Rejuvenating South Africa's economy - The role of the mining sector

INCLUSIVE SOCIETY INSTITUTE

Rejuvenating South Africa’s Economy – The Role of the Mining Sector January 2022

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DISCLAIMER Views expressed in this report do not necessarily represent the views of the Inclusive Society Institute or those of their respective Board or Council members. All records and findings included in this report, originate from a panel discussion on developing a new economic blueprint for South Africa, which took place in November 2021

Author: Mariaan Webb, Creamer Media Writer Edited by: Daryl Swanepoel

Contents Abbreviations & acronyms...........................................................4 Introduction...................................................................................5 Identifying weaknesses...............................................................6 • Electricity tariffs and supply.....................................................................................6 • Infrastructure shortcomings.....................................................................................6 • Labour and community relations...............................................................................7 • Localisation and black empowerment.....................................................................8 • Mining narrative...........................................................................................................8 • Planning and implementation gap.............................................................................8 • Policy and regulatory uncertainty.............................................................................9 • Slow on innovation....................................................................................................10 • Weak government......................................................................................................10

Suggestions for fostering growth .......................................... 11 Conclusion.................................................................................. 14 Reference list............................................................................. 15

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Abbreviations & acronyms

BEE.................................................................black economic empowerment GDP.............................................................................gross domestic product ISI............................................................................Inclusive Society Institute PGM.............................................................................. platinum-group metals

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Introduction South Africa is one of the world’s leading mining and mineral-processing nations. The country has the world’s biggest reserves of platinum-group metals (PGMs) and manganese, and is ranked among the top three countries for chromium, fluorspar, gold, vermiculite and zirconium reserves (Minerals Council, 2021a).

For many years, mining has been the mainstay of the South African economy and the industry continues to be a valuable contributor. In 2020, mining added 8.40%, or R371.90-billion in nominal terms, to gross domestic product (GDP). Mining also provides the single greatest part of South Africa’s export revenues and employs directly, and indirectly, more people than any other comparable sector. The industry in 2020 provided direct employment to more than 452 000 people, which is 4.70% of the total formal nonagricultural employment (Minerals Council, 2021a).

As a major exporter that competes with international players, South Africa must be competitive if it is to realise the true potential of its rich resource endowment. However, regulatory uncertainty, unreliable power supply, high electricity tariffs and rail and logistical shortcomings continue to negatively affect the sector, holding back investment and limiting its contribution to economic growth and development.

This report by the Inclusive Society Institute (ISI) is a summary of themes that emerged from virtual discussions, held in November 2021, with participants from the mining industry to gather their views on what South Africa must do to remove constraints to economic growth and development. The report also puts forward suggestions on what can be done to accelerate GDP growth.

The report is one in a series of ISI reports, which forms part of a broader research project to develop a New Economic Blueprint for South Africa. Discussions were also held with other sectors, including finance, manufacturing, construction, information communication and technology, and retail to canvass their opinions as part of the broader research project.

Unless South Africa achieves much higher levels of economic growth for a sustained period, the country’s economic and social problems of poverty, inequality and unemployment will not be resolved.

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Identifying weaknesses Electricity tariffs and supply Electricity tariff increases since the onset of the power crisis in 2008 have been significantly above inflation levels, with a doubling in real prices from 2008 to 2012 and a further increase of 25% above inflation from 2012 to 2016 (Minnaar, 2021). Power utility Eskom argues that the pricing regime does not meet the requirements for cost-effectivity at an efficient operational level, but customers are concerned about affordability in relation to other countries.

Above-inflation tariff increases have a substantial impact on the mining industry’s cost structure, jeopardising the viability of marginal and lossmaking mines and threatening to accelerate job losses at energy-intensive mines. In 2021, mining input cost inflation averaged 8.80%, but this will increase to 13.30% should Eskom’s latest requested tariff increases for 2022/23 to 2024/25 be approved (Langenhoven, 2022).

The Minerals Council argues that the mining sector is a price taker and cannot influence selling prices. Therefore, cost increases erode profit margins and jeopardise the sustainability of the sector.

The mining industry has also called for a more predictable price path for electricity.

While Eskom will continue to supply the bulk of the mining sector’s power needs for some time, Minerals Council member companies have announced a pipeline of 3 900 MW of potential renewable-energy projects worth more than R60-billion that would, when implemented, substantially contribute to bridging the large country electricity supply deficit, diversify the country’s supply, reduce the sector’s carbon footprint

“. . . the mining sector is a price taker and cannot influence selling prices. Therefore, cost increases erode profit margins and jeopardise the sustainability of the sector.”

and stabilise costs (Mining Weekly, 2021).

Infrastructure shortcomings The mining industry has singled out logistics as one of its biggest domestic constraints, particularly for

those companies producing bulk commodities, like iron-ore, coal, chrome and manganese. These firms have been unable to benefit from higher global commodity prices, in some instances record prices, because of rail and port inefficiencies. State-owned Transnet’s rail system faces major impediments stemming from high levels of theft and vandalism, among other operational challenges. The parastatal loses about 120 km of overhead cables a month, owing to criminality.

Security incidents across the freight rail network have increased 177% in the past five years and the cost to Transnet and its customers has increased exponentially (Transnet, 2021).

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Identifying weaknesses Africa’s top iron-ore producer, Kumba Iron Ore, has said that it cannot transport its premium steelmaking material from the mines in the Northern Cape to the Port of Saldanha on the West Coast, because of rail bottlenecks, costing the company billions of rand in lost revenue.

Logistical issues also affect the movement of coal, with major producers Exxaro Resources and Thungela Resources having flagging concerns about rail shortcomings. The Richards Bay Coal Terminal last year exported its lowest volume of coal since 1996, owing to an inability to get coal from the mines to the export terminal, in KwaZulu-Natal.

The rate mining companies are charged for rail services is also deemed to be uncompetitive.

As mining companies are not the owners or operators of the rail services, it is difficult to influence Transnet to be more productive, innovative or to introduce better technology. In many other countries, private companies own or partially own the infrastructure in the logistics value chain. More private-sector involvement in rail and port logistics is considered a key enabler that can make South Africa more competitive.

Plans are afoot for more private participation in logistics. Government is promoting greater private-sector participation in rail, including through granting third-party access to the core rail network and the revitalisation of branch lines. A major ports reform is also under way.

Labour and community relations A stable labour workforce and sound community relations are key enablers in making mining companies globally competitive. Without stable relationships, the industry will not produce the tons that are required to compete on a global level. Civil society has a role to play in levelling the playing field between labour and mining companies. However, the mining industry is perceived as being too defensive in its interactions with civil society.

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Identifying weaknesses Localisation and black empowerment Localisation, procurement and broad-based black economic empowerment (BEE) can be burdensome on the industry, when sufficient capacity does not exist in the value chain of smaller players. The Mining Charter requires that 44% of the total procurement budget be spent on South African manufactured goods by BEE-compliant companies, 21% on South African goods manufactured by black entrepreneurs and 5% on goods manufactured by BEE women entrepreneurs or youth-controlled companies. In respect of services, even higher percentages are set for procurement from majority black-owned suppliers. The Mining Charter provides that 60% of the total services must be procured from BEE entrepreneurs, 10% is to be procured from BEE-compliant companies and 10% from BEE women entrepreneurs or youth-owned companies (Department of Mineral Resources, 2018).

Mining narrative The tone from politicians, some senior State officials and communities is one that is not always supportive of the mining industry, with a narrative that mining is the ‘big evil’. These messages sow mistrust and negatively affect investment appetite.

Planning and implementation gap South Africa seems to be stuck in a phase of ongoing planning, often without much progress on the implementation front. This could be owing to a lack of political backing for certain plans or owing to a shortage of people with the necessary skill, professionalism and capabilities to implement plans. The private sector feels its assistance, offering specialists skills through secondments, is met with an unwelcoming attitude.

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Identifying weaknesses Policy and regulatory uncertainty South Africa must address policy and regulatory uncertainty if it is to attract more investment in exploration and mining. South Africa attracted $194-million a year in exploration expenditure between 2000 and 2018, compared with Canada’s $2-billion a year and Australia’s $1.80-billion a year (Baxter, 2021).

The Canadian public policy research organisation, the Fraser Institute, in its 2020 Survey of Mining Companies, released in early 2021, shows a regression in perceptions relating to South Africa as a mining investment destination. South Africa ranked sixtieth out of 77 jurisdictions for investment attractiveness and its attractiveness score worsened from 64.79 in 2019, to 56.33 in 2020 (Yunis & Aliakbari, 2021). In comparison, Botswana has been the top-ranking African country in the Fraser Institute survey for more than 20 years.

In 2020, Botswana was the eleventh most attractive jurisdiction in the world for mining investment, with an investment attractiveness score of 81.48 (Yunis & Aliakbari, 2021).

Minerals Council South Africa CEO Roger Baxter attributes Botswana’s success to the stability of its regulatory system. He notes that Botswana changed its Mines and Minerals Act in 1999 and has left it untouched since then. By comparison, South Africa has sought to implement an ongoing sequence of major changes to its mining laws and policy frameworks over the past 25 years.

Botswana’s mining and prospecting rights application processes are also more streamlined than South Africa’s. In Botswana it takes 20 days to get a mining right for a major project and 40 days for a prospecting right. It takes vastly longer in South Africa to obtain the same licences. In South Africa, to secure a mining right takes on average 355 working days and a prospecting right 245 working days (Minerals Council, 2021b).

Unresolved licensing applications currently hold back about R30-billion of committed investment by companies that cannot be spent, owing to red tape, including delays in approval of permits and mining right transfers, issuing of water-use licences and environmental permits (Baxter, 2021).

Mining companies have difficulty explaining to shareholders, credit agencies and investors what the future of investment in South Africa holds, when the regulatory framework is not stable.

At times the mining regulations, and the bodies empowered to implement them, are experienced as punitive and combative, rather than as collaborative.

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Identifying weaknesses

Slow on innovation South African mining urgently needs innovation. Over the past decade, multifactor productivity in South Africa, an indicator of innovation, has fallen by 7.60% (Baxter, 2021). The local industry is lagging its competitors when it comes to innovation. The mining industries of Australia and the Americas are at the forefront of, or leading, the charge in making their mines safer. They are introducing technology to get to deeper ores that using older technologies are not currently accessible at an economic rate. This is particularly important for South Africa, which has some of the world’s deepest mines. South Africa is not implementing policies, or support measures, to allow for productivity-enhancing measures to be introduced into its mines. Government is not clear on what its social strategy is with regard to innovation and technology, and how the country is going to adapt to it.

Weak government The weakness of State entities and the failing of local and provincial governments are areas of concern for the industry. When the State fails to provide services, mining companies are forced to take on the role of ‘surrogate State’ as near-mine communities often expect private businesses to pick up the slack and provide housing and related services. This can result in tension between the industry and communities.

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Suggestions for fostering growth Focus points to accelerate growth

Attract talent

Build trust

Place more focus on promoting the mining industry as a career opportunity for younger people. Talent must also be retained, as many skilled South African workers are attracted to other jurisdictions, including Australia, Canada and Indonesia.

The mining industry’s motivation has evolved from being focused purely on profit to managing the impact of mining on the broader society.

Some in government seem to still have a negative perception about the industry. To build more trust, a broader range of stakeholders, including civil society, must be engaged. Civil society could help to bridge the gap between government, mining companies and labour. Mining houses must be clearer about what they can do and what technical capabilities they can offer government.

