[miningmx.com] – IN advance of President Zuma’s State of the Nation Address later this week, and as more than 7,000 people – investors, media, analysts, producers, governments, NGOs and others – gather in Cape Town for the annual Mining Indaba, it is worthwhile reflecting on the state of our mining nation.
The South African mining industry is under significant economic and financial pressure, driven by a combination of the slowdown in the Chinese economy, anaemic growth in South Africa and other regions and the strength of the US dollar.
These and other factors have all conspired to contribute to declining demand and moribund prices for most metals and minerals. And while the weakness of the Rand may appear to be tantalizing in the short term – this is only a very superficial panacea and does nothing to address the real and worrying structural problems in the South African economic landscape.
It is a truism that mining is a cyclical business.
It is also predominantly a price-taker as commodity prices are set by international markets and are dependent on many variables outside the industry’s control. As commodity prices remain weak and mining revenues remain under pressure, our only redress is to manage costs.
Currently, around half of our coal and gold mining operations are not profitable, with this figure rising to around 80% for the platinum sector.
A sustained depressed outlook for the metals we mine, in combination with a high cost profile, threatens the sustainability of the industry.
This in turn would jeopardize employment, tax contributions to the state, and local economic development, not to mention the impact that this loss of value would mean to the millions of shareholders in mining companies – many of whom are ordinary South Africans invested through their pension funds.
Ours is an industry under pressure globally. But the South African mining industry faces more than depressed commodity prices.
Our challenges include unsustainable cost increases; infrastructure constraints; increasing mining depths and declining grades; regular and prolonged disruption of operations; and massive expectations and demands from all stakeholders.
Over the past decade, productivity has declined – between 25% and 30% in the gold sector and by as much as between 40% and 50% in the platinum sector. Real labour costs increased by between 150% and 250% in these sectors.
Operating costs continue to increase at rates well above inflation, with electricity alone having increased by 19% per annum over the five-year period to 2014.
It stands to reason that improving productivity and reducing or containing costs are key to the sector’s viability.
We are concerned about the further 8.6% increase in the electricity price that Eskom is seeking over and above the 8% already granted. This is why the Chamber of Mines opposed Eskom’s R22bn 2013/2014 Regulatory Clearing Account application to the National Electricity Regulator.
Given all of the above it is not surprising that investor confidence is waning. This is already reflected in the decline in mining industry’s foreign direct investment which fell to 14% in 2013, down from 25% in 2010.
Investors are concerned about depressed commodity prices, regulatory and political certainty, labour instability, productivity and spiralling cost increases.
To be able to attract investment to sustain and to grow our mining industry we need to improve our global competitiveness, which in turn will enable mining companies to raise cost-effective capital and attract investment from institutions which are not constrained by geography or industry.
There are many things that are out of our control, but there are areas where we can determine our own destiny. And achieving regulatory certainty is one of them.
Among the issues that the chamber will be seeking to resolve this coming year are the review of the Mining Charter, which will need to take account of both the need to advance transformation and the current economic environment; resolution of issues surrounding the continuing consequences of BEE transactions where the chamber has applied to the High Court for a declaratory order; and finalisation of the MPRDA amendments.
The chamber is of the view that openness and transparency need to be key considerations in all dealings undertaken by the state and the regulator, and in any engagement between the minister and parties within the industry.
Speculation relating to anything untoward can only bring further harm to South Africa’s reputation as an investment destination.
The industry is fully supportive of transformation: In our view the mining sector has done more to progress the transformation agenda than any other sector in South Africa, and continues to do so despite serious economic headwinds.
What has become critically apparent during these challenging economic times, is that the sustainability of the industry is paramount, and that all stakeholders have responsibility to take on custodianship of an industry in crisis, rather than pushing short-term agendas.
No review of the state of our mining nation would be complete if it did not deal with the very real consequences of an industry under pressure – the destruction of jobs.
The industry is working with its social partners to address the challenges in terms of the 10-point jobs declaration agreed by stakeholders last year.
Only through preserving the viability of the industry can the majority of the mining jobs be saved for the long term.
It is incumbent on all stakeholders to work collaboratively to reduce cost pressures, to minimise production disruptions and to improve the viability of the sector.
Wage negotiations for the major players in the platinum industry will start later this year. Given the state of the sector, and that companies are investigating all avenues in the quest to remain economically viable, it stands to reason that even moderate wage increases could have a significant negative impact on the sector’s sustainability.
The platinum industry provides jobs for around 190,000 employees – these are good jobs, with good benefits, and remuneration significantly above the national average. We need to do all that we can to preserve them.
A key issue for the industry is the need to modernise the way we work to counter increasing mining depths and accessibility and to promote safe, efficient production in our traditional deep-level mines.
By modernising and mechanising we may enhance the lives of the country’s mines for many decades: R&D into mechanised forms of ore extraction are the way of the future, and early pilot schemes show promise. Improving safety is a key focus of this modernisation programme.
In respect of health and safety, we are gratified to note the continuing improvement in safety performance in the mining industry, particularly the sustained reduction in the number of fatalities in accidents on our mines.
The 87% improvement in this outcome over the past 21 years is testimony to the significant safety efforts of management, employees, government and trade unions.
While 2015 saw an overall reduction of 8% in mining fatalities during 2015 compared to the same period in 2014, we reaffirm our acknowledgment that we cannot rest until every mineworker returns from work unharmed every day.
In conclusion, this is a resilient industry that has risen to significant challenges many times in the past.
What is key is to deal with the short-term issues to ensure sustainability and then to focus on the key constraints holding back investment and growth in the medium and longer term.
We need to work together to stabilise the industry and realise its longer term potential. This is because mining and minerals matter for the growth, development and transformation of South Africa.
Mike Teke is president of the Chamber of Mines of South Africa and chairman of Richards Bay Coal Terminal.