SA mining potential crippled, solutions sought
Allan Seccombe | Tue, 13 Apr 2010 15:10
[miningmx.com] -- SOUTH AFRICA'S mining sector must address bottlenecks of railways and ports, reliable power supplies, costs, better defined regulations and quicker administration of those rules to create thousands of new jobs as the industry increases production, generates wealth and become globally competitive.
These are just some of the issues raised in a lengthy discussion document at the heart of sweeping changes envisioned for the South African mining sector by the government, labour and mining companies to ensure that it does not again miss a commodities boom, losing market share and a critical chance to grow employment, bolster government coffers and ensure a vibrant future.
The first draft of the document entitled “Strategy for the Sustainable Growth and Meaningful Transformation of South Africa’s Mining Industry” is in two parts. The first part deals with constraints on growth, while the second section covers transformation and the shortcomings of the sector in de-racialising the mining industry, long the preserve of white ownership and dominance.
The South African mining sector, almost unbelievably, shrank in the 2001-2008 commodity boom that saw its competitor nations growing their mining industry’s by an average five percent.
One of the statistics in the document is that in real 2005 rand terms the value of South Africa’s mining sector had shrunk to R92bn in 2009 from R103bn in 1993. In 1987, nearly 830,000 people were employed on the mines, mainly in the gold sector. By 2009, this number had fallen to just below 500,000 because of the global recession and domestic issues like electricity shortages amongst others.
“The mining sector has the potential to increase employment back to 700,000 people by 2020 if the constraints and obstacles are resolved,” the document reads.
Based on an expectation of a broad range of minerals experiencing a 3-5% annual growth in demand, international consultants McKinsey reckoned that the platinum sector could add 61,000 jobs by 2020, coal 23,000, iron ore 10,000, manganese 3,200 and diamonds some 5,500. Other minerals could add around 15,000 jobs.
The gold sector could slow the rate of declining output from 7.7% a year, which more than halved production to 205 tonnes in nine years. The McKinsey report suggests if this rate of decline slows to 3.9%, South African gold output would fall to 137 tonnes by 2020 and jobs in the sector would fall to 117,000 from 159,000 now.
“An even slower rate of decline is possible for the gold sector, provided costs are constrained and infrastructure constraints are removed (electricity),” the document said.
HIGH ROAD VS LOW ROAD
The document looked at two scenarios, one being where nothing changes, costs increase as they have been doing and logistical bottlenecks remain unresolved. Understandably, this low-road scenario warns of declining mining investment, reduced global market share and the closure of marginal shafts, which entails job losses, an anathema to government and labour.
The bulk of the document, however, focuses on the ‘what if’ scenario and what needs changing.
If the domestic mining sector had grown during the commodity run, if it matched the growth of the rest of South Africa’s economy between 1993 and 2009 of around 3.3%, the value of the sector would have swelled to R173bn, making it 87% larger than the actual 2009 outcome. South Africa’s GDP growth rate would have been 3.6% instead of 3.3%, with increased exports narrowing the current account deficit.
The nominal value of South African mineral sales would have stood at R390bn in 2009 against the R232bn actually achieved, a welcome boost for export earnings.
An OECD country report on South Africa and the Harvard Centre for International Development both picked out the country’s weak export performance as its economy’s Achilles’ Heel” and something that needed urgent attention.
For a variety of reasons South Africa missed the boat and these were dealt with in the document, which was designed to establish a consensus on what the problems are. The next phase is a recommendation by June this year on how to resolve these problems, giving mines minister Susan Shabangu something to work with at cabinet level and within her department to make amendments to laws to iron out any confusion.
While the geological potential of the country is unquestioned, it is the ability to get minerals to the coast and export them that is seen as one of the major constraints. The poor level of education and “abysmal performance” in school maths and science is another factor hampering growth.
CONSTRAINTS, CONSTRAINTS, CONSTRAINTS
There is a high concentration of suppliers in South Africa, which is a relatively small market globally, resulting in suppliers pushing through high price increases for things like steel and equipment in excess of inflation. Infrastructure, which is owned by government-run organisations, have undercapitalised their assets and now large price increases to catch up are being pushed through to the detriment of the mining sector.
The most obvious example is electricity, which has already gone up 127% between 2007 and 2009. It stands to nearly double again by 2012 as Eskom scrambles for funds to install new capacity.
Charges for rail and ports have also risen sharply. “While mining costs may be globally competitive, it is often the costs of railing the products to the ports and port charges that make South African mineral exports less competitive in the global market place,” the document said.
“In many cases the domestic inland rail costs and port charges outweigh the long-haul shipping costs from the ports to the foreign markets.”
The regulatory environment is one matter that appears to have caused heated debate amongst the tripartite partners, where there was “misalignment” and the need for further discussions. New regulations were enacted as the Mineral and Petroleum Resources Development Act in 2004, aligning South Africa with most other mining jurisdictions. However, “it is the relatively high levels of discretion afforded [to the mines minister] in the South African mining law that challenges the South African mining industry,” the document said.
Mines minister Susan Shabangu has said she wants a broad raft of amendments made to all mining laws by early next year to clarify any points of uncertainty or ambiguity so as to create a certain investment environment that feedback from offshore players has indicated is a major hurdle.
The time it takes for the granting of mining and prospecting rights as well as the relatively high rejection rates was also singled out for attention, and something the department has said it is addressing.
“The general lack of mandatory time periods under the MPRDA is a real deterrent to investment as investors are reluctant to delay large capital investments indefinitely while they wait for a decision to be taken,” the document said.
Management of mining companies did not escape unscathed.
“... management to a certain extent must take responsibility for some of the short comings related to the adoption of new technologies, the procurement of new capital equipment for mine development, poor life of mine planning, frequent changes at managerial level, the inability to instil a strong performance culture in some of the mines and so on,” the document reads.