AMN - Mining can be GDP’s saviour and grow full time employment - comment by Yolanda Torrisi

David Christianson of South Africa’s The Institute of Race Relations has commented recently and provided this report about mining leading GDP growth and rapidly employing people. This report is presented as it was recently published, expressing David Christianson’s views.

Mining employs people, props up South Africa’s balance of payments, and creates important linkages to the financial and manufacturing sectors. But it should be seen as much more than this.

GDP growth is all but stagnant. When Finance Minister Pravin Gordhan revised his GDP growth prediction for 2016 to 0.5% in his October mini-budget speech, we were relieved to discover that we were, technically, not in recession. But relief was tempered by the difficulty identifying any factor or combination of factors capable of driving future growth.

To be bemused over this issue is to miss the obvious. Mining created this economy, has long been its backbone, and can now turn it around.

It is true that the role of mining in the overall economy is a more modulated one than it was in the days when it was unquestionably the sole locomotive of growth. But there is no alternative. The tertiary sectors of the economy are limited by both our national skills profile and our relatively small market. Manufacturing, despite the Department of Trade and Industry’s almost religious commitment to intervention on its behalf, runs into the same deficiencies and, in any case, can only really thrive if it has a primary sector to serve. Agriculture is neither sufficiently intensive nor large enough, even at maximum potential, to play this role. By default, then, it has to be mining.

In any case, there is still enormous potential in the ground. In a much-quoted 2010 report, US banking conglomerate, Citigroup, found that South Africa has the world’s richest minerals jurisdiction, with reserves worth (at the time) US$2.5 trillion.

South Africa’s mining sector has been hard hit by the collapse in commodity prices since mid-2014. But it is undoubtedly leaner and meaner than it was only three years ago. And the signs are that the ‘super-cycle’ has bottomed out and that global commodity prices are starting to move upward. The last time there was a boom, from 2000 to 2014, South Africa missed out, hamstrung as the domestic industry was by uncertainties in the enabling environment.

It may be true that the last ‘super cycle’ upswing was a once in a lifetime event. However, the oversupply that was its most negative consequence has been mostly played through the system and the balance between supply and demand is being restored. International money managers are in the process of building long positions in industrial metals such as copper, aluminium, zinc, lead, and tin.

But is a mining-led recovery likely in South Africa? Not under the present circumstances. A calculation made by Datta Burton in early November, based on Stats SA figures, suggests that there is less investment within South African mining than needed to maintain current levels of output. Datta Burton’s figures show capital expenditure to be half of what it was in 2008, in contrast to the 2005 to 2008 period, where it doubled. In other words, the industry is back where it was during the so-called investment strike during the early years of the millennium.

The problem is the same – crippling uncertainties in the enabling environment. Immediately after 2000, the issues were the Mineral and Petroleum Resources Development Act and Black Economic Empowerment (BEE). In 2016 the primary outstanding issues are the same.

This time around, though, matters are even more alarming. The industry’s painstaking attempts to provide input to policy are simply cold-shouldered. It has not even seen a copy of the revised BEE Charter, which government intends promulgating in December, although leaked information suggests it is even more onerous than the draft released earlier this year. It is said, for instance, to increase the requirement that inputs be procured from local sources from 40% to 70%.

Government is simply not coming to the party; as a result, the enabling environment is increasingly toxic. South Africa may have riches in the ground, but it’s not a place companies want to go to retrieve them. On 22 November, when Anglo American chief executive Mark Cutifani announced that the company wanted to decrease exposure to South Africa across its global operations from about 50 per cent to less than 30 per cent, Anglo’s share price jumped 4% on the London Stock Exchange (LSE).

South Africa has lost all growth momentum. Regaining this is hard – just ask Japan, or Greece. But there is an obvious solution. Mining can lead the economy out of the doldrums. Beyond the direct effect and the impact of the industry’s legendary multipliers – historically the basis of almost all the South African economy – is the demonstration effect. A thriving industry will prove to the undecided that honest money can be made in South Africa and, thus, that the country is a viable investment destination.

As the next commodities boom takes off, the potential solution to the South African economy’s stagnation needs to be recognised. Government policy needs to turn on its axis and support mining, not undermine it. This is the only sector with real potential to pull the country out of the swamp.

Yolanda Torrisi is Chairperson of The African Mining Network and comments on African mining issues and the growing global interest in the African continent. Contact:yolanda@yolandatorrisi.com