Opening the annual Investing in African Mining Indaba in Cape Town, Minister of Mineral Resources Mosebenzi Zwane observed that "the mining industry is in its winter season, a season which some have characterised as a crisis". This is an apt analogy for the continuing commodity slump, inspired by the slowdown in demand from China and Asia, which has seen the prices of South Africa's major mineral exports plummet to their lowest since the global financial crisis in 2008/09.
The World Bank's South Africa Economic Update, released this month, paints a bleak picture. Since peaking in August 2011, prices for South Africa’s key mineral exports - iron ore, platinum and gold - have declined by 76.9%, 52.3% and 39.3% respectively. Over the same period, the value of listed mining companies on the Johannesburg Stock Exchange has fallen 53% while mining companies have reduced their capital expenditure similarly. Alarmingly, since 2011 the industry has shed about 145,000 jobs, and further retrenchments now seem inevitable.
This is not confined to one sector. Despite rapid diversification over the past two decades (especially into financial and other service industries, which continue to perform well), South Africa's economy remains heavily reliant on mineral exports. The World Bank notes that, in close correlation with mineral prices, the country’s GDP growth has slowed from 3.2% in 2011 to 1.3% in 2015 and a projected 0.8% in 2016, falling far behind other mineral exporters, such as the Democratic Republic of Congo (8.6%), Tanzania (7.2%), Ghana (5.9%) and Zambia (3.8%).
It is wrong to attribute all of this to external economic forces beyond our control. Minister Zwane correctly acknowledged that "during our summer season, as an industry, we have failed ourselves in not preparing better for this winter". There is indeed much that we could and should have done – and still can do – to insulate South Africa from the economic headwinds which it now faces.
This should begin by addressing five critical factors within our control: policy; bureaucracy; infrastructure; employment; and empowerment. Historical challenges in these five areas have had a significant chilling effect on foreign investment inflows, which fell by a staggering 74% last year, according to the United Nations Conference on Trade and Development – more than double the 31% decline in Africa as a whole. Of the US$38 billion invested into Africa in 2015, Nigeria and Mozambique drew US$3.8 billion and US$3.4 billion respectively, but South Africa attracted only US$1.5 billion, down from US$5.7 billion in 2014 and US$8.3 billion in 2013. How can this trend be reversed?
Government policy on mining has been unpredictable, to say the least, for several years. The Mineral and Petroleum Resources Development Act, already beset by vagueness and ambiguity, was not improved by the piecemeal amendment passed in 2008 and only implemented in 2014. There is still no certainty on the fate of the 2013 amendment bill, which will (among other costly impositions) create beneficiation quotas for designated minerals. It was rushed through Parliament before the 2014 elections, but awaited the President's assent for almost a year before he sent it back for constitutional correction, citing inadequate public consultation and a risk that its beneficiation provisions breached South Africa’s international trade agreements. In that time, South Africa tumbled twenty places (from 55th to 75th) on the Fraser Institute's ranking of countries' 'mineral potential under the current policy environment'. Over a year later, the corrective exercise has yet to commence. Minister Zwane last week promised to prioritise this, but did not say how or when.
Next, the Department of Mineral Resources must be much more efficient, professional, accessible and accountable if it is to facilitate, rather than frustrate, exploration and extraction of mineral wealth in the national interest. Its often adversarial approach to licensing, compliance and approval procedures has resulted in inefficiency, obfuscation and delay, which is not conducive to a predictable and secure regulatory environment. The 'one stop shop' for all mining-related licences, which former Minister Susan Shabangu claimed was 'close to completion' in 2012, seems to be something of a mirage, perhaps made only more remote after 2014, as the new 'One Environmental System' has obscured the overlapping responsibilities of the Departments of Mineral Resources, Environmental Affairs and Water & Sanitation.
Public infrastructure remains inadequate for optimal and efficient mining. A mining industry can only ever be as good as the power, water and transport facilities at its disposal, and ours are increasingly costly, constrained and deteriorating. Despite undertaking in 2012 to fix this by spending four trillion rand over fifteen years, the state now has neither the capacity nor the cash to do so. To invigorate our mining infrastructure, we need to follow the example of countries such as Mali, Mozambique and most recently Zimbabwe, and make it not only possible but commercially sensible for the private sector to participate in the development and management of innovative infrastructure solutions.
South Africa’s employment challenges are daunting. Understandable demands for higher wages cannot be met by companies battling to break even, the industry's net profits having fallen from an average of 8% return on equity in 2011 to almost nil last year, according to the World Bank. In that period, wages rose at double the rate of inflation without being tied to productivity, which was in turn crippled by protracted strikes, with some 145,000 jobs lost in the process. Alleviating these pressures will require closer collaboration between business and labour, going far beyond the 'closed shop' agreements that so frustrate minority unions, and extending into the management of the enterprise. It will also require more responsive and effective mediation by the government.
The country’s empowerment efforts have not yet yielded a strong social licence to operate, in that mining companies arriving in impoverished communities are met with suspicion rather than a sense of opportunity. While most major mining companies have devised valuable initiatives for socio-economic upliftment of local communities, these are often not coherently integrated into municipal planning, which can mean their implementation is delayed or disjointed. The resulting risk of frustrating communities' expectations leads both business and government to be non-specific and sometimes secretive about the empowerment profile underlying the grant of a prospecting or mining right, including a company’s social and labour plan. There is no reason not to publish social and labour plans, while the DMR should require mandatory community consultation about these.
Part of the problem is that a mining company’s score is still skewed heavily in favour of black shareholding rather than more broad-based means of empowerment, which explains why the stakes are so high in the Chamber of Mines' current court challenge to determine how it ought to be calculated. This will worsen if the Mining Charter is trumped by the generic codes of good practice, as dictated by the latest amendment to the Broad-Based Black Economic Empowerment Act by the Department of Trade and Industry, which discourages employee and community share schemes in favour of creating individual black industrialists. Minister Zwane secured the mining sector's exemption from this trumping provision, but that will expire in October 2016, so there is now urgency in developing a new Mining Charter which not only resolves the current dispute with the Chamber but formulates a more inclusive, comprehensive and coherent empowerment package that will foster communities' confidence in mining as a fair process for creating shared prosperity.
By improving the country’s performance in these five areas, we can make our mining industry more attractive to investors and more competitive to commodity consumers. While demand has declined, it has not disappeared. There is still a market for the country’s vast mineral wealth, but we cannot exploit it without investment, efficiency, infrastructure, stability and predictability. If government, labour and business work together effectively, we can ensure that the mining industry not only survives the current winter but ensures that it has a summer.