What future for SA mining? Anaemic investment, regulation hobble industry
BN
JOHANNESBURG — South Africa’s mining industry has faced huge pressures in recent years as the sector has shrivelled in size and importance. Mining was once the bedrock of the South African economy, but falling productivity and throttling regulation have had major impacts. Innovation and technology are the only possible saviours for the industry, as this writer points out below. – Gareth van Zyl
By Terence Corrigan*
There is a quaint morality tale familiar to many people around the world. A young boy sought to trick an old man who had an unsurpassed reputation for wisdom. The boy held a dove behind his back and asked the old man whether the bird he had brought along was alive or dead. If the old man said it was dead, the boy would produce the live dove. If he answered that it was alive, the boy would snap the bird’s neck, thereby proving the old man wrong. The old man mulled the question, stroked his beard, and replied: “The answer is in your hands.”
This is typically recited as a comment on people’s agency, emphasising that the choices they make matter. But it contains darker signifiers as well: hubris, venality and pride. It is also a metaphor for the future of South Africa’s mining industry.
Long the bedrock of South Africa’s economy, concerns about the industry’s future role – indeed, its future existence – is in deep doubt. On the face of it, this is counterintuitive. South Africa has an extraordinary mineral endowment, estimated at around US$2.5 trillion. Mining contributes about 8% of South Africa’s GDP, and 5% of the country’s employment, and roughly a third of its exports. The country’s mining industry has over the years made an impressive contribution to the global commodities market and the development of mining technology.
But indicators for the future are not encouraging. The 2017 edition of Mine SA, PWC’s annual analysis of the country’s mining industry, lays this out. While the 2016/17 financial year was better than the preceding year, the overall impression is of a deeply troubled industry.
Mining revenue for 2016/2017 stood at R371 billion, in nominal terms a significant rise over the R333 billion recorded the previous year, and the R335 billion the year before. Net profits stood at R17 billion, also an increase over the substantial loss the previous year (R46 billion), and the small profits of R5 billion and R2 billion achieved in 2014 and 2015 respectively. But they represent a big drop from the highs of previous years – R65 billion in 2012. However, in real terms – adjusted for inflation and price fluctuations – they denote stagnation. As the report comments: “The ten-year summary shows flat revenue with significantly reduced profitability as a result of continued increases in cost pressures and marked impairments.”
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The trends relating to capital expenditure are revealing and worrying. In the 2016/17 financial year, this amounted to R48 billion. This is the lowest level recorded in a decade. In 2008, capital expenditure stood at R57 billion. (The industry was experiencing significant impairments – that is, decline in value of assets – too; the report notes that these amounted to some R100 billion in the past three years.)
This matches other research. Late last year, management consultants Datta Burton Associates estimated that capital expenditures, in real terms, stood at that point at roughly half the level reached in 2008. Mining firms were not investing much beyond what was required to maintain their existing assets – and perhaps not even at that level.
Anaemic investment is the single most serious challenge confronting the industry. Henk de Hoop and Sandile Mbulawa of Rand Merchant Bank have remarked: “The mining sector requires constant investment for the value sitting below the surface to be realised sustainably for generations to come.”
So what accounts for this? A major consideration is the changing nature of the mining industry, globally and in South Africa. While demand for minerals – buoyed by Asian, and above all, Chinese demand – has offered valuable opportunities, a countervailing reality is that rich and easily accessible deposits are gradually being worked out. Mining firms are increasingly having to look at new jurisdictions and new models of operation.
This takes countries’ mining industries into uncharted territory. If tomorrow’s mining industry will not look like today’s, it is important that stakeholders – mining companies, government, labour and communities – find one another to prepare for this. Mining is, after all, an industry that evokes enormous sensitivities and competing claims, irrespective of the historical context.
Thus, Datta Burton has noted the decline in productivity in South Africa’s mining sector. To address this will require adaption and innovation, and this, as Datta Burton notes, “requires major investment to realise … and there is hardly any regulatory encouragement for it”.
No development has so rocked mining this year than the revised Mining Charter. Its demands, such as raising BEE ownership from 26% to 30% within one year, were unworkable and would inevitably plunge the industry into ferment. That it apparently ignores the input from mining companies speaks volumes about the absence of a cooperative relationship between business and government. The upshot is a volatile, low-trust environment, one primed for conflict.
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Following the release of the Mining Charter, investment houses were blunt in their language. JPMorgan Cazenove indicated that “a protracted and antagonistic timeline is likely, which we expect will be negative to SA risk premia and corporate and institutional investment in SA’s mining sector”. Investec warned that the Charter would make the mining sector “uninvestable to a large segment of the market and it will be very tough to attract fresh capital to an already unloved sector”.
Currently, the Charter is being challenged in court. That it has come to this is deeply concerning. But it is emblematic of the problems facing South African mining: the industry has a vitally important role in the country’s future, if only it can be freed from the political and regulatory shackles that constrict it. And much of this is directly within the purview of policy makers to address.
What future, then, for mining in South Africa? Like the dove in the boy’s hands, the answer is in ours…
- Terence Corrigan is a Policy Fellow at the Institute of Race Relations, a think tank that promotes economic and political freedom.