Minerals Council South Africa has reported that mining input cost pressures accelerated sharply in May, reflecting the transmission of higher global energy prices into the South African economy amid the conflict in the Middle East at the time.

The Minerals Council's Mining Composite Input (MCI) Cost Index rose to 5.3% year-on-year, up from a revised 2.8% in April.

The 2.5 percentage-point increase was driven primarily by higher prices for coke and refined petroleum products, as well as chemicals. Cost pressures are likely to remain elevated on a year-on-year basis in June.

While Brent crude prices fell following the ceasefire reached in the third week of the month, oil prices remained above pre-conflict levels for much of June.

Consequently, the Minerals Council says, energy-related inputs are expected to continue exerting upward pressure on annual mining input cost inflation, even though month-on-month fuel prices have begun to ease.

Looking ahead, it notes that further cost increases are expected as winter electricity tariffs take effect from mid-June, typically raising electricity costs by 20% to 30% through to September, while municipal water tariffs are set to increase in July.

Together, the Minerals Council says, these developments point to a period of rising input cost pressures for the mining sector in the months ahead.

On a month-on-month basis, almost all cost baskets comprising the MCI Cost Index recorded increases in May.

The Minerals Council explains that the most significant contributor was coke and refined petroleum products, which rose by 15.3% month-on-month, reflecting the sharp increase in global energy prices during the month.

This was followed by chemicals and man-made fibres, which increased by 11.5% month-on-month.

Broad-based price increases across the remaining categories also contributed to the acceleration in mining input cost inflation, resulting in the MCI Cost Index rising by 2.3 percentage points compared with April.

The only category to record an improvement was imported intermediate goods, which declined by 0.4% month-on-month. This reflected an improvement in the nominal effective exchange rate (NEER), supported by a stronger rand against a basket of currencies of our major trading partners.

In May, the rand appreciated by 0.5% against the dollar relative to April, while also strengthening against the euro (0.7%), pound sterling (0.2%), Japanese yen (0.3%) and Chinese yuan (0.6%). This helped to partially offset broader cost pressures stemming from imports.

Coke and refined petroleum products rose by 40.3% year-on-year, largely reflecting the 62% increase in Brent crude oil prices, which averaged $103.80/bl in May compared with $64.10/bl a year earlier.

Higher oil prices also drove increases across the chemical value chain, with other chemicals and man-made fibres rising by 19.8% year-on-year, the Minerals Council notes.

Key chemical inputs such as ammonia, ethylene and propylene all recorded substantial yearly price increases, underscoring the broad transmission of energy price shocks through industrial supply chains.

The Minerals Council explains that the impact of the energy shock stemming from the conflict in the Middle East was not uniform across mining commodities, with cost pressures largely reflecting each subsector's exposure to fuel, energy and transport inputs.

Other mining and quarrying, which includes aggregates and sand, recorded the highest input cost inflation at 6.3% year-on-year, reflecting its heavy reliance on diesel-powered operations and road-based transport.

Similarly, coal, chrome and manganese producers faced disproportionate cost increases owing to their significant transport and storage requirements, much of which remains road-based and therefore highly exposed to higher fuel prices.

Gold mining input costs also remained elevated. The energy-intensive nature of deep-level gold mining, combined with yearly electricity tariff increases and broad-based increases across key input categories, continued to place upward pressure on operating costs, the Minerals Council says.

CONCLUSION

The Minerals Council says the May data show that the energy shock triggered by the conflict in the Middle East has transmitted more forcefully through the mining input cost chain.

Cost pressures increased across almost all categories, with the largest yearly impacts concentrated in fuel, energy, chemicals and transport-related inputs.

These were the areas most directly affected by heightened concerns over oil supply disruptions through the Strait of Hormuz, a critical global shipping route through which around one-fifth of the world's oil trade passes.

Looking ahead, the Minerals Council says imported energy-related cost pressures may begin to ease. Following the ceasefire reached in June, Brent crude prices retraced to levels broadly consistent with those seen before the conflict, while tanker traffic through the Strait of Hormuz has now resumed.

However, it notes that domestic cost pressures are likely to intensify.

June marks the start of the winter electricity tariff period, which typically increases electricity costs by 20% to 30% through September, while municipal tariff increases, including water tariffs, came into effect from July 1.

Given mining's reliance on both electricity and water, the Minerals Council says these increases are expected to place further upward pressure on operating costs in the months ahead.

It adds that the broader inflation outlook also remains challenging, noting that the South African Reserve Bank has increased its focus on inflationary risks following the energy-driven rise in headline inflation and inflation expectations, raising interest rates in May.

“With upside risks to inflation still present, the possibility of further monetary tightening later in the year cannot be ruled out.

“Together, these developments suggest that mining cost pressures are likely to remain elevated over the near term, even as the immediate global energy shock begins to subside,” the Minerals Council says.