Analysis: Mining will be the bedrock of economic growth this year

THE mining industry will be the bedrock of economic growth in South Africa this year, because higher commodity prices will boost its contribution to exports, while improved profit margins will enable it to create more jobs and expand capacity.

Agriculture had a higher growth rate in the first quarter – 22.2 percent at a seasonally adjusted annualised quarter-on-quarter rate, compared with mining’s 12.8 percent – but mining’s share of gross domestic product (GDP) is 7.5 percent, compared with agriculture’s 2.2 percent. As a result, mining’s R6.8-billion contribution to first-quarter GDP growth was more than double agriculture’s R3.36bn.

Both mining and agriculture are in the primary sector – that is, they take their inputs from nature and turn it into a product. This product is converted into value-added products or services by the secondary sector, which consists of manufacturing, electricity and construction.

The products from the secondary sector are distributed or sold by the tertiary sector, which consists of services such as transport, warehousing, wholesaling and retailing.

It looks as if the flow is all downstream, but mining and agriculture need inputs from the secondary and tertiary sectors, such as electricity, fertilisers and explosives. In addition, their workers need to be clothed, fed and kept in good health. This is what one can call the circular flow of goods and services, so a small increase in the primary sector can have a large impact on the total economy.

What is the current state of play of the mining industry? After a dismal 2016, when commodity prices were low, profitability was minimal and job shedding was the order of the day, the election of Donald Trump in the US brought about a revival in commodity prices, because one of his election pledges was to spend $1 trillion on infrastructure.

That promise spurred a recovery in commodity prices, but it also encouraged inventory rebuilding, which resulted in increased volumes.

The South African mining industry responded with a 8.2-percent increase after seasonal adjustment (5.4 percent if not seasonally adjusted) in production between November 2016 and March 2017. The extent of the turnaround is best illustrated by the 24.4-percent increase, in non-seasonally adjusted terms, between the low of February 2016 and March 2017.

The data in terms of mineral sales is even more impressive. Not only has there been a substantial gain by way of higher volumes, but higher commodity prices mean the value has also soared. There was a 44.3-percent jump between January 2016 and March 2017, to R39bn, while in US dollar terms the increase has been a stratospheric 82.7 percent.

Talk about hitting the ball out of the park! No wonder foreigners are salivating when they consider South African mining companies.

The South African mining industry increased production by 5.9 percent yearon-year in the first four months of 2017, compared with a five-percent decline in 2016. The 10.9-percent year-on-year increase in bulk export volumes in commodities such as coal and iron ore in May suggests that this excellent performance will continue for the rest of this year.