Nation reflects the ebb and flow of mining’s fortunes

AFTER a coruscating commodity boom from 2003 to 2011, the mining industry worldwide is reluctantly returning to a new normal, mostly with a bit of a babalaas. The decade of the boom, combined with the transition to democracy from 1994, saw seismic shifts in South African mining. To understand mining today we have to dig into those changes.

The recent mining roller coaster mostly reflected the fluctuating value of SA’s top four mining exports — platinum, iron ore, coal and gold. In 2003-11, a weighted average of their unit export prices soared fivefold. That kind of increase is seen only every 25 to 50 years or so.

Just when we all got used to mining prosperity, from 2011 those same unit export prices dropped 40%. As a result, South African exports of the four commodities fell from a peak of $37bn in 2011 to $20bn in 2015. In consequence, South African exports as a whole declined about 25% in dollar terms.

Low prices mean mining made overall losses over the past two years. That has brought job cuts and depressed mining towns. It also narrowed demand for many industries, ranging from capital goods to construction to the repair shops, grocery stores and shebeens around the mines.

The mining boom and bust was associated with profound structural changes across SA’s mines, the most obvious of which was to the structure of production.

In 1994 about 49% of South African mining output came from gold. In 2014, the figure was just 16%. In the same period, iron ore climbed from 3% of production to 15%, platinum from 11% to 20% and coal from 20% to 27%.

Mining jobs followed production. From 1994 to 2014, employment in gold dropped from 400,000 to 120,000. Platinum employment doubled from 100,000 in 2000 to 200,000 in 2012, then dropped to 190,000 in 2014. Coal saw gradual mining losses through the 1990s to a low of 50,000, but climbed to more than 85,000 in 2014. Since iron ore is mostly mined in vast open pits, it employs only about 20,000 people despite rivalling platinum as SA’s largest export during the boom.

The production structure of mining also affected SA’s geography. A century of gold industrialised Gauteng and bolstered prosperity in the Free State. Today, however, gold’s decline means these two provinces account for just 15% of total mining output, down from over a third in the early 1990s.

In contrast, the rapid growth in platinum, iron ore and coal moved the centre of mining to the North West, Mpumalanga, Limpopo and the Northern Cape. These provinces now account for 80% of mining production, and mining contributes more than 20% of their economies.

The mining boom brought heavy industry to mineral-rich but remote areas. New mining towns, especially in the platinum belt in North West and Limpopo, received thousands of miners and others seeking new opportunities. They grew as fast as Johannesburg, at about 70% in 1996-2011.

But they had far less capacity to serve new residents. By 2011, a third of the population of North West’s platinum belt lived in informal settlements — about twice the national average. The crash in export prices and subsequent job losses compounded the stress.

In contrast, the Free State is suffering from gold’s contraction, with lagging economic growth and jobs. The resulting outmigration means the province’s population grew just 7% over the past 20 years; national population growth totalled 35% over the same period.

The geography of mining largely defined the national infrastructure programme. Roughly a third of all infrastructure projects listed in the national budget depend on mining for core demand and revenue. Through the boom, infrastructure investment as a percentage of GDP closely tracked mining prices. Both were fairly low and stable from 1994 to about 2004. Then they more than doubled through 2008, followed by a plateau until 2011.

After 2011, infrastructure investment stabilised while mining prices fell by more than half. That is, in itself, cause for concern. What if the assumed demand for new freight rail, electricity and bulk water does not materialise for another decade? Already, the fall in steel output has cut electricity use by about 5%.

Some projects, like Transnet’s iron ore lines, have been scaled back. But others — notably the electricity, water and freight complex in the northeast — seem to be moving forward without review, despite the commodity bust. That risks overinvestment and stranded assets, with the cost ultimately borne by all South Africans.

Mine ownership also underwent deep structural change in the past 20 years, as local owners replaced foreign investors.

With the opening of the economy, the gold giants redesigned themselves as global mining companies, pursuing prospects across the world. In the process, they sold out of SA’s maturing gold industry. Then, like other international mining companies, they cherry-picked investments in SA’s rich iron ore, ferroalloys, coal and platinum.

But the gold mines did not close down. They were sold to local mining houses — Sibanye, AngloGold Ashanti and Harmony Gold. These companies have more interest than mining multinationals in sustaining the local industry, and they have made the investments in deep mining technology to prove it.

A similar pattern is now playing out in platinum and ferroalloys. As prices and profits fall, global mining companies have begun to sell their holdings to local groups. Obviously, local owners cannot solve every problem. But at least they have an interest in sustaining the industry in the long run.

Finally, the regulatory framework. From 1994, the state sought to disentangle mining from its apartheid roots, making it more friendly towards labour, the environment and communities; more representative in ownership and top management; a stronger source of revenues; more supportive of industrialisation; and a bigger contributor to infrastructure costs.

Undertaking a systemic overhaul is always challenging, costly and conflict ridden. In SA, the difficulties were increased by the fragmentation of the state. As each department and sphere pursued its own priorities, producers saw contradictions, endless modifications in the regulatory framework and accumulating expenses. Investors could tolerate the uncertainty and costs during the commodity boom. With the industry at best breaking even, the impact is harder to bear.

Structural changes since 1994 have made mining a more diverse industry with stronger local interests. But they also raise concerns around policy coherence, the management of spatial impacts and how to ensure mining supports broader development now that the commodity boom has turned into a bust.

What if the assumed demand for rail, electricity and bulk water does not materialise for another decade?