Mining sector still at a tipping point

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LonminMine Independent Newspapers. Picture: Boxer Ngwenya.

The mining sector endured another rough year in 2013, and companies are unlikely to get relief this year as regulatory pressures, coupled with poor productivity, are among the challenges that are expected to lie ahead.

Rising power and labour costs are making South Africa a more expensive mining jurisdiction with investors jittery over labour unrest and regulatory uncertainties. However, it is not all gloom as analysts have given varying forecasts for the four major commodities for this year, from a volatile gold price to an increase in iron ore volumes as prices encourage higher production.

Furthermore the rand, which has weakened 19 percent since the start of last year and is forecast to fall further this year, will somewhat assist the embattled sector to cope with rising input costs, although labour unrest remains a wild card.

“The weaker rand will lessen the pain, but expect the cycle of margin pressure due to rising costs and poor productivity to continue. This will be negative for jobs, sadly [we] expect more to be lost,” said Michael Kavanagh, a metals and mining analyst at Noah Capital Markets.

Kobus Lamprecht, a chief commodity economist at Afriforesight, envisages higher demand for most commodities encouraging output growth. “That increased demand will, however, not be sufficient to push up prices in all instances.”

In the thermal coal market, he expects prices to increase strongly this year, as recovering global activity lifts demand and new coal-fired power stations come on line.

Platinum prices are expected to rise this year, boosted by the European automotive industry, where new emissions rules will be enforced in September and next year, raising the platinum needs for catalytic converters.

“A threat of strike action at all major South African producers places uncertainty on supply in the short term. Ironically, the supply uncertainty will boost the platinum price.

“Uncertainty about sufficient electricity over the winter period should also boost the price at that time,” Lamprecht said.

Meanwhile, the gold sector was still in decline, even though the price in rand terms remained around the long-run highs seen since 2011, Nomura analyst Peter Attard Montalto said.

Last year gold mining companies restructured their operations in a bid to cut costs, while others idled uneconomic shafts, resulting in job shedding.

Montalto predicted, however, that the lack of immediate price pressures in gold and platinum had reduced the call for aggressive restructuring after the elections. Even so, platinum producers have also been busy laying the groundwork, with Anglo American Platinum having restructured and shed jobs last year.

Labour strife, a major source of discomfort in recent years, continues, especially in platinum where 7 000 workers at Northam Platinum’s Zondereinde mine in Limpopo have been on strike since November 3.

The continued labour unrest in the mining sector was likely to accelerate the move to mechanisation, especially in surface mining in the platinum sector, according to Charles Kieck, the chief economist at Afriforesight.

“Continuously improving technology also supports this trend. Only slow growth in mining output and commodity prices should limit the potential for job creation,” Kieck said, adding that it was unlikely the youth wage subsidy would have a significant impact on job creation this year.

The government is expected to sign the Mineral and Petroleum Resources Development Act into law after the elections, which will give the mineral resources minister the discretion to declare certain minerals as strategic. Coal is most likely to be declared a strategic resource, allowing the minister to determine to whom and at what price coal is sold in a bid to secure supply for Eskom. This would restrict exports and potentially deter investment in new coal, according to analysts.

“The imposition of formal strategic resource designation may shift the cost-benefit balance versus export opportunities in the wrong direction,” Montalto said.

Kieck believes there is a strong risk of “populist rhetoric” on regulatory changes leading up to the elections. “Recent pronouncements by government officials have already raised fears.

“This poses risks to foreign investment [already on the retreat due to the tapering of US monetary stimulus] and a squeeze on mining development.”

Last year metal prices fell, Chinese economic growth slowed and companies cut costs.

New chief executives were hired to lead several mining companies including Lonmin, where Ben Magara is the new boss, following the violent deaths of more than 50 people in labour unrest around its Marikana operation in August 2012.

Despite efforts to restore peace and investor confidence in the sector, assassinations linked to union rivalry in Marikana have continued. The police arrested three people last month in connection with two murders. But as much as the new year is filled with challenges, it also presents opportunities for innovation.



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