Miners balk at talking about adding value

When you see the comments by Pravin Gordhan at the recent Mining Indaba and by Rob Davies at the linked Investment Dialogue, one wonders whether all the companies gathered in Cape Town were sufficiently sensitive to what our policy makers are thinking.

The finance minister said: “We are no longer in an environment where we can extract and export.” That is, companies should ensure that they “add value” to their products. The trade and industry minister talked about the opportunities to extend and strengthen value chains through downstream manufacturing.

I was unable to attend either event, but from various reports, these sentiments received little attention. That is par for the course. For about seven years, the Institute For African Alternatives has been exploring value chains in South African mining and across Africa, with a view to discussing how mining can play a larger role in our economies. Former president Thabo Mbeki was driven to say that none of the companies that spoke in the plenary session referred to the African Mining Vision. Why is it so problematic to talk about value-addition in countries rich with minerals?

Mining has two main components: extraction and fabrication. In SA, mining companies have invested a great deal in extraction and are deeply embedded in our economic system. They employ large numbers of workers directly and even larger numbers indirectly. Many sectors of our economy benefit from the extraction of our minerals. However, there has been a regrettable reduction in the production of mining engineering equipment in SA, which is where really good profits lie.

The same cannot be said about fabrication. While there is some fabrication downstream, the bulk of our minerals are exported.

This institute opened a public discussion on this issue about five years ago at a conference convened jointly with the Industrial Development Corporation (IDC) and attended by the Chamber of Mines and many relevant corporates. We followed this up with a conference on “the interface between mining and manufacturing”, also with the IDC and the UN Economic Commission for Africa with the same kind of representation. Although there was some meeting of minds, little progress has since been made to add value to our minerals prior to export.

But our concern did not evaporate. Instead, the Economic Commission for Africa commissioned us to do a major study on mineral value chains in SA and the rest of Africa. This was completed in July 2016. The study tried to answer the question: why is there so much reluctance across Africa to add value domestically to our minerals once they are extracted?

We proposed a number of answers, including resistance by mining companies to extend beyond their normal operations; the preference of governments to look to royalties and taxes rather than get into the complexities of manufacturing; a reluctance to do rigorous studies on how value chains work; and fears of interfering with existing global value chains. There is also the problem of corruption by foreign companies.

Our main recommendation to African countries rich in minerals was for them to adopt a modest step-by-step approach. First, by offering basic services to foreign mining companies so that they become participants in the value chain rather than mere bystanders and then by steadily building a skills base for an ever-increasing role in the extraction and fabrication of their minerals.

Our message to South African companies operating in the rest of Africa was different. Whereas many European mining companies work on the basis of providing a total package, including bringing in all the equipment and skilled (even semi-skilled) workers from Europe, leaving nothing behind when a project is completed, South African companies should adopt a better, more long-term approach. They must find local partners. They must train local personnel. They must procure locally as much as possible. And they must localise whatever systems they can. In this way, host countries will see important benefits that will last long after a particular operation is completed.

But to return to the South African case, we still have the puzzle of insufficient value addition and fabrication of our own minerals. The urgency of increasing job opportunities is obvious. There is also the importance of building technical capabilities in manufacturing, so vital for industrialisation. We should be far more conscious of satisfying our home market with our own products rather than with imports.

Does this sound like protectionism? Perhaps. But China, South Korea and many others, not excluding the US and UK, used such measures to build their economies. Of course, there can be adverse consequences, such as rising prices for consumers and other market distortions. But can we not have a serious discussion about this without simplistic gut reactions?

We are doing research on the activities of South African mining companies and related firms across Africa. There is a great deal of activity that is not being made public or recorded. And most of these companies are very optimistic about the future of Africa. It is therefore most important that we analyse how mining and the related industrialisation could take place and have the best outcomes.

SOUTH AFRICAN COMPANIES SHOULD ADOPT A BETTER APPROACH. THEY MUST FIND LOCAL PARTNERS. THEY MUST TRAIN LOCAL PERSONNEL