A better social compact will also bode well from an international perspective, as well as the elevation of environmental, social and governance issues.

Capitalise on hydrogen economy

Conducive regulatory environment

Interest in the global hydrogen economy is growing rapidly and South Africa must ensure that it remains at the forefront of developments. As a major PGMs producer, South Africa has an unprecedented opportunity to capitalise on hydrogen developments, ensuring a long-term future for its mining industry.

Regulatory uncertainty is a disincentive for investors and South Africa must provide more certainty or it risks remaining at the wrong end of the investment scale.

Government must also take decisive action to implement its ideas and plans. Vague intentions will not attract the capital that is needed to grow the South African economy.

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Suggestions for fostering growth Suggestions to enhance investor confidence – continued South African mines are ageing operations and must be more productive to remain competitive.

Drive productivity and innovation

– Labour and communities must be brought on board with productivity improvements.

– New technology must be ‘people-centred’, considering South Africa’s high unemployment rate.

– New technology could also shape a role for more women to be employed in the mining industry.

Improve Africa trade

Following the pandemic, the world is in a “shift-mode” in terms of alliances. There is an opportunity for South Africa to improve its relationship with other African countries for multilateral trade and collaboration.

Immediate action on infrastructure, especially energy and logistics infrastructure, is needed to ensure South African mining operations can compete with competitors in the rest of the world.

– Electricity: Work with government to build an energy system that is reliable, greener and advances the country to its carbon neutrality goals. Invest in Eskom to make it work and allow for mining companies to provide their own electricity.

Invest in infrastructure

– The mining sector has already shown its willingness to help the country bridge its large electricity supply deficit by announcing a potential 3 900 MW of renewable-energy projects. The mining industry is involved in various stages of building plants, conducting studies, planning and applications for solar, wind and battery energy projects (Mining Weekly, 2021).

– Transport: Fix Transnet’s rail infrastructure to enable bulk commodity producers to cost-effectively export their production. Public–private partnerships are considered to be the solution to bolster rail infrastructure investments and performance.

Government’s commitment to introduce third-party rolling stock on the rail system by August 2022 is applauded, but private-sector participation must extend to beyond not only rolling stock but to the entire system.

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Suggestions for fostering growth Suggestions to enhance investor confidence – continued

Lower input costs

Administered costs like electricity, transport logistics operated by Transnet on railways and ports are driving up input costs for the mining industry. A predictable price path for electricity is needed to ensure the viability of the mining sector and broader economy.

Promote exploration

South Africa needs to promote minerals exploration as the country has a significant quantity of untapped resources. Government must put in place incentives and an effective and efficient licensing regime to promote the country as a partner of choice to unlock investment in mining and exploration. The Minerals Council believes South Africa can attract 5% of global exploration expenditure.

Rally behind renewables

South Africa has an opportunity to ride the global wave of growth driven by the adoption of renewable-energy solutions. The country must organise itself better to take advantage of these opportunities and collectively rally behind the adoption of renewable energy.

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Conclusion South Africa has vast mineral resources – estimated to be worth $2.50-trillion – but unless the country manages to attract investment in exploration and mining, its minerals are going to stay in the ground. Providing certainty of policy and a predictable regulatory environment could speed up investment, which will drive up inclusive economic growth and much-needed employment creation.

Improving the global competitiveness of South Africa would change the country’s economic growth trajectory. Modernising the economy, including the mining sector, will be key to achieving this goal and will require a new approach to technology and innovation. Partnering with the private sector will help the country be more competitive, and will unlock greater privatesector investment required in core infrastructure such as railways, harbours and electricity. To encourage private-sector participation, the country must continue to implement long-awaited structural reforms.

In an environment often characterised by talk, rather than action, it is time for the country to roll up its sleeves and get things moving to create an investment framework that is conducive for investors to commit to South Africa. At the same time, the mining industry must seek buy-in from all stakeholders and be more vocal about the consequences of a scenario in which South Africa fails to encourage more resources investment.

