Turok, B. 2013. Problems in the mining industry in South Africa. GREAT Insights, Volume 2, Issue 2. February-March 2013. Maastricht: ECDPM
The current turbulence in the mining industry in South Africa has its roots in several different factors. First, the fall in global demand for platinum and other minerals due to recession; second, the consequences of the Marikana disaster in destabilising labour relations; and third, the structural character of our mining industry. A great deal has been written about the first two factors, so this article will examine the last factor, especially as the special features of mining cuts across the whole of mining and not just platinum.
Mining in South Africa has always been an enclave industry, albeit with substantial impact on the rest of the economy. In the main, minerals have been extracted from deep levels, subjected to some basic processing and then exported as ores without a great deal of beneficiation or fabrication. For instance we do not have substantial gold or diamond manufactured products capabilities despite having huge natural resources.
The gap between mining and manufacturing
The result of this restricted role of mining is a large gap between mining and manufacturing to the detriment of both sectors and to the national economy. Manufacturing has been subjected to extraordinarily high prices for raw material inputs such as steel, making our manufacturers uncompetitive internationally and even in the home market. The value chain and linkages so necessary for efficient and competitive production of finished goods have been seriously undermined. So has the flexibility of production needed to cope with shifts in global supply and demand, due to rigidities arising from the separation of the production of minerals and manufacturing.
This separation is strongly supported by the Chamber of Mines of South Africa, which argues that mining is driven by inherited comparative advantages, such as mineral deposits or natural beauty, while manufacturing depends on competitive advantages. They emphasise that a mineral resource endowment does not necessarily translate into manufacturing beneficiation. Furthermore, the mining industry should not be required to subsidise manufacturing beneficiation or to provide minerals below internationally determined prices.
In practice, this means that South African manufacturers have to pay import parity prices to the mining companies – i.e. the same price paid by overseas manufacturers – which ensures that our manufacturers are not competitive. When this difficulty is added to the problem posed by cheap manufactured goods from China and India, South African manufacturing operates on a very uneven playing field. Its only hope is to find niche markets where its specialised products may find space.
The isolation of mining from the total industrial value chain also has consequences for labour policy. Amplats is now proposing to displace 14,000 workers from mining into other activities. But what broad training have they been given to enable them to switch to other jobs, especially in manufacturing ? These workers have been confined to mines, so what skills could a rock driller bring to a production line in a factory?
Bridging the gap with beneficiation
The mining industry has substantial multiplier effects on the rest of the economy, but it could contribute even more to the development of other enterprises. We need to take a hard look at the potential for downstream processes if the country is to benefit from these enviable mineral resources. The export of raw mineral resources has been steadily rising over the past decade.
In June 2011, the Department of Mineral Resources developed a beneficiation strategy for the minerals sector (1), arguing in essence that it is possible to industrialise by leveraging natural resources, with the government driving beneficiation. Noting that “the composition of South Africa’s trade with most parts of the world is characterised by the export of raw materials and the import of manufactured goods”, it defined beneficiation as entailing “the transformation of a mineral (or combination of minerals) to a higher value product, which can either be consumed locally or exported. The term is used interchangeably with ‘value addition’” . The document called for a “paradigm shift in mineral development” and sought to “advance development through the optimisation of linkages in the mineral value chain, facilitating economic diversification, job creation and industrialisation”.However, the mining industry “remains geared towards export orientation of raw material, with the bulk of current producers bolted in long term contracts with their international clients”. This is the pattern across Africa and is leading to calls for “resource nationalism” to ensure greater benefits from natural rersources.
As mentioned above, the Chamber of Mines rejected many of these provisions on the grounds that mining is a specialised activity quite distinct from manufacturing. This highly questionable position serves to reinforce the enclave character of mining, with its high levels of foreign ownership and orientation towards the export of raw ore.
In December 2012, the Cabinet approved a draft amendment to the Mineral and Petroleum Resources Development Act (MPRDA) that gave effect to its constitutional obligation (in Section 24) to ensure that “the nation’s minerals are developed in an orderly manner while promoting justifiable social and economic development”. It provides for “the implementation of the approved beneficiation strategy through which minerals can be processed locally for a higher value”, and for mineral “rights to fall within the insolvent estate in the event that a company is liquidated”. It will also “strengthen the provisions relating to cession, transfer and encumbrance of rights in order to permit the partitioning of rights”, and “regulate the exploitation of associated minerals”.
The case for an increased role for manufacturing in the beneficiation of minerals is therefore compelling. This role would seem to be primarily suited to domestically based firms located within the mining value chain. Such firms are more sensitive to national interests and more likely to co-operate with government requirements in terms of producing for the domestic market, keeping economic rents under control, complying with tax rules, employing local rather than foreign managers and technical staff (where available) and taking account of the social impact of their activities.
The benefits of beneficiation are: job creation, contribution to skills enhancement, diversifying the economy and moving away from a primary producer status towards manufacturing-based industrialisation, increasing foreign direct investment, turning the comparative advantages of being resource-rich into a competitive advantage, small and medium enterprise creation.
Making beneficiation work for development
South African emerging mining lobby groups argue that location advantage means that finished goods are easier to transport than raw ore. Furthermore, since many mines are located in rural areas, special economic zones with tax incentives for manufacturers would encourage job creation and associated industries and services there. It is indeed the case that many mines in South Africa are self-contained enclaves that import what they need from Johannesburg and have no impact on their neighbourhood, apart from limited labour supply. Even the most basic requirements are brought in from large cities.
As other minerals such as chrome ore, platinum and copper were mined, there was some processing and smelting but the main beneficiation and fabrication was done abroad. At the same time, manufacturing industry developed partly to create inputs to mining but also in other sectors such as clothing and textiles, leather etc. A wall seems to have developed between mining and manