The outlook for the mining sector in South Africa for 2019 remains fairly bullish. Photo: Reuters

JOHANNESBURG – The outlook for the mining sector in South Africa for 2019 remains fairly bullish, despite concerns about labour and power costs. 

There is also cautious optimism of strong commodity prices. Producers are facing more complex reserves, with higher input costs putting pressure on operating margins. 

The cost of power is a concern for mining companies, as annual tariff increases are having a negative impact on the cost of production, particularly at high energy consuming miners.

On the power used by miners, considering early 2008 as a base, South Africa’s electricity price was around $0.04c (R0.53) per kW/h and was lower than that of larger emerging economies like Brazil, India and China. 

However, current energy costs are between the $0.08c and $0.10c per kW/h prices, also higher than the same group of emerging economies. The annual electricity increases have indeed had a negative impact on the cost of production for high energy consuming industries.

Eskom's proposed turnaround plan will be crucial for the success of miners. However, miners are seeking alternative sources of energy in order to remain sustainable.  

This means that captive power plants are a reality for the future. Mining companies have also been investing in renewable energy sources to accommodate power demand in the long-term, with natural gas and newer technologies that bring cost efficiencies.

Platinum is trading at levels last seen in 2016, with palladium prices increasing dramatically. From a base metals side, copper trades at circa $5 900 per ton, with current inventory levels lower than in 2015. 

Iron ore has also been on an upward trend. We foresee improved base metal prices in the short term for copper and nickel on the back of global commodity demand for infrastructure development, with China and the US having a material influence on the demand.

On the diamonds side, reduced supply in the long term will be a reality, given the lack of new discoveries.

Appropriate risk management strategies to weather currency and price volatilities are crucial during these times. Apart from the usual commercial bank or project finance funding, many miners are also considering other sources of liquidity for current expansions or new projects such as streaming structured facilities, asset based finance facilities and accessing the debt capital markets. 

On the regulatory front, there have been some positive sentiments following the finalisation of the 2018 Mining Charter. The notable feature of the charter is the once empowered always empowered ownership element and the drive for inclusive procurement, as well as supplier and enterprise development elements.

The procurement element in the Mining Charter is positive for small-sized enterprises in an effort to grow local content for mining goods and services, where mining companies will need to source 70 and 80 percent, respectively, from South African entities. In addition, small businesses can ultimately create jobs to curb the increasing unemployment rate.

Shirley Webber is the coverage head natural resources at Absa Corporate and Investment Banking. The views expressed here are hers.

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