A new report by business advisory firm FTI Consulting discusses the pivotal role of South Africa in the global mining industry and how mining has supported South Africa’s industrial development.
This comes as the Investing in African Mining Indaba is being held in Cape Town this week.
South Africa’s mining industry has been in the doldrums and this has led commentators to question whether the industry is in a sunrise or sunset stage.
FTI reports that South Africa has a mineral reserve valued at about $2.5-trillion and is estimated to have the world’s fifth-largest mining sector in terms of gross domestic product (GDP) value.
South Africa has the world’s largest reserves of platinum-group metals (PGMs), accounting for 95% of world reserves, as well as the world’s largest reserves of chromium, gold and manganese.
South Africa’s diamonds account for 10% of the world’s reserve, while its coal reserve accounts for 7% of global reserves.
The country’s total sales value of commodities was R432-billion in 2018, with R171-billion attributed to domestic sales and R261-billion to export sales.
In total, the South African mining industry exported R312-billion worth of commodities to international buyers or commodity markets in 2018 – 66% of its total production.
At its peak in 1980, the mining sector contributed 21% to the country’s GDP. In 2018, the sector contributed R351-billion to GDP, representing 7.3% of GDP.
Mining provides jobs for about 465 000 people directly, currently, which is 4% of South Africa’s workforce, while supporting a further 1.3-million indirect jobs. The industry spends R126-billion a year on labour costs.
FTI reports that the South African mining industry’s contribution to GDP has been on the decline, on the back of decreasing production, lagging cost competitiveness, low levels of exploration spend, labour unrest, policy uncertainty and reputation scepticism related to the industry’s readiness for a greener world.
The firm says some major global trends have also affected how South Africa’s mining industry evolves, including changing demand patterns in Asia, urbanisation, diverse commodity price cycles, rand depreciation, the transition to cleaner energy sources, falling ore grades, labour cost increases, higher electricity and water prices and advances in technology.
To this end, FTI recommends that miners increasingly diversify their portfolios, develop a consumer-led approach in target markets, automate mines, manage costs, self-generate electricity and remain strict on ethical governance.
FTI also hopes the industry will amplify its exploration efforts, technology development or deployment efforts and improve its market intelligence.
This all while decarbonising the supply chain and standardising environment, social and governance (ESG) reporting.
FTI suggests that anticipating changing demand patterns is complex. For example, despite the energy transition to lower emission sources, world coal demand is still expected to grow in China, India and Russia, while Europe and the US are more focused on switching to alternative sources of energy.
Urbanisation will increase demand for consumer electronics, which require PGM components, while platinum-based fuel cells will also become more significant as the hydrogen economy evolves.
The firm says another consideration is the diverse and cyclical nature of commodity prices, particularly when exporting to overseas markets. South Africa exports significant amounts of its mining products and the volatility of the rand, coupled with these price fluctuations, mean that the dollar value and economic contribution of these exports can vary even from month to month.
Balancing the portfolio between domestic consumption and export markets is therefore another important consideration.
FTI says mining is a global industry, therefore in-country assets need to be globally cost competitive and have production cost curves higher than commodity spot prices to be sustainable.
According to global cost benchmarks, some South African assets are top quartile and others are bottom quartile.
After a period of sustained cost cutting across the industry, there is still a place for continuous monitoring of costs. In South Africa, cost pressures are particularly challenging in the areas of rising wage costs and electricity costs.
Negotiations with labour unions and new models for electricity supply will be important for future cost containment.
FTI predicts that mines will be increasingly modernised to ensure higher efficiencies, lower costs and better safety outcomes. However, it comes with the price of reducing employment in the communities in which they operate.
To remain a prominent player in the global mining industry, FTI says South Africa needs to pay particular attention to exploration, technology, consumer rights and trading, and strategic partnerships and stakeholders.
This while keeping in mind ESG in their decisions, since ESG plays an ever-increasing role in influencing capital allocation.
FTI notes that a higher level of communication and transparency may enable mining companies to better communicate the in-country benefits that their operations bring – in terms of climate change, safety, tax payments and social upliftment.