For all of its challenges, much of South Africa’s mining industry has recently been becoming more profitable. There have been costs involved, including the closure of underperforming shafts and job losses. But the sector has been doing relatively well.

One number that speaks to this was the Producer Price Index (PPI) number for mining for March 2019, which showed that prices at the mine gate rose 20.2% year on year from 10.6% in February. It was last in this region about three years ago before slowing sharply, briefly into negative territory.

Meanwhile, input costs remain relatively subdued. The Minerals Council South Africa has designed its own index to measure these costs, which exclude labour and which has been peer-reviewed by Statistics South Africa.

Henk Langenhoven, the chief economist at the Minerals Council, told Daily Maverick that these costs are currently running at around 6% to 7%. The latest Eskom power hikes have not been factored in yet, so that could change. The bottom line is that the price of products sold at the mine gate is rising much faster than the costs incurred by the industry to produce those products in the first place. Some of this is bound to flow to the bottom line of miners.

There is an unsurprising correlation between the mine PPI and commodity prices. But this does not immediately translate into increased production.

“Production trends tend to lag behind changes in commodity prices by around 12 to 18 months. Due to structural constraints — such as policy uncertainty, increasing input costs in general, above-inflation electricity price increases and unreliability of supply, as well as other issues such as industrial action — mining companies are hampered in their ability to respond quickly when commodity prices improve or decline,” Langenhoven said.

This is another example of how structural policy and economic issues prevent industries in South Africa from realising their full potential.

If mining production could nimbly scale up to take advantage of this situation, the benefits would not just flow to mining boardrooms and investors. They would feed into economic growth, employment (production increases could lead to hiring instead of lay-offs), tax collection, the current account and other areas.

By the time production catches up, mining PPI and commodity prices could be cooling off again. DM