Outlook sombre for mining recovery
THE mining sector, once the bedrock of South Africa’s economy, could continue to struggle to make a production recovery in coming months because of low global demand for commodities and policy hiccups.
Commodity prices have been recovering since January but remain low. This exerts pressure on producers’ margins, Investec economist Kamilla Kaplan said.
Another headwind for the mining sector is the government’s plan to revise the Mining Charter, which was potentially bad for investor confidence and could deter investment, S&P Global Ratings noted in its review of South Africa this month.
Mining sector output has a significant impact on GDP although the industry was only the sixth-largest contributor to GDP in the first quarter.
The sector contracted 18% quarterly on a seasonally adjusted annual rate.
This took 1.5 percentage points off the real GDP figure, which reflected the importance of the declining sector.
Peter Major, director of mining at Cadiz Corporate Solutions, said: “The first quarter of every year is always the worst quarter for mining production simply because of all the holidays over December and January.” In this period, oil fell to a low of $27 a barrel.
Mining production figures released by Statistics SA on Thursday show a continued decline in the sector.
Production contracted by 6.9% year on year in April compared to a 17.8% drop year on year in March.
Iron ore production recorded the largest decline, shrinking 23.4% year on year. According to Iraj Abedian, CEO of Pan African Investment and Research Services, the decline was company-specific but also largely driven by the global economy.
Iron ore producers are struggling to sell their inventory as Chinese demand is waning. Locally, Kumba had to cut back on production and lay off 3 900 of its workforce.
Gold miners are faring better and benefiting from the weaker rand. Stats SA said gold miners sold 23.5% more of the metal in March.
Abedian said the investment demand for gold had increased due to its increased price this year, up 18% so far.
Globally, Abedian said, a number of central banks had been buying up gold because of currency volatility.
Another headwind is the government’s plan to revise the Mining Charter
The FTSE-JSE gold mining index for the year to date and year on year has outperformed the FTSE-JSE Africa All Share benchmark.
Platinum group metals production, which accounts for 19% of the mining production index, contracted in each of the past three months. PGMs were also the largest contributor to the 1.1% decline in mineral sales.
This was due to there being a secondary market for PGMs, said Abedian.
Mamello Matikinca, an economist at FNB, said: “The mining outlook remains poor and the potential for labour unrest adds downside risk to even our bearish outlook.”
The platinum sector is awaiting pay negotiations set to start this month.
According to forecasts by the World Bank and IMF, commodity prices will stabilise next year as global demand rises. This suggested prospects for the mining sector could improve, Kaplan said.