The turbulence in the mining industry has its roots in several factors. First, the fall in global demand for platinum and other minerals due to recession; second, the consequences of the Marikana disaster in destabilising labour relations; and third, the structural character of our mining industry. A great deal has been written about the first two factors so this article will examine the last factor.
Mining in South Africa has always been an enclave industry, albeit with substantial impact on the rest of the economy. In the main, minerals have been extracted from deep levels, subjected to some basic processing and then exported as ores without a great deal of beneficiation or fabrication. For instance, we do not have substantial gold or diamond manufactured products capabilities despite having huge natural resources.
The result of this restricted role of mining is a large gap between mining and manufacturing, to the detriment of both sectors and the national economy. Manufacturing has been subjected to extraordinarily high prices for raw material inputs such as steel, making our manufacturers uncompetitive internationally and even in the home market.
The value chain and linkages so necessary for efficient and competitive production of finished goods have been seriously undermined. So has the flexibility of production needed to cope with shifts in global supply and demand due to rigidities arising from the separation of the production of minerals and manufacturing.
This separation is strongly supported by the Chamber of Mines, which argues that mining is driven by inherited comparative advantages, such as mineral deposits or natural beauty, while manufacturing depends on competitive advantages. The chamber emphasises that a mineral resource endowment does not necessarily translate into manufacturing beneficiation. Furthermore, the mining industry should not be required to subsidise manufacturing beneficiation or to provide minerals below internationally determined prices.
In practice, this means that South African manufacturers have to pay import parity prices to the mining companies – ie the same price paid by overseas manufacturers – which ensures that our manufacturers are not competitive. When this difficulty is added to the problem posed by cheap manufactured goods from China and India, South African manufacturing operates on a very uneven playing field. Its only hope is to find niche markets where its specialised products may find space.
The isolation of mining from the total industrial value chain also has consequences for labour policy. Angloplat is now proposing to displace 14 000 workers from mining into other activities. But what broad training have they been given to enable them to switch to other jobs, especially in manufacturing? These workers have been confined to mines, so what skills could a rock driller bring to a production line in a factory?
A report by Citibank in 2010 asserted that South Africa has the largest in situ mineral resources in the world, excluding oil, with an estimated value of $2.5 trillion (R22 trillion). These are dominated by the platinum group of metals (PGMs) (88 percent of global reserves), manganese (80 percent), chrome (72 percent), vanadium (32 percent) and gold (30 percent).
But partly due to declining ore grades in some sectors and ever-deeper mines, especially in gold, the value-add of mining was only 0.5 percent per annum between 2001 and 2008. Furthermore, there is a low level of beneficiation, and trade with most parts of the world is characterised by the export of raw materials and the import of manufactured goods.
For the present exercise, the most important aspect of the industry is the extent of its multipliers into the rest of the economy. These are obviously substantial, but the mining industry could contribute even more to the development of other enterprises. We need to take a hard look at the potential for downstream processes if the country is to benefit from these enviable mineral resources. The export of raw mineral resources has been steadily rising over the past decade.
There is no doubt about the contribution of mining to the rest of the economy. However its contribution to government revenue has been in decline for a long time. Income tax payments from gold mines contributed 4.96 percent to GDP in 1980/1, but this fell to 0.16 percent in 1992/3. The contribution of other mines for the same years was 0.38 percent and 0.20 percent respectively.
In June 2011, the Department of Mineral Resources developed a beneficiation strategy for the minerals sector, noting that “the composition of South Africa’s trade with most parts of the world is characterised by the export of raw materials and the import of manufactured goods”. It defined beneficiation as entailing “the transformation of a mineral (or combination of minerals) to a higher value product, which can either be consumed locally or exported. The term is used interchangeably with ‘value addition’ ”.
The document called for a “paradigm shift in mineral development” and sought to “advance development through the optimisation of linkages in the mineral value chain, facilitating economic diversification, job creation and industrialisation” and argued that it is possible to industrialise by leveraging natural resources, with the government driving beneficiation.
However, the mining industry “remains geared towards export orientation of raw material, with the bulk of current producers bolted in long-term contracts with their international clients”. This is the pattern across Africa and is leading to calls for “resource nationalism” to ensure greater benefits from natural resources.
In December 2012, the cabinet approved a draft amendment to the Mineral and Petroleum Resources Development Act that gave effect to its constitutional obligation to ensure that “the nation’s minerals are developed in an orderly manner while promoting justifiable social and economic development”.
It provides for “the implementation of the approved beneficiation strategy through which minerals can be processed locally for a higher value”, and for mineral “rights to fall within the insolvent estate in the event that a company is liquidated”. It will also “strengthen the provisions relating to cession, transfer and encumbrance of rights in order to permit the partitioning of rights”, and “regulate the exploitation of associated minerals”.
The case for an increased role for manufacturing in the beneficiation of minerals is therefore compelling. This role would seem to be primarily suited to domestically based firms located within the mining value chain. Such firms are more sensitive to national interests and more likely to co-operate with government requirements in terms of producing for the domestic market, keeping economic rents under control, complying with tax rules, employing local rather than foreign managers and technical staff (where available) and taking account of the social impact of their activities.
A wall seems to have developed between mining and manufacturing which stands in the way of creating an integrated economic base for the country. Yet co-operation could include such elements as agreed pricing arrangements, limited and selective protectionist measures applied by government, co-operation in skills development, positive procurement in favour of domestic industry, and taxation policies to encourage localisation.
In any event, a rigorous examination of the value chain will indicate where the potential for local intervention may be maximised at any point in the production process from extraction to fabrication in order to become a significant multiplier. Or, if the capability is not available steps may be taken to correct this, for example by government support for infant industries, by expediting special training etc.
Since markets in minerals are generally imperfect due to the cartels dominated by multinational monopolies, developing countries need to be vigilant to protect the national interest.
The government is responsible for laying out the necessary infrastructure such as energy supply, roads, water, rail, ports etc, but these facilities should not only be in favour of foreign firms which export raw ores, but also for support for domestic firms in the value chain. This has been neglected in South Africa.
The licensing of mining to foreign firms may be a problem. Since minerals in South Africa are formally public property, under the control of government, conditionalities should be prescribed such as providing a portion of mineral assets for beneficiation by historically disadvantaged firms and their communities, local procurement etc.
Licences should specify the quantities allowed for export, prices for domestic users, environmental protection, and all socio-economic factors. Above all, there must be full acceptance that minerals are a depleting resource, so downstream considerations should be taken seriously and industrial capabilities built in to ensure a sustainable economic future.
The main message from all this research seems to be that we need to break away from the notion that mining is an enclave industry which must be treated as a generous benefactor to be treated with kid gloves. On the contrary, mining exploits a country’s endowment, which is ephemeral, and whose potential multiplier effect must be realised while it is thriving, not when it is in decline. This is best realised by rigorous analysis of the interface between mining and industrialisation.