those who do – yet they have been effective: refined copper and copper alloys (unwrought) account for 63.5 % of the country’s copper exports.
Botswana has also enjoyed success in developing downstream diamond processing, with De Beers relocating its formerly London-based rough diamond sales activity to Gaborone. This has been enabled by the government’s efforts to establish an attractive downstream environment: infrastructure was provided in the specially constructed Diamond Technology Park, and the government has been praised for adopting reasonable regulations on employment, taxes and currency exchange. The profit threshold for diamond processing in Botswana has now fallen from 1 carat in 2000 to 0.4 carats.
There is some success in South Africa too. In March 2013, Samancor Manganese opened its Metalloys smelter, which contains a 1 billion ZAR furnace from BHP Billiton. This will allow BHP Billiton to beneficiate nearly 30% of its manganese ore production in South Africa and gives a huge boost to the governments beneficiation strategy; adding value to the ore and creating nearly 2,000 jobs. However these companies are unusual: Samancor, right from its 1975 origin, had a processing capability far greater than most miners. BHP Billiton is a multinational giant and – perhaps due to its activities in the oil and gas sector where this is more common – is more vertically integrated than most of its peers in the mining industry. What this success highlights, however, is the need for collaboration between the industry and government, rather than the imposition of top-down and often unrealistic regulation. “Although the hurdles may sometimes be quite high and the issues difficult and complex, with the close collaboration between big business, communities, government, employees and all stakeholders, it can be done, right here in South Africa,” said BHP Billiton Manganese South Africa president Ravi Moodley. Governments, however pure their intentions may be to their state and society, cannot disregard these fundamentals. Susan Shabangu, South Africa’s Minister of Mineral Resources, explained on the sidelines of the Africa Down Under conference in Perth, Australia in August 2013, “we are trying to balance the needs of the country with the export market. The export market cannot come at all costs: it must be done in a sustainable, responsible way, understanding that we still have a country which depends on coal for its energy generation.”
More recently she acknowledged that the mining industry has a part to play in defining that balance, suggesting that miners’ concerns will be taken into account, and stating that the government is “open minded” about the 2013 alterations to the MPDRA. For the industry, fighting against what appears to be an inevitable move downstream is not in their interests: the larger the role mineral extraction plays in the economy the more likely governments and communities are to look kindly upon it. “Let me be clear: it is not that the mining industry does not support beneficiation, but the laws of economics are simple and all-powerful,” explains Anglo American’s Cutifani, who also holds the presidency of the Chamber of Mines in South Africa. “South Africa needs to compete where we have competitive advantage, and the most important thing legislators can do is create an environment that incentivizes the massive investment needed in the mining industry, first and foremost, but also in the downstream businesses that make economic sense.”
If South Africa and its neighbors seek to obtain greater value from their extracted minerals through industrial processes, their priority must be to make such an industry economically viable. If they attempt to force mining companies to engage in downstream processing (for example through the full use of export bans) without making this profitable, the effect will be to hamper mining investment rather than encourage beneficiation. Investment into the infrastructure, workforce and regulations needed for a successful manufacturing industry, combined with incentives for the mining industry to work with it, has been and will continue to be a more effective method for promoting beneficiation.
This article was written as part of the research being conducted by GBR for its upcoming Mining in Africa Country Investment Guide (MACIG) 2015. To participate in this report, please contact Sharon Saylor at firstname.lastname@example.org.