Mining strikes: The costs to SA’s economy

Wednesday, March 5, 2014

South Africa is a world leader in mining, and mining remains the back bone of the country’s economy. It has been so since the precious metal was discovered in Johannesburg around 1887.

The country’s huge and varied mineral reserves play a vital role in the economy, accounting for nearly half of the country’s merchandise exports, including beneficiated products. The industry is the largest employer, rivaled only by the public service which employs over a million people.

According to Brand South Africa, South Africa’s total reserves remain some of the world’s most valuable, with an estimated worth of R20.3-trillion ($2.5-trillion). Overall, the country is estimated to have the world’s fifth-largest mining sector in terms of GDP value. With South Africa’s economy built on gold and diamond mining, the sector is also an important foreign exchange earner.

But economists are concerned that continued strikes in major mining companies could damage the South African economy and hold back growth and employment. This comes as reports indicate that more than 70,000 platinum mineworkers downed tools in Rustenburg on January 23.

The alarm by the government and some economists is probably justifiable considering that in 2009, South Africa’s diamond industry was the fourth largest in the world. The country is also a major producer of coal, manganese and chrome. Even though the price for platinum has not been affected by the wave of strikes since last year, economists warn that things could change if the unrest continues.

Senior economist at Investment Solutions Chris Hart says the industrial action has both long term and short term negative impacts for South Africa.

“They (strikes) affect our current accounts and they contribute to a weaker rand and we will have fuel price increases. At the moment, we are experiencing all of that,” says Hart.

“What’s happening is that if the strikes prove to take longer and are more frequent, in the long term, investors may choose to abandon the industry because the perception will be that if you invest in South Africa’s mining sector, you expose yourself to unreliable labour,” he says.

This sentiment is echoed by Independent economist Peter Major who says the platinum sector generates over $10 billion a year.

“It’s huge and it’s way important for this country. South Africa produces 30 per cent of platinum used every year and if the strikes continue, that will inevitably affect the price of platinum and that doesn’t do us any good”.

Hugo Pienaar, researcher at the Bureau for Economic Research says while mines, particularly in the platinum belt, were probably safe for now because many had built up stocks before the strikes, prolonged strikes could have distressing impacts on exports.

“So many mines may be able to use their stock to export. On the production, we will have a problem because production is likely to take a dip in the first quarter, because we have had strikes in the three biggest platinum mines,” Pienaar says.

“Workers are losing wages and at this stage it is estimated to be around a billion rand that has been lost in potential wages. That leads to reduced spending by those people which in itself has broader impact on the economy”.

Pienaar adds that protracted strikes in mining also have a negative impact on investor sentiments.

“You could argue that the strikes are one of the things that are keeping the rand relatively low and weak against the US Dollar. I don’t think it’s a major factor but it might be a contributing factor. So we are not winning either way”.

Earlier this month, the Chamber of Mines estimated that the country’s platinum strikes were costing the economy about $36-million a day. Terence Goodlace, CEO of Impala Platinum was quoted this week as saying the strike in the platinum sector will have "absolutely dire" consequences for the industry. Business Day said Impala has lost 80,000oz of production to date because of the strike and R1.7bn in revenue, but is guaranteeing foreign deliveries until the end of March and domestic deliveries until the end of April.

Last year, President Jacob Zuma asked Deputy President Kgalema Motlanthe to lead discussions in the mining industry, with a view to stabilising the environment ahead of annual wage talks and calming investor fears over labour unrest.

The Association of Mineworkers and Construction Union (AMCU), which is the majority union in the platinum belt, has been demanding R12 500 salary for its members. Impala on the other hand, is reportedly offering increases of 9% in the first year, 1.8% in the second and 7.5% in the third, which will increase entry-level wages from R9,297 a month to R11,746 by the third year. This apparently includes a living-out allowance, medical and retirement contributions and a 13th cheque.

According to the Chamber of Mines, mining:

  • Creates one million jobs (500 000 direct and 500 000 indirect).
  • Accounts for about 18% of GDP (8.6% direct, 10% indirect and induced).
  • Is a critical earner of foreign exchange at more than 50%.
  • Accounts for 20% of investment (12% direct).
  • Attracts significant foreign savings (R1.9-trillion or 43% of value of JSE).
  • Accounts for 13.2% of corporate tax receipts (R17-billion in 2010) and R6-billion in royalties.
  • Accounts for R441-billion in expenditures, R407-billion spent locally.
  • Accounts for R78-billion spent in wages and salaries.
  • Accounts for 50% of volume of Transnet’s rail and ports.
  • Accounts for 94% of electricity generation via coal power plants.
  • Takes 15% of electricity demand.
  • Responsible for about 37% of the country’s liquid fuels via coal.

       Total mining expenditure in 2010 was R441-billion, of which:

  • R228.4-billion was spent on purchases and operating costs (timber, steel, explosives, electricity, transport, uniforms, etc.
  • R78.4-billion went on salaries and wages for mine employees.
  • R49-billion on Capex (the lifeblood of mining).
  • R17.1-billion in tax.
  • R16.2-billion in dividends (only 3.7% of total).
  • R38-billion on depreciation and impairments.
  • R13-billion on interest to the banks. – SAnews.gov.za

 

 

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