Although South Africa has in excess of a potential trillion dollars in mineral resources, its mining sector is struggling. Populist rhetoric on nationalisation, and contradictory government statements are not helping matters. MJ Morgan describes the tensions within the industry.
According to Deloitte, South Africa possesses a remarkable $1.5 trillion worth of non-energy minerals. Although mining currently accounts for around 40% of the country’s export earnings, the sector now faces rising energy costs, a continuing global economic slump and increasing labour costs.
Additionally, at the Mining Lekgotla in June, concerns were raised that the sector has failed to attract the level of investment that the commodities boom should have provided – and has instead shrunk.
At the meeting, Department of Mineral Resources Minister Susan Shabangu proposed greater collaboration between all industry participants if the relative decline of the sector is to be reversed. She is keen to reverse the downward trend in exploration expenditure that has seen South Africa’s share of global mining exploration spend decline from 5% to 1% between 2004 and 2011.
Despite various strategic policy approaches designed to help the sector grow, such as the New Growth Plan and National Development Plan as well as the Mineral and Petroleum Resources Development Act (MPRDA) and Mining Charter, there has been a failure to secure the prosperity and jobs the country’s considerable mineral endowment should permit.
Minister Shabangu put beneficiation – the processing of refining minerals rather than simply exporting them raw – firmly at the heart of the government’s strategy at the Lekgotla, in order to capture more value and increase employment. However, Anglo American CEO Cynthia Carroll disputes whether South Africa has a competitive advantage in beneficiation that would justify such a move. Certainly there is a severe lack in terms of infrastructure and energy provision for such a move as yet.
The ANC’s five-yearly National Policy Conference held in Midrand at the end of June was an opportunity for the party to consider policy options ahead of the party conference in Mangaung in December.
The meeting considered deeming coal, the source of nearly all the nation’s electricity, a strategic resource. Addressing the meeting, President Zuma said that the party “must deliberate on how the state can obtain an equitable share from the mineral resources and how communities can benefit more from these natural resources.”
There remains anxiety in the mining industry in response to the rhetoric around nationalisation. Carroll warned against nationalisation, increased taxes and proposals to increase beneficiation, and told the meeting, “There is a clear path that will lead to prosperity and there are blind alleys that we must avoid.”
However, the ANC’s Freedom Charter, adopted in 1955, after all does include the line – “The mineral wealth beneath the soil, the banks and monopoly industry shall be transferred to the ownership of the people as a whole”, which seems pretty unambiguous, despite the claims of some, including its author Ben Turok.
Indeed, to try to draw a line under the issue, the party commissioned a report, State Intervention in the Mining Sector (SIMS), which was published in March but despite its coming down against nationalisation, concern amongst miners regarding expropriation has not been dispelled.
Clear regulation needed
The report concurs with the aims and principles of the AU’s African Mining Vision which seeks to use mineral resources as a catalyst for development of the wider economy and stresses the importance of capturing more of the value chain, both up- and downstream, and of building cross-border cooperation, especially in terms of infrastructure.
It also proposed a 50% tax on mining profits in excess of 15%, increased regulation and the ring fencing of certain strategic minerals as well as the creation of a sovereign wealth fund. It recommends that platinum be subject to similar export controls as gold, price controls and export tariffs. This has added to the woes of the struggling PGM sector. Aquarius Platinum and Eastern Platinum have both substantially curtailed their activities in the wake of adverse market conditions, low prices and a market that is solidly in surplus.
The industry is seeking greater regulatory clarity and a more streamlined permit application process that avoids the lengthy delays of the current system.
Whilst the National Union of Mineworkers does not support nationalisation, the National Union of Steelworkers of South Africa (NUMSA) does support nationalisation of mines, banks and telecommunications without compensation. NUMSA is affiliated with the Congress of South African Trade Unions (COSATU), which is in turn allied with the ruling ANC.
However, Section 25 of the South African constitution requires any nationalisation to include compensation at market value. Full-scale nationalisation with compensation has been estimated to cost in the region of $122bn.
Nevertheless, Enoch Godongwana, the chair of the ANC’s Economic Transformation Committee, denied the party proposed to implement an export tax, as some had feared: “People have misread the document. We are not saying that we will impose an export tax. If you look at the wording, it says, “if other instruments don’t work.”
