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South Africa is the richest country in terms of mineral resources, according to Citigroup. In a 2010 study it reported that the nation’s mineral resources were worth about $2.5 trillion (R25 trillion). South Africa has the largest reserves of gold, platinum, chrome and manganese ore.
In the 2010 financial year, gross revenues for sales of minerals amounted to $24.5 billion, yet only $9bn was earned from processing South African minerals.
The current strategy in South Africa is to pull unprocessed ore out of the ground, export it, then import products made from it. Beneficiation is the technical term used for the crushing and separating of ore into valuable products but it is more popularly used to refer to the process of adding value to extracted minerals before export.
The goal of beneficiation is to have the wealth created from the minerals remain in the economy in which they were mined. It is also a valuable buffer against fluctuating commodity prices and would bring more stability to the rand exchange rate.
Beneficiation processes that are particularly well suited to our resources are energy generation, iron and steel, autocatalytic converters, pigment and titanium production, and jewellery fabrication.
But in South Africa, where there is a competitive advantage in extraction of primary goods but not in the making of secondary goods, it makes more business sense to invest in extraction than manufacturing. Beneficiation may be the answer to sustainability and growth but as long as primary resources are abundant the market will have no incentive to allocate investment to it.
The longer we wait, the more deeply entrenched the competitive advantage of other economies becomes. The kick-start to beneficiation is thus unlikely to come from the private sector and must be led by the state. For this reason, the Mineral and Petroleum Resources Development Amendment Bill states: “Section 26 of the act is amended to subject any export of… resources to minister’s written consent and relevant conditions. [The act is] further amended to place an obligation on producers to offer a percentage of minerals or form of petroleum resource to local beneficiators.”
In the current political climate a statement like this sends shivers down the spine of any investor or business person in the mining industry. Centralised action requires centralised power, but centralised power can lead to centralised abuse.
The bill gives the minister and the Mineral Resources Department discretionary power in 34 instances. It allows the minister to determine not only the percentage of production that must be processed locally, but the price at which it must be sold after processing.
It is dangerous territory and policies that seek to fix flows in a free-floating economic model result in more damage than good. Instead of commanding quantum and prices, policies would be more effective if they sought to incentivise the market to invest in beneficiation.
Tax cuts and subsidies are the simple financial method of doing so, but it costs the fiscal purse dearly and may not guarantee an increase in competitive advantage.
Other methods include more investment in research and development in beneficiation methods, better infrastructure and assistance in attracting foreign direct investment. In all aspects diversification is necessary for the economy and beneficiation of mineral resources is an excellent way to encourage it. But policies must be flexible enough to attract, not deter, investment.
* Pierre Heistein is the convener for UCT’s Applied Economics for Smart Decision-Making course.