The mining sector remains an important component of the South African economy, says Minerals Council South Africa.

Last week, the council published its ‘Facts and Figures 2018’ report, which pointed out that the sector had contributed R350.8-billion to the country’s gross domestic product in 2018, constituting 7.3% of GDP.

Additionally, the Minerals Council said the industry’s fixed investment had increased by 13.2% to R91.1-billion in 2018, which, it said, had been possible, owing to the shifts in South Africa’s and the industry’s political leadership.

Minerals Council CEO Roger Baxter cited 2018 as a “turning point” for South Africa’s mining industry, as well as for the country, adding that the changes in leadership were “necessary in order to deal with the country’s previous downward spiral into recessionary conditions”.

As a result, these changes had introduced a period of new-found business confidence, he noted.

However, the long-term nature of mining means that this increase needs to be sustained for a significant period before it translates into a growing industry.

The report outlines how, since the beginning of this year, the industry has seen significant rises in the prices of commodities that had previously been disappointing for some time.

Although employment in some sectors – such as coal, iron-ore, manganese and chrome – had grown during 2018, this growth was masked by reductions in employment in other sectors – such as gold, diamonds and platinum – which resulted in a net job loss position in the sector during the year.

The industry’s safety performance was more positive, with a slight drop in the number of fatalities in 2018, compared with 2017, largely based on the considerable improvements in the last third of the year.

This improved performance had extended into 2019, the Minerals Council noted.

Carbon Tax

With the mining industry accounting for about 15% of South Africa’s greenhouse-gas (GHG) emissions, the Minerals Council believes the Carbon Tax – which came into effect in June – could cost the industry an additional R900-million to R1.8-billion a year during the first phase of implementation.

The first phase, which runs from June 2019 to December 2022, is considered a transitional period, during which the efficacy of the implementation of the new law reducing GHG emissions nationally will be reviewed. Impacted companies will be assisted with allowances to cushion the impacts of the tax on their operational costs.

In this phase, the Carbon Tax will be levied on Scope 1 emissions, applying to process and internal combustion emissions. The Carbon Tax is levied at R120/t of carbon dioxide emitted, which will increase at a rate as increases in the Consumer Price Index plus 2%.

In Phase 1, the National Treasury has proposed several offsets, including, but not limited to, a 60% basic tax-free allowance, as well as a 10% allowance for process and fugitive emissions and a 5% allowance for companies that have allocated and comply with a carbon budget, as well as a 5% tax-free allowance in above- average performance in reducing carbon emissions.

However, given that mining companies faced multiple hurdles in starting renewable-energy projects, most mining companies had limited scope to benefit from the carbon offset, the Minerals Council noted.

“The uncertainty for the mining sector is compounded by the fact that the Department of Environment, Forestry and Fisheries process to finalise carbon offsets and carbon budget regulations is still to be finalised”.

Additionally, in the February 2019 Budget Speech, the National Treasury indicated that, during Phase 1, the carbon tax would initially be factored in through a 10c/ℓ increase in fuel prices.

During the second phase, which will start in January 2021, it is expected that the draft Climate Change Bill would have come into law and, thus, it would be compulsory for companies to have a carbon budget.

According to the Minerals Council, however, there is still “considerable uncertainty” around the second phase, particularly, whether the tax offsets allowed in Phase 1 will be maintained, and the electricity generation sector will be allowed to pass on the cost of the tax to consumers.

In the absence of policy certainty from the National Treasury on whether the allowances granted in Phase 1 will fall away, the council believes the potential Carbon Tax liability on Scope 1 emissions for the mining sector would rise to R10.2-billion a year.

“Additionally, it is our view, that in Phase 2 of the Carbon Tax implementation process, the full impact of the Carbon Tax on electricity will be fed through to the mining sector because the National Treasury has not yet specified any potential tax-free allowances,” the council said.

Overall, the Minerals Council’s analysis found that the imposition of the Carbon Tax would result in an additional 6 000 job losses a year and reductions of R4-billion in output and R2.2-billion in investment in the mining sector.

The tax would also result in an increase in costs to the tune of R10.2-billion, the council said.

Across the 18 mining companies that responded to a Minerals Council survey in August, the Carbon Tax is estimated to cost as much as R517-million a year in Phase 1 of its implementation.

In the absence of the offsets allowed in Phase 1, the Carbon Tax liability for these 18 companies was estimated to increase to R5.5-billion for each year of Phase 2, which represented a 972% increase in the tax liability, it said.