Growing mine closures are the expression of the existential threat to an industry confronted with a persistent global economic downturn, relentless cost inflation and unceasing policy uncertainty. From a recession in the midst of the second commodity boom, the industry has now reached crisis in a new commodity bear. As the ANC considers the future of mining – and thus future government policy – the State Intervention in the Mining Sector (Sims) proposals and state-centric resource nationalism are woefully out of sync with reality. A new mining deal focused on productivity and investment is an existential imperative for the industry, for tens of thousands of jobs, for entire communities and for the country.
Aquarius’ suspension of its Marikana operation and Eastplats’ termination of two projects should be a “penny dropped” moment for the country’s leadership. It should make obvious the fact that mining is facing a crisis that does more than merely threaten the profits of an industry thought to be poorly transformed.
The cancellation of projects, which is expected to accelerate, and the continuing serious declines in production have severe economic implications for now and the future. If investment and production come to a stop, this will cause job and value-added losses within the affected mining companies and their vast networks of suppliers, directly and indirectly. This will negatively affect communities and it will lead to tax revenue losses. Mining accounts for about half of local export earnings and decreases will damage the country’s macroeconomic standing and the rand.
Dismissing these closures and the industry’s recession to the persistent global economic crisis would be an easy mistake to make. It is undoubtedly a tempting excuse. But when it comes to its most pertinent causes, the mining recession overwhelmingly points to domestic factors – now only aggravated by international ones: inflation-beating factor cost increases (labour, electricity and fuel); infrastructure bottlenecks (power, transport, water); fractious labour relations; administered mine closures (safety); administrative inefficiencies (in the Department of Mineral Resources but also across the board); a flawed transformation framework; the lingering impact of the Municipal Property Rates Act’s patchy implementation; continuing policy uncertainty (with the possibility of significant changes being voted by the ANC); and growing concerns over corruption.
The reality is that these factors have cost the country the second commodity boom, after having cost it the first. Over the course of the past decade, high commodity prices merely allowed the industry to partially offset the relentless onslaught of rising costs, infrastructure bottlenecks and continuous administrative pressures to transform and be safer (legitimate demands, no doubt). Commitments from the Department of Mineral Resources that the country would do better after 2010 have had a marginal impact. The government has tinkered at the margins – with, for instance, its electronic licensing management system – and the results show.
The government has made transformation a priority and growth a secondary consideration. And yet, by its own reckoning, transformation has been insufficient. As for growth, the record speaks for itself.
The local mining industry is no longer globally competitive. This loss of competitiveness has been known to analysts, investors and providers of capital for some time. Be it the Frasier Institute global ranking, the Behre Dolbear Group survey, moods at mining conferences, Anglo American’s Cynthia Carroll’s speech at the recent Mining Lekgotla, or the growing body of professional opinions, the message to the government and the ANC should be clear: the mining industry is a sunset proposition, in part because of geology but in a larger part because of policy.
By letting costs grow uncontrolled and by not creating a stable and good practice investment climate, government has neutralised a growing share of the country’s mineral bonanza. As a result, investors have been looking away from South Africa. In the globalised economy perception is reality.
The fact that the industry contracted in absolute terms during boom times portends of very hard times ahead should the slowdown persist. And there is evidence that persist it will: Europe remains mired in its sovereign debt crisis, America’s recovery keeps on stammering and China is restructuring from export-led high growth to a domestic market-led lower growth. The short-term outlook is set on lower demand and continued downward pressures on commodity prices.
In the prevailing economic conditions, the industry is turning its focus on trimming excess capacity and controlling costs. Marginal operators are at a great existential risk. The Aquarius and Eastplats decisions are a manifestation of this powerful trend. These are not the first ones, and others will join. The platinum sector – the country’s largest contributor to its mineral wealth – is in a particularly bad shape, when the opposite should be the case. Anglo Platinum is conducting a comprehensive review of its business.
