South Africa sits on an estimated R35-trillion worth of mineral resources. To put that number in perspective, that is more than R600,000 for every man, woman and child in the country. It amounts to 100 times South Africa’s education budget, seven times the country’s entire GDP and 19 times the entire 2019-20 government budget. That’s a lot of mineral wealth.
If South Africa were to follow international best practices in its mining policies, it would rank second in Africa and 21st in the world for mineral potential, according to the Fraser Institute’s most recent survey of mining companies. But it doesn’t follow best practices. Not by a long shot.
Policy uncertainty related to delays in amendments to the Mineral and Petroleum Resources Development Act and the legal wrangling over the latest Mining Charter has dented investor sentiment. This is compounded by widespread perceptions of cronyism, corruption and inefficient administration of mining licences.
In terms of policy perceptions, South Africa ranks third-worst in which to own mining interests, among 15 African countries with significant mining interests. It ranks 81st in the world, out of 91 countries ranked by the Fraser Institute.
The only reason investors are still here is the country’s stellar mineral potential, and even then, investors feel Ghana, Mali and Botswana are more attractive to investment.
Mining has declined significantly as a share of the country’s GDP, from 21% in 1980 to 7% today, representing a contribution to GDP of R291-billion. In real terms, measured in constant 2010 rands, the contribution of mining to GDP has declined on average by 0.8% a year between 2007 and 2016.
In 2017, the industry saw a brief rise in revenues, and the first profit it had seen in years, on the back of strong commodity prices. By 2018, it had sunk back into losses, however, consistent with the industry’s loss-making performance since 2013.
It is easy to dismiss mining as an antediluvian enterprise that ought to be supplanted by the modern information and service economy. However, the tertiary economy cannot survive without the primary and secondary industries of mining and manufacturing.
In 2018, only about 6% of the value produced by the mining industry accrued to shareholders. The biggest slice of the pie, 47%, went directly to workers. Mine employees are the highest-paid industrial workers in the country, alongside Eskom employees. They consistently enjoy wage increases well above inflation. The entry-level salary for an underground worker in the struggling gold sector is about R150,000 a year.
This is at once an important benefit of mining, as well as one of the major challenges the industry faces. Some 465,000 people are employed in the mining industry, and these workers support an estimated 4.5 million dependents. In addition, mining can claim credit for 1.4 million indirect jobs created in other industries. At the same worker-to-dependant ratio, that would mean almost 20 million South Africans are somehow dependent on the mining industry for their income.
The mining industry is the single biggest contributor to the country’s exports, by a country mile. In 2018, minerals accounted for 38% of all exports. If you add beneficiated products, the tally rises to 60% of exports. A country’s current account consists of its trade balance, which is the difference between imports and exports, added to the value of cross-border capital flows. South Africa hasn’t had a current account surplus since 2003. As an industry that contributes substantially to exports, mining is critical to earning foreign exchange to pay for the country’s appetite for imports.
After workers, the government claims the second-largest share of the value created by the mining industry, at 24%. This consists of direct taxes (12%), payroll taxes (9%) and royalties on mineral rights (3%). These taxes pay — or are supposed to pay — for the education, health care, and social development grants of millions of South Africans.
The mining industry also ploughs a lot of its own money back into communities. In 2017, the last year for which data was available, and the last year in which the industry was profitable, 28 companies surveyed by the Minerals Council invested more than 3% of the entire industry’s after-tax profit into community projects.
The mining industry spends almost as much on goods and services as it contributes to GDP itself. Of the R245-billion it spent, capital expenditure accounted for R89-billion, and R156-billion went to current spending on goods and services such as transport, storage, communication, chemicals, machinery and equipment. By comparison, the national government reported R188-billion in current spending on goods and services, and all municipalities together accounted for R169-billion similarly.
Manufacturing is critically dependent upon mining. A major report on structural transformation published recently by the Industrial Development Think Tank at the University of Johannesburg concluded that South Africa has deindustrialised prematurely. Manufacturing GDP has declined from 21% of the economy in 1994 to a mere 13.3% in 2016, which compares poorly with other middle-income countries (20%) and developing countries in the Asia-Pacific region (28%).
The report attributes much of South Africa’s stagnant economic growth to the decline of the manufacturing sector. Not only does mining provide the raw materials for manufacturing, but it is also a major customer of manufactured products, particularly in the metals and engineering sectors. Without revitalising the mining industry, a revitalised manufacturing sector would increasingly rely on imports.
