Since the discovery of diamonds in the 1860s South Africa has been a major international player in the mining markets; but as tough market conditions and social issues take their toll on the economy, TABJ looks at some of the major problems facing the country’s mining sector.

Behind every successful economic story stand one or two industries that helped transform and modernise a country. In the case of resource-rich South Africa it is the mining sector.

While the southern tip of the African continent is well known for its 150-year-old diamond trade, it was in coal and gold that the country would find its industrial calling.

South Africa is also a leading chromium, palladium and manganese producer, and is the planet’s principal producer of platinum.

The mining industry accounts for 18.6 per cent of South Africa’s gross domestic product and in 2010 earned the country R17 billion in corporate tax revenues and R6 billion in royalties.

Industrial strife

Despite being home to a host of resources within its borders the country has suffered from years of boycotts related to the apartheid era, a succession of internal economic crises and infrastructural problems.

In more recent years striking workers have affected the country’s industrial efficiency.

The 2007 strikes, coordinated by the South African National Union of Mineworkers (NUM), saw close to a quarter of a million workers putting down their tools to protest about unsafe working conditions at the country’s mines.

Not helped by this year’s industrial ‘strike season’ in South Africa, in the year up to June the output of the mining industry has contracted by 5.1 per cent in comparison with the previous year’s performance to June, according to figures released by Statistics South Africa.

In July hundreds of thousands of workers across South Africa went on strike to demand higher salaries.

Statistics SA says: “Seasonally adjusted mining production decreased by 6.3 per cent for the three months ending July 2011 compared with the three months ended April 2011.

“The main contributors to the 6.3 per cent decrease were platinum group metals (contributing -4.7 percentage points) and coal (contributing -2.1 percentage points). 

“Actual mining production was 1.4 per cent higher for the three months ended July 2011 compared with the three months ended July 2010. A year-on-year decrease of 5.1 per cent was recorded in July 2011 compared with a revised 0.1 per cent decrease in June 2011.”

The powerful NUM Union has also been active recently by warning that more checks need to take place regarding Chinese investment in the country’s mining sector. Its general secretary, Frans Baleni, says that Chinese investment in South Africa “needs to be viewed with caution”.

The union released a statement saying: “The NUM has reliably learnt that China is stockpiling chrome and ferrochrome in order to dictate prices in the future. This, the union believes, is tantamount to colonisation of a special type.”

Rob Davies, the trade and industry minister, has responded to concern over Chinese interests by emphasising the fact that South Africa has been considering a number of ways in which the two countries can positively interact economically with each other.

“China, as the largest investor in this country, has undertaken to invest largely in mineral beneficiation and we have already submitted to them a list of what we want — we are looking at their commitment on that,” Davies remarks.

Unstable ground

The mining sector has been described as the heartbeat of South Africa’s economy, but the lack of a stable political situation is causing major problems to the industry. Many within the sector are concerned at the direction the current administration is taking in respect to its efforts to quell the effects of the global financial crisis, with nationalisation being promoted by many within the ANC.

The powerful ANC Youth League, led by the controversial figure of Julius Malema, has even called for the introduction of a policy that would allow the State to take 60 per cent of all mining companies, while the senior party has appointed a task team to investigate the merits of nationalisation.

Chamber of Mines of South Africa CEO Bheki Sibiya said recently that South Africa’s government should focus on “bigger” challenges, such as the high levels of unemployment, instead of the nationalisation of the country’s mining sector.

“There is too much at stake,” Sibiya says. “Investments in South Africa should be protected and a legacy needs to be saved for our children. The economies of the countries that have nationalised have suffered.

“South Africa may not be broke, but the country does not have sufficient liquidity, so the question becomes, how can we afford to nationalise with compensation?”

According to the Chamber, nationalisation without compensation would result in the downgrading of South Africa’s sovereign rating and would lead to a fall in foreign direct investment.

A spike in illegal mining would also increase if mines were nationalised without compensation, Sibiya warns.

Perhaps one of the larger short-term concerns for South Africa’s mining sector is the fear that international investors will begin to shift their focus to neighbouring developing markets.

Botswana was recently placed joint fourth in ResourceStocks magazine’s annual World Risk Survey — South Africa didn’t even feature in the top ten.

But unlike many of its neighbours the country has in place a comparatively strong infrastructural platform, enabling South Africa to present itself as an international mining giant.

Success stories remain visible as evidenced by the country’s booming coking coal industry, which Coal of Africa (CoAL) CEO John Wallington says, along with deposits in Mozambique and Zimbabwe, has huge potential and could lead to an rise in exports from ten million tonnes of chocking coal a year to more than 50 million tonnes.

Currently Australia supplies two-thirds of the coking-coal market at a rate of 170 million tonnes a year.

But Wallington says that Southern Africa and Mozambique could be the next Queensland.

“If you add the three [countries] together, you are looking at something very significant,” says Wallington. “As we develop and explore further, perhaps that ten million tonnes can be doubled over the next 20 years. Certainly, the potential is significant.”

The long-term gold outlook also looks positive with prices within the sector currently flying high and demand remaining steady.

Research firm RCR says that gold equities have outperformed broader world markets over the past decade with the best performing index being that of South Africa, which has grown by 22 per cent over the last year and 35 per cent in the past three months.

With prices close to the $2,500 an ounce mark, gold could lead play a vital role in stabilising South Africa’s economic and political situation.

With a more established infrastructural system in place than any of its neighbours, and vast resources to hand in a variety of markets, South Africa’s position as Africa’s leading resource centre remains strong, even if domestic concerns over economic and social policies remain palpable. 

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