Despite its wealth of mineral resources, and the likelihood of plenty more to be discovered, Africa’s mining sector comes bottom of the heap when it comes to current investments. MJ Morgan tries to find out why.
Every year Ernst & Young publish a report called Business Risks Facing Mining and Metals. It provides an interesting snapshot of the evolving challenges facing the industry.
Top of their list is productivity improvement, up from second place last year. The company’s Global Mining & Metals Leader, Mike Elliott, says: “The decade-long decline in productivity, as the sector chased growth during the commodity boom, will require complete business transformations to fully recover.” Productivity in African mining is lower than on any other continent, deterring investment.
The decline in labour productivity is striking. Since 2001, it has fallen by 50% in Australia, 25% in the US in the past three years alone – and the South African gold sector has seen a 35% fall since 2007. Meanwhile, salaries have risen faster than inflation. This amplifies the problem. Nevertheless, there are bright spots too. Africa’s Exxaro Resources, according to Boston Consulting Group, has outperformed the sector.
The commodity super-cycle, from the late 1990s until the 2008 crash, went on for so long that many of those working in mining have no experience of operating in a time when margins are tight. The focus during the super-cycle had been simply on maximising volumes, which is all well and good when prices are rising. This has clearly led to inefficiency and there has been insufficient focus on research and development.
In addition, low wages in developing countries have been relied upon for competitive advantage and, as these economies have succeeded, wages have risen – eroding this advantage and undermining competitiveness. This further reduced investment.
Rising wages mean projects become more capital intensive and less labour intensive. This requires more skilled labour (the risk is described as ‘balancing talent requirements’). But that talent is in short supply, particularly during a secular downturn.