More so even than the manufacturing industry, the transport sector relies on mining. Coal alone accounts for 60% of Transnet’s rail freight revenue and the trucking industry is also heavily reliant on mining customers.
Despite its declining national contribution to GDP, mining remains the single largest contributor to economic output in four out of the nine provinces: The North West, in which mining, particularly of platinum, accounts for 30% of GDP; Limpopo, where mining of diamonds, iron ore and other minerals account for 25% of GDP; Mpumalanga, where mining, predominantly of coal and copper, contributes almost a fifth to GDP; and the Northern Cape, where iron ore dominates and mining also accounts for nearly a fifth of GDP.
Six of the country’s 16 largest towns, measured by contribution to GDP, are substantially dependent on mining. These towns are Rustenburg, Middelburg in Mpumalanga, Witbank, Secunda, Sasolburg and Thabazimbi. Some towns, like Kathu in the Northern Cape near Kumba’s Sishen ore mine, wouldn’t exist at all if it was not for mining.
Kimberley, Klerksdorp, Newcastle and Benoni all have their roots in mining, and Westonaria, Carletonville and Welkom still depend largely on the mining industry. The ports of Richards Bay, Durban, Ngqura near Port Elizabeth and Saldanha Bay are heavily dependent on mining, and the town of Ermelo hosts Transnet’s largest marshalling yard, where trains from nearly 50 coal sidings from mines in the region are assembled into 200-car behemoths destined for Richards Bay.
Without mining, these towns would slide into decay and their populations would be condemned to poverty. An example can be found in the Free State town of Welkom. In the 1960s, it was a gold rush boom town with the largest Porsche club in the country. But the gold began to run out in the 1980s, leading to the town’s long, slow decline into economic misery. Between 1987 and 2010, the town shed 150,000 mining jobs, leaving only 35,700 behind. Seventy-one percent of the region’s manufacturing jobs vanished. The only sector that increased employment, finance, added only 1,600 jobs, far too few to make up for the 190,500 jobs lost elsewhere in the economy.
As recently as 1996, the town boasted a population of a quarter of a million people, but by 2010, there were only 158,600 left. The surrounding Lejweleputswa District Municipality lost 120,000 people. The poverty rate rose from 36% in 1996 to 61.3% in 2010. In 1996, the district played host to just more than a quarter of the Free State’s unemployed people; by 2010, it was one third.
On most economic indicators, Welkom is the worst-performing urban area in South Africa. This is what happens when mining dies.
There are many policy interventions that can stem the decline in the mining industry in South Africa. To mitigate the extraordinarily high wages of mineworkers in an environment where the business is unprofitable, for example, we must look to increase labour flexibility and curb the power of unions.
But the first and most important policy change would be to simplify the legislative environment and ease mining regulations.
Both Botswana and South Africa embarked on major changes to their mining laws in the 1990s, according to Institute of Race Relations CEO Frans Cronjé, speaking at the 2017 Mining Indaba. Unlike South Africa, Botswana simply reformed its existing law in line with international best practice.
“The new mining law Botswana adopted in 1999 is reasonably predictable and clear,” said Cronjé. “Mining rights depend, in the main, on applicants having adequate financial resources, technical competence, and experience to carry on effective mining operations. The mining minister and his officials have relatively little administrative discretion, making the licensing process transparent and predictable. Time frames for decision-making are also brief: 60 days for prospecting licences and 20 days for large-scale mining licences.”
He added that the obligations imposed on the holders of mining licences are also stable, having remained effectively the same since the statute was adopted. Nor has Botswana threatened the mining industry with nationalisation or expropriation, whether direct or indirect.
By contrast, South Africa’s Mineral and Petroleum Resources Development Act introduced complex and costly regulations and a great deal of legislative vagueness and uncertainty.
Despite having a far lower rating on minerals potential than South Africa (50 vs 75), Botswana’s high policy perception rating has consistently made it a more attractive place to invest in mining than South Africa. The same is true for Namibia.
South Africa’s mining law needs to be simplified and streamlined, along with the model of Botswana’s law, and investors need assurances that the goalposts will not keep shifting, as they do now.
In an industry where investment cycles are long, prices are volatile and profitability is marginal, investors need regulatory efficiency and certainty.
Mining policy and regulations ought to be light-touch, predictable, competitive and stable. That’s the very opposite of the reality for the mining industry today. DM
For more on the importance of the mining industry, and the policy interventions required to revitalise it, read the report I wrote for the Institute of Race Relations, Why mining still matters, published on 18 March 2019.
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