South Africa’s new economic stimulus and recovery plan is unlikely to revive growth in the country’s bleak mining sector, Fitch Solutions’ latest Industry Trend Analysis shows.
Despite a R400-billion infrastructure fund pledge and renewed mining regulatory clarity to restore investor confidence, subdued growth is anticipated for the sector.
“President Cyril Ramaphosa’s drive to spur growth in South Africa’s mining sector is unlikely to result in a significant revival of an industry in secular decline,” the group says, noting the low prices forecast for strategic commodities, a contracting construction sector, restrictive regulations and high operational costs that will continue to hinder investment into the sector.
South Africa’s mining sector faces a number of structural challenges that are unlikely to be solved in the short term, particularly high operational costs and depleting ore reserves.
“We forecast South Africa’s mining industry value to grow by a meek 0.8% [on] average in the period from 2018 to 2022,” Fitch says in its research note.
Restrictive regulations and policy uncertainty have been a key “pain points” for South Africa’s mining sector for over a year and, while the latest version of the Mining Charter will provide much-needed regulatory clarity, it will largely fail to attract new investment, as it remains more restrictive than the regulatory framework currently in place, the rating agency asserts.
The new charter makes concessions through the removal of some of the controversial provisions introduced in previous drafts, including the requirement for mining companies to maintain black ownership participation rates at 30% throughout the life of the mine and a requirement to pay workers and communities the equivalent of 1% of earnings before interest, taxes, depreciation and amortisation for new mining rights holders in the years that they do not declare dividends.
However, some provisions aimed at increasing local beneficiation, black ownership rates and community development that have been introduced or retained are expected to increase compliance costs for miners, offsetting the temporary boost to investor sentiment and any subsequent pick-up in investment over the coming months stemming from increased regulatory certainty.
Meanwhile, despite the promise of a significant infrastructure fund, a contraction in South Africa’s construction sector cannot be averted during the period 2019 to 2022 on the back of the structural financial difficulties.
“Further, a bearish outlook for both coking coal and iron-ore prices over the coming years will continue to negatively impact on domestic production of both commodities. We forecast iron-ore prices to average $48/t in 2022, down from $60/t this year, owing to slowing Chinese demand, while coal prices are set to fall to an average of $48/t from $180/t over the same time period,” Fitch points out.
Resource depletion and the resultant structural challenges are forcing miners into “ever deeper and more costly” operations, as well as relatively high labour costs, compared with other key producers.
South Africa’s all-in sustaining cost of gold production, for example, stood at $1 184/oz in 2017, far above the global average of $884/oz.
This challenge is most evident among precious metal producers, which are being forced to lay off workers as a result of financial difficulties, Fitch highlights.
However, the country’s thermal coal sector is expected to be the bright spot within the country’s mining industry, owing to continued domestic dependence on coal-generated power and rising demand from India.
“Despite government’s push to increase the share of renewables in the country’s power mix, inefficiencies at State-owned power utility Eskom will continue to delay a broader shift to renewables and clean energy in the country and we expect coal to continue to account for over 75% of the country’s total generation over our forecast period to 2027,” the agency says.
“The portfolio of coal reserves in South Africa has attracted an increasing number of Indian companies looking to establish a foothold in the country’s mining sector.”
South Africa has been cited by Indian mining and industrial companies as the “obvious supplier”, since Indonesia’s coal is of poor quality and extraction costs in Australia are high.
“We forecast thermal coal production growth in South Africa to average 2.4% over 2018 to 2027,” Fitch concludes.