[miningmx.com] — NICK HOLLAND, perhaps buoyed by a much improved operational performance of his company, Gold Fields, was in eloquent mood at the group’s September quarter results last week.
“All bets are off,’ he warned on the prospect of avoiding forced retrenchments if the gold price retreated to $700/oz, an unlikely halving of its current price.
Another way of looking at the risk of further retrenchments in South Africa’s gold mining industry, however, is if the rand were to inexorably strengthen against the dollar. While rand strength is compensated by a stronger dollar gold price – the factors that strengthen gold, weaken the rand – gold producers would much prefer a weaker gold price and a much weaker rand.
The possibility of a stronger rand gained momentum only hours after Holland’s comments when the US Federal Reserve announced a further $600bn in quantitative easing, ostensibly into government bonds. Ostensibly because some of the cash stimulus, aimed at boosting liquidity, will find its way into emerging market economies by yield-seeking investors.
Finance Minister Pravin Gordhan, reacting a full 24 hours after the US Fed’s announcement, could barely contain his chagrin. He described the QE2, as it’s become known, as “undermining’.
Given that G20 finance ministers had only in Korea last month resolved to avoid unilateral decisions affecting the global economy, Gordhan could have justifiably used “back-stabbing’ to describe QE2.
I suppose that’s why you shouldn’t write a letter in anger. Is Gordhan’s anger fatuous given the relative size of the US GDP versus South Africa’s?
Perhaps, but the fact remains that while the world ultimately needs a strong US economy, the price will paid by the export industries of emerging markets in the interim.
That takes us back to Gold Fields, and its gold-producing next-of-kin, Harmony Gold, and AngloGold Ashanti which has assets in Brazil and Argentina, countries with which Gordhan fears a “currency war’.
Quite frankly, a yet stronger rand is the very last thing our mining industry requires coming amid the thunderous rumbles of nationalisation.
As if evidence were needed, the Chamber of Mines of SA’s (CoM’s) annual report, also published last week, made for some grim reading, especially on the jobs front. From 2008 to 2009, employment levels fell by over 20 000 in the South African mining industry. The total production index fell 6.6% and mining GDP was some 7.2% lower.
Sobering stuff
While the South African construction sector achieved growth rates of 11% between 2002 and 2008, the South African mining sector shrank 1% per year over the same time. The world’s top 20 global mining countries averaged 5% growth rates by comparison.
All sobering stuff, although anyone with an even casual interest in South African gold mining in particular can’t claim to be surprised.
Annual gold production figures have been heading south for a while; China – a rural economy when South Africa was the gold producing powerhouse in the Seventies – produces more gold than us today.
The CoM’s newly installed president, Xolani Mkhwanazi, who is also BHP Billiton SA’s chairperson, echoed a line in the chamber’s annual report that on an in-situ mineral resource basis, South Africa is the world’s richest mining nation.
It cites the $2.5 trillion in mineral resources calculated by Citibank which is more than a trillion dollars more than the mineral resources wealth of Russia, our closest competitor.
But that’s all rubbish, isn’t it? Or a kind of theoretical, scholarly observation at best.
Exogenous factors
The fact of the strengthening rand serves to underline the severity of being a price-taker, which the mining world surely is, especially when other forces are not working in one’s favour. Nationalisation, regulatory uncertainty, high labour costs – which serve to rub out the benefits of cheaper import prices – they all cripple South African mining.
These exogenous factors also deliver one swift kick to the knackers of MIGDETT: the process of conciliation between government, organised labour, and the industry following the 2008 financial crisis. MIGDETT laudably recommitted the South African government to mining as a priority industry, especially in the job creation battle.
Mkhwanazi said in a Fin24.com podcast on Thursday that government had accepted it had to shift back to the mining sector: “We’ve shifted back to realising mining will and can still play in the critical role of growing and developing the economy. It is a competitive advantage for the country. Government has now correctly identified mining as its number four priority.’
Mines minister Susan Shabangu survived President Jacob Zuma’s cabinet reshuffle, which kicked off a busy seven days last week, possibly because she has purposefully set about restoring calm to the regulatory environment in South African mining: decrying nationalisation, restructuring minerals legislation she described as ambiguous, rooting out possible corruption.
She’s got my vote. But is it all too late, and are these small victories pyrrhic ones?
Mkhwanazi, speaking in his capacity at BHP Billiton SA, conceded the nationalisation debate had sparked “general nervousness’ relating to security of tenure and the consistency of regulation going forward. He thought, however, MIGDETT had “put a cap’ on these fears. I hope he’s right, but the markets have in cruel, ironic fashion turned against South Africa again.
The last time commodity prices burgeoned, South Africa’s mining sector was crocked by the effects of the mining charter, a legislated social and economic transformation that scared off investors. The strength of the rand has made growth in the sector similarly difficult.
