Another tough year ahead is expected for the mining industry, but Mining Indaba presents a crucial opportunity for industry, government and labour to collaborate on solutions. Miyelani Maluleke, macro analyst at Barclays Africa looks at the prospects for the South African mining industry in 2015.
By Miyelani Maluleke
Although South African mining is facing another challenging year, an opportunity exists for mining companies, labour and government to help the industry get through the difficult times ahead. The industry is the cornerstone of the South African economy and in addition to directly employing more than 400 000 people, mining has strong linkages with other sectors in the economy. We continue to believe, as stated in our 2013 report “South Africa’s troubled mining sector” that the South African mining industry certainly faces difficulties which if not addressed will continue to negatively affect the sector’s growth performance and its ability to create jobs.
Last year was particularly challenging with total industry output contracting by an estimated 2.4% and we don’t expect much improvement for the industry in 2015. One of the major challenges for this year is going to be the softer commodity price environment. Since the start of last year, coal prices have fallen by 27%, iron ore prices are down 54% and platinum prices are 8% lower. China, the main market for South Africa’s exports of iron ore and to a lesser extent coal, is expected to see slower growth this year so we could see prices of those commodities come under some more pressure. Another important downside risk to the sector’s growth outlook, are the persistent and seemingly intensifying electricity shortages. All of this, combined with labour productivity failing to match wage increases adds up to a less than optimistic outlook for the year ahead.
However, there are also a number of factors on the positive side. Labour stability has improved since last year’s five-month strike in the platinum industry and the South African government has shown greater interest in resolving disputes and restoring stability in the mining industry, which is encouraging. We do not expect another year of labour confrontation, particularly after last year saw a few multi-year wage deals in a number of key mining areas. Nonetheless, this is always an ever present risk and the gold sector wage negotiations later in the year are worth watching. The wage deal in gold mining is due to expire in the second half of this year.
On the issue of mechanisation, we see this as unavoidable for gold and platinum mining, which are the two areas that are generally more labour intensive. However, this is not purely a reaction to the recent strikes and high wage demands. Labour instability is only one factor. There’s also the safety factor as mines get deeper and the risks of sending people underground increase. So mechanisation will be a structural change for South Africa’s traditionally labour-intensive mines.
The government’s decision to refer the contentious Mineral and Petroleum Resources Development Act (MRPDA) Amendment Bill back to parliament is a positive signal, in our view. There was widespread criticism from gas and oil industry representatives about some of the provisions, including an automatic free carried interest in gas and oil projects, amongst others. The rejection of the Bill, which was supported by mineral resources Minister Ramatlhodi opens up an opportunity for the government to engage the industry again and also to split oil and gas regulation from the regulation of the rest of the industry. The Chamber of Mines has called for urgent finalisation of the legislation in order to eliminate the policy uncertainty and restore investor confidence.
Commodity price cycles are also important for mining investment. While it’s hard to forecast when the commodity price cycle will turn again, mining investment will be driven by more than just commodity prices. Countries are competing for investors’ money, and the regulatory environment and policy certainly play a big role in that. So it is very important for South Africa to try to draw investors in by making the regulatory environment more competitive.
Another important way in which the government could help the mining sector is on the issue of beneficiation. Instead of the present broad emphasis on beneficiation, the government should engage with industry to identify South Africa’s competitive strengths and focus on the opportunities for viable beneficiation.
But we reiterate our point that we don’t see the SA mining industry as a sunset industry, as long standing challenges for the sector and the commodity price cycle could not be any less helpful right now. However, many of the problems in the mining industry are domestic. We need strong leadership from mining companies, labour unions, and government to get cooperative, innovative solutions to the many challenges facing the industry.