The signs are that these developments are more than mere response to the international economic downturn. There is every chance that the industry is shutting down capacity for good. Increasingly, thus, a growing portion of the country’s mineral endowment is being neutralised, rendered uneconomic to mine, refine and export, let alone be locally beneficiated.
The government’s focus on accelerated transformation and greater state extraction out of the country’s vast mineral rent – as illustrated by the SIMs report – is thus woefully out of sync with reality.
As the ANC policy conference approaches there is a narrow chance that the spate of mine closures and evident sectoral crisis move the party to a policy turnaround: to adopt a more business-friendly stance. But there is also the chance that, on the contrary, the frustration regularly expressed at the lack of co-operation from industry with “national goals” increases.
Illustrative of this frustration is Minister Susan Shabangu’s statement at a conference in February that “continued reliance of the sector on the previously advantaged 20 percent of the population, obsessed with a bottom line approach at the expense of national objectives, has undermined the objectives of this sector”.
The government wants to ensure that the industry becomes deputy to the state’s sheriff. This is the developmental state concept, South Africa redux, and applied to the so-called mineral-energy complex.
There is broad consensus in the government that the state must take greater ownership (not through nationalisation, but through the state mining corporation and through state-directed investment); guarantee that licence conditions are enforced (social and labour plans, actually mining rather than holding on to a resource); direct the cost and direction of sales of “strategic” minerals (import parity prices, export taxes); and generally serve the vision of turning the mineral-energy complex into the centre of the national economy.
The policies that emerge from the ANC policy and leadership are unlikely to provide relief to the industry. The rift between the two parties – industry on one hand, and the government and ruling party on the other – may grow wider: the first calling for measures to help it sustain the economic downturn, the second proposing to take matters into its own hands to implement its national objectives.
This plausible scenario would leave the mining sector and the economy worse off. The industry would see any state-centric policy – with the introduction of a resource-rent tax, a strategic minerals policy, export taxes, sunset clauses on licences, and so on – as confirmation that conditions are likely to worsen. In the short term, this would translate into more mine closures. In the medium term, it would further chase away investment, and reliance on the developmental state to compensate for the decline in private investment and production would be insufficient to compensate for this “investment gap”. The state is already stretching its fiscal and administrative capacity to deliver its infrastructure strategy.
In parallel, structural politico-economic factors would continue to be left unattended. For political reasons, the government has systematically failed to tackle unaffordable wage increases. It is argued by their advocates (mostly the unions) that these increases lead to greater domestic consumption, and thus to greater domestic production. In reality these wage increases have far outstripped productivity gains and have led to three negative economic consequences: a shift away from labour-intensive processes across the economy, a decline in domestic production and an increase in imports.
The economy is hollowing out. The trajectory experienced by the mining industry in the past 10 years or so is spectacularly illustrative of this grave phenomenon.
As the ANC considers the future of mining ahead of its policy conference, it faces a stark choice:
n Continue with the “recessive bias” that is inherent to the policy choices that have been made. This bias would only be accentuated by increasing the commitment to the developmental state in search of transformation and elusive growth.
n Decisively turn to a “growth bias” by focusing on the true causes of decline while finding a transformation model that is not growth-reducing. Such a “transformation in growth” model should not seek to displace the private sector. The state simply does not have the resources required – in capital, in manpower, in know-how or in credibility.
For international observers, South Africa is clearly at an economic crossroads. It still has tremendous sources of economic strengths, but time is running out if the country wants to remain a meaningful presence in the world, let alone Africa’s leading economy. It cannot for long continue to lose its core industries, add to its mass of jobless people and weaken its fiscal stance in pursuit of a developmental state project that is politically convenient but economically risky.
The recent closures are a clarion call to action. A “transformation in growth” strategy with a focus on costs, productivity, investment retention and attraction as priorities equal to transformation could, if rapidly implemented, stabilise the mining industry under the current conditions, and equip it with the foundation for expansion when the global economy improves.
The alternative is the acceleration of the sterilisation of the country’s mineral wealth, rendered fallow not by nature but by choice.
Claude Baissac is the director of Eunomix, an investment climate and risk consultancy.