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References Baxter, R. 2021. Address to the 2021 Minerals Council Annual General Meeting, May 26, 2021.

[Online]. Available at: https://www.mineralscouncil.org.za/industry-news/publications/annualreports [accessed January 23, 2022].

Bloomberg News. 2021. Coal and iron pile up in South Africa on rail constraints, October 21, 2021. [Online]. Available at: https://www.bloomberg.com/news/articles/2021-10-21/coal-andiron-pile-up-in-south-africa-on-rail-constraints [accessed January 23, 2022].

Department of Mineral Resources. 2018. Draft broad-based socioeconomic empowerment charter for the mining and minerals industry, June 15, 2018. [Online]. Available at: https://www. gov.za/documents/mining-charter-broad-based-socio-economic-empowerment-charter-miningand-minerals-industry [accessed January 23, 2022].

Langenhoven, H. 2022. MYPD5 – Nersa public hearings, January 21, 2022. [Online]. Available at: https://www.mineralscouncil.org.za/industry-news/media-releases/2022 [accessed January 23, 2022].

Minerals Council South Africa. 2021a. Facts and Figures 2020, October 14, 2021. [Online].

Available at: https://www.mineralscouncil.org.za/industry-news/publications/facts-and-figures [accessed January 23, 2022].

Minerals Council South Africa. 2021b. Integrated Annual Report 2020, May 26, 2021. [Online].

Available at: https://www.mineralscouncil.org.za/industry-news/publications/annual-reports [accessed January 23, 2022].

Mining Weekly. 2021. Minerals Council members could deliver up to 3 900 MW of supplementary electricity supply, November 23, 2021. [Online]. Available at: https://www.miningweekly. com/login.php?url=/article/minerals-council-members-could-deliver-up-to-3-900-mw-ofsupplementary-electricity-supply-2021-12-10/searchString:minerals+council+members [accessed January 24, 2022].

Mining Weekly. 2021. South Africa’s RBCT exports lowest coal tonnages since 1996, January 25, 2022. [Online]. Available at: https://www.miningweekly.com/article/south-africas-rbct-exportslowest-coal-tonnage-since-1996-2022-01-25/rep_id:3650 [accessed January 25, 2022].

Minnaar, U. 2021. Energize: A brief perspective on Eskom’s electricity tariffs, September 27, 2021. [Online]. Available at: https://www.energize.co.za/article/brief-perspective-eskomselectricity-tariffs [accessed January 23, 2022].

Transnet. 2021. Media statement: Transnet continues to implement interventions to curb cable theft, June 10, 2021. [Online]. Available at: https://www.transnet.net/Media/Press%20 Release%20Office/TRANSNET%20CONTINUES%20TO%20IMPLEMENT%20INTERVENTIONS%20 TO%20CURB%20CABLE%20THEFT.pdf [accessed January 23, 2023].

Yunis, J. & Aliakbari, E. 2021. Fraser Institute Annual Survey of Mining Companies, 2020. [Online].

Available at: https://www.fraserinstitute.org/studies/annual-survey-of-mining-companies-2020 [accessed January 23, 2022].

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This report has been published by the Inclusive Society Institute The Inclusive Society Institute (ISI) is an autonomous and independent institution that functions separately from any other entity. It is founded for the purpose of supporting and further deepening multi-party democracy.

The ISI’s work is motivated by its desire to achieve nonracialism, nonsexism, social justice and cohesion, economic development and equality in South Africa, through a value system that embodies the social and national democratic principles associated with a developmental State. It recognises that a well-functioning democracy requires well-functioning political formations that are suitably equipped and capacitated. It further acknowledges that South Africa is inextricably linked to the ever transforming and interdependent global world, which necessitates international and multilateral cooperation. As such, the ISI also seeks to achieve its ideals at a global level through cooperation with like-minded parties and organs of civil society who share its basic values. www.inclusivesociety.org.za