Although Minister Shabangu said that the issue of nationalisation would be put to one side at the policy conference, in fact the matter remains live due to remarks by Godongwana, who reportedly told Talk Radio 701, “I do not know what kind of clarity people want,” he said, before adding, “[Nationalisation] remains as a weapon for the ANC, as a tool, an instrument, as an option.”
It is no wonder miners are confused by these mixed signals, since Godongwana had said a week before the conference that “Nationalisation is not appropriate under the circumstances of the proposals we are entertaining.”
The ANC Youth league and delegates from six of the nine provinces supported “strategic” nationalisation if the “balance of evidence” supported it, but did not qualify what this test might amount to. The Black Business Council at the start of July called for clarity on the matter, saying the uncertainty was hurting investment prospects.
It does not seem that there is any realistic prospect of nationalisation, yet even talk of the subject makes miners – an industry in which capital expenditure is vast and front loaded, taking decades to recover – extremely nervous. It seems that the policy conference, rather than unifying, only further divided the stakeholders.
The demand for populist rhetoric in the face of often-ineffectual governance is such that whilst it is extremely unlikely to actually happen, banging the nationalisation drum is a cheap way to curry favour with a considerable sector of the population, who feel let down by the failure to harness mineral wealth in the collective interest.
The opposition party Democratic Alliance’s Shadow Mines Minister James Lorimer said, “Obsession with a mineral-resource rent tax in particular indicates that the ANC is more interested in filling government coffers in the short run rather than winning global market share, growing the mining sector and creating jobs in the long run.”
He also pointed to the loss of 179,000 mining jobs between 2001–11, as mining output fell to its lowest level in 50 years in February.
Seizing the initiative
According to the Human Sciences Resource Council, a 30% increase in mineral exports could generate up to 280,00 new jobs. This has the potential to reduce the chronically high unemployment rate, which stands at 25% officially and may well be higher.
To this end, National Planning Minister Trevor Manuel has been pushing for South Africa to seize the initiative to develop the nation’s infrastructure on the back of its competitive advantage in the coal, iron ore and manganese sectors. Although prices remain high by historical standards, rising input costs and prices well off their peaks are making for a challenging environment. Additionally, creaky infrastructure hampers export capacity. Steel consumption currently sits at 5.4mt, with capacity at 9mt, but this could easily be raised to 11mt without substantial cost, according to the International Development Corporation. If the South African economy is going to grow at 4% plus as is desired, domestic steel consumption will need to expand significantly.
There is the iron ore to drive the steel sector: South Africa’s iron ore output totalled 60.5mt in 2010, around 4% of global production, making the country the world’s seventh-largest producer. Kumba Iron Ore, majority owned by Anglo American, produced the largest share of this output. Despite numerous challenges, it is worth bearing in mind that South Africa captured 16% of all foreign direct investment into the continent between 2003–11, according to an Ernst & Young report, making it the leading nation.
Furthermore, South Africa is responsible for 1% of global carbon emissions, making it one of the 20 most-polluting nations. This is a consequence of its almost exclusively coal-based energy mix and the fact that mining is inherently a high pollution sector. Managing emissions for a sustainable future is going to be a challenge.
The mining sector itself sees its number one and number two challenges as resource nationalism, the fear that states will engage in a land grab of assets or dramatically scale up mineral rents, and skills shortage, the lack of appropriately qualified staff.
It is, of course, vital that South Africa and other resource-rich countries ensure that the development of their mining industries gives lasting benefits to all citizens. But the long-term planning required for mining investment means that transparency and consistency by governments is necessary to achieve this. Inflammatory rhetoric, rather than straightforward and open policy planning, hampers investment.
Additionally, it is equally vital that South Africa significantly improves its education sector to enable the sector to have the skills it needs to expand and create more jobs. Currently too many jobs are going to foreigners that could just as well be undertaken by its citizens because of a lack of the prerequisite training. As the SIMS report states, “There is little doubt that improving quality of education provision at all levels represents one of the greatest challenges to policy makers and implementers in South Africa.”
South Africa has been relying for too long on its overwhelming preponderance of minerals but all the while is losing competitiveness.
Well-intentioned and frequently sensible policy initiatives must translate into action, and unhelpful rhetoric must be replaced by a firm and steady insistence that miners demonstrate their commitment to a social compact that serve justly the needs of both miners and citizens.