Commodity exchanges should be established for the metals and minerals that South Africa supplies from a dominant global position.
That is the upheaval remedy that Pan-African Capital CE Dr Iraj Abedian advocates for the currently stricken platinum mining and ferrochrome industries in particular, at a time when Mineral Resources Minister Susan Shanbangu is putting government, business and labour heads together to arrive at solutions.
He tells Mining Weekly that while individual mining companies may not have an across-the-board global supply obligation, it can be argued that a country does.
If that is so, the right thing for South Africa to do, as a dominant-supply country, is to ensure continuous, undisrupted global access to the metals and minerals it supplies from a position of dominance.
However, South Africa is unable to ensure that access without stabilising its key metals and minerals sectors and the way to ensure stabilisation is through the creation of commodity exchanges, similar to Canada’s producer-led potash marketing exchange, which has been a stabilising influence on the potash industry for the last four decades.
New Merafe Resources CEO Zanele Matlala, who took over the reins of the JSE-listed ferrochrome group from Stuart Elliot at the beginning of June, shares Abedian’s view when it comes to chrome.
She believes that a mechanism is needed to curb the unbridled export of raw chrome, which she says is costing South Africa jobs.
“Jobs have to be a priority, so you cannot ignore the possible loss of over 40 000 jobs,” Matlala comments to Mining Weekly.
Because of growing chrome exportation, South Africa’s leading position in ferrochrome is being lost to China.
Half of the 9.4-million tons that China imported last year came from South Africa and half of the South African contribution came from platinum mines that produce chromite ore as a by-product of mining chrome-rich upper group two (UG2) reef.
The quick flow of ore from UG2 platinum miners is at the heart of the ferrochrome problem.
Another 20% supplied to China comes from independent chrome ore miners and integrated ferrochrome producers themselves supply the remaining 30%.
“We have about 75% of the world’s chrome ore reserves and we could end up in a position where we are displaced by a country that does not have its own reserves,” Matlala adds.
She also aligns herself with the imposition in the short term of a $100/t duty on the export of raw chrome ore, until such time as a chrome exchange is established or quota rules are in place.
Matlala reiterates that the South African ferrochrome industry as a whole, which met as recently as last week, is working in unison in its interaction with government for the stabilisation of an industry that employs more than 200 000 people and which contributes more than R42-billion a year to South Africa’s gross domestic product.
The ferrochrome industry makes the point in a brochure that it is seeking a self-regulating mechanism to “dynamically optimise” South African chrome ore exports, “while ensuring a fair and competitive domestic market”.
The position of chrome-trading participants within the domestic market has to be taken into account and would need to be represented on any commodity exchanges that are formed.
While the ferrochrome industry views Canada’s Canpotex potash single-channel marketing organisation as a case study, Matlala reports that it is also examining other models, including one in India, where an exchange-type mechanism for chrome ore is in place.
A commentator makes the point to Mining Weekly that there are already large commodity marketing operations in place that could potentially perform the role of a commodity exchange without producers having to be put to the trouble of setting one up from scratch.
Some say that the South African office of London Commodity Brokers (LCB), by way of example, and other organisations like it, may be able to fulfil a similar marketing role to that played by organisations like Canpotex.
It is conceivable that chrome-mining companies, which currently market their own output, opted to make use of a neutral marketing intermediary, for example LCB or others like it, to sell South African chrome to all the international chrome buyers and stabilise the ferrochrome industry at the same time.
Canpotex, which was established in 1972 to stave off a potash price depression, describes itself as a marketing and logistics company that sells and delivers potash to international markets as a wholly owned entity of the country’s potash producers.
“For supply, price and employment stability, there’s a need for a producer platform to plan for decades ahead,” Abedian comments to Mining Weekly.
His advocacy arises after Minister Shabangu met with the Mining Industry Growth and Development Task Team (Migdett), the two-year-old joint venture of government, labour and business, and South African platinum producers in what was described as “a frank and open discussion on the challenges facing South Africa’s platinum industry”.
The meeting resulted in Migdett principals and all parties agreeing on a process to be put in place for the short-, medium- and long-term benefit of the platinum industry, which has seen Aquarius Platinum temporarily suspend mining operations at two of its mines, Eastern Platinum cut mining production and halt project development and Royal Bafokeng Platinum defer exploration drilling at Bafokeng Rasimone Platinum Mine (BRPM) and hold back the second phase of the expansion of the Styldrift project as well as the upgrade of the BRPM concentrator plant.
Government, business and labour, which have agreed to engage on ideas in order to enrich the work of Migdett, will also draw on the experience of South Africa’s gold-mining industry during its devastating 1996 downturn, when the gold price fell to as low as $250/oz.
The ferrochrome industry’s call for govern-ment intervention in March preceded that of the platinum industry by several months.
Abedian’s view is that, without the stability of commodity exchanges, national interest, job preservation and investor certainty will continue to be at excessive risk and the sectors will continue to be characterised by boom-and-bust scenarios.
He sees no need for government to play a regulatory role over commodity exchanges.
“There can be voluntary participation by the platinum producers themselves,” says Abedian, with the main role of the exchanges being to synchronise supply to match demand.
Until the late 1990s, the South African Reserve Bank was the single channel to market for all South African-mined gold.
Abedian sees commodity exchanges dove- tailing well with South Africa’s long-held beneficiation dream that the National Treasury appears now to be buying into.
“I am well aware that there has been too much heated debate and misguided discussion and discourse around the notion of mineral beneficiation.
“South Africa’s reindustrialisation is inseparable from mineral beneficiation, which is where our dynamic comparative advantage lies and the sooner we recognise and focus on mineral beneficiation, the sooner we will unlock all the benefits.
“In bankers’ language, beneficiation means leveraging what you have and making the most of it,” Abedian adds.
South Africa has 80% of the known reserves of platinum, 90% of the known reserves of manganese and 74% of the known reserves of chrome.
There should be research institutes attached to each of these metal endowments as a starting point.
With $2.5-trillion worth of endowment, the country can be assured of a mining industry for the next 80 to 120 years and should be planning with that long time horizon in mind.
“Time is of the essence. If we don’t beneficiate in South Africa, the Chinese and the Russians will do it. We have already lost our dominance in ferrochrome and, clearly, we will lose out on ferromanganese, too, if we fail to get the timing right,” he warns.
He believes that South Africa has an oppor- tunity to reindustrialise on a scale far larger than in the 1950s and the 1960s owing to technology and finance no longer being binding constraints and the pace of global urbanisation creating ongoing demand for platinum, chrome, manganese and energy coal.
“For as long as that structural demand is there, South Africa is well placed to leverage its mineral base and put together an integrated reindustrialisation programme, which could easily sustain the average growth of 10% a year for the South African economy,” Abedian says.
While the export of raw ore creates only 5.7 South African jobs per 1 000 t of ore, the export of ferrochrome creates 17.3 jobs per 1 000 t of ferrochrome – over three times more.
There is a nigh six times value uplift, with ore exports contributing R1 660/t to GDP and ferrochrome contributing R9 109/t to GDP.
These figures justify South Africa’s bene-ficiation strategy, which should be accom- panied, the industry believes, by the laying down of a justifiable electricity price path that keeps State utility Eskom in business and also sharpens competitiveness.
South Africa would not be alone in implementing measures to maximise return from the resources it hosts in abundance, given what Canada has done in potash, Brazil in iron-ore, China in metallurgical coke and India in both chrome and iron-ore.
Inspired leadership is needed from business, labour and government.
MINERS TO PURSUE VALUE OVER VOLUME
Risk consultancy Eunomix MD Claude Baissac believes the lower tempo of the global economy will mean that the mining industry starts to focus more on the value of production rather than the volume of production, with enormous impli-cations for Africa.
“We’re seeing this in South Africa already,” says Baissac, who took part in a panel discussion at the Gordon Institute of Business Science in Johannesburg earlier this month.
Three companies mining platinum in South Africa have announced curtailment of operations and deferment of capital expenditure and projects.
There is evidence of an oversupply in the market.
“So we can expect that the return to value means, in a lot of industries, that there’s going to be blood on the street,” Baissac comments.
He foresees marginal operations having to close and new emphasis being placed on cost control and consolidation.
“I expect to see more negative news coming from the mining industry,” he adds.
Labour costs are increasing way above the rate of inflation, electricity prices are rising and there is pressure to increase taxes.
It raises the question: How does the mining industry intend to engage with government, the leadership of the ruling party and with the labour unions in order to find a way of returning the South African mining sector to being a sought-after mining destination?