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A rough year

I think few would disagree that 2009 has been a rough year in Africa’s mining sector, but strangely, in the 15 or so years I have been following the industry, it does not seem like the worst.

Maybe it is because I am based in South Africa, whose mining industry did not experience the heights achieved in other parts of the world, and indeed on other parts of the African continent. But let me dwell on South Africa, since this is where this edition focuses.

Although South Africa’s mining industry overall has declined over the past few years in spite of the global boom, it still remains the fifth biggest worldwide as measured by value added to GDP. At US$21 billion this is some nine times smaller than that of the leading country, China.

To put it into further perspective, South Africa’s mining sector is six times smaller than that of the USA and a third the size of Australia’s. It lags Brazil, the fourth placed country as well. But it is marginally ahead of Canada, Russia, India and Chile, and thus, based on the company it is in, South Africa remains a mining country of note.

South Africa’s mining sector was unable to fully tap into the global boom whose trend I continue to maintain remains intact in spite of the major dip we have seen. Many of the factors that drove the boom are intact, i.e. strong materials intensive growth in large developing countries like China and India, and constraints in the mining pipeline. These relate to difficulties in getting mining permits, the effects of bad politics, a lack of people with the necessary skills, power shortages, procurement shortfalls and a lack of projects being undertaken.

Those constraints are faced by mining companies internationally but in South Africa they were particularly inhibiting during recent years.

No one will forget Eskom’s disastrous decision to shut down the mining industry last year when it was unable to meet power demand and was looking for ways out of its predicament. Few will argue with the need to improve safety at South Africa’s mines, but few too who understand the industry will argue that shafts have also been shut unnecessarily to the detriment of everyone. The skills shortage is global, but in many sectors is exacerbated in South Africa. And increasingly South Africa’s mining sector is bearing the brunt of some damning politics like the demand to abolish labour brokers as unions flex their muscles in a bid for more power. It is also fair to say that South Africa’s existing subjective mine permitting policy is not among the best practice in the world.

But the biggest infrastructural investment boom in the history of the world is still underway, with more than 50% of global infrastructure spending taking place in emerging markets.

In 2008, emerging economies spent US$1.2 trillion on infrastructure, and this is driven by the fact that three billion people are expected to urbanise between now and 2050. The impact will be so large that emerging economies will spend more than US$22 trillion on infrastructure. China, which will need to add the equivalent of 250 significantly sized cities by 2025, will alone account for 43% of this. Also good news is that most of the large emerging economies are in good shape financially.

One of the reasons Eskom thought shutting down the mines to buy time last year was not as stupid an idea as it was, is the misconception that mining is no longer that important as it accounts for only about 7% of South Africa’s GDP. Fact is, the country is still about mining. A lot of our manufacturing base exists largely because of the mining industry it supports.

Mining remains one of the country’s largest employers of semi-skilled and skilled workers. It is a net generator of foreign exchange. Considering the country’s 7% current account deficit, it is one of the few very large magnets for foreign investment inflows South Africa has. Mining has been a significant contributor to BEE with some R150 billion in BEE deals undertaken, and this sector accounts for 33% of the number of all such deals done to date.

Based on 2008 figures, mining in South Africa generates just over R400 billion a year, and most of the benefit is captured locally. This includes R200 billion of local procurement, R61 billion in labour costs, R52 billion in capital expenditure and R33 billion in taxes.

Thus I very much hope that the talk of state owned national or even trans-national mining companies, as suggested by Chavez of Venezuela in trying to export his failures, nationalisation of the mining sector and moves such as the banning of labour brokers are indeed just hot air and common sense will prevail.

Undermine its mining sector and South Africa will be much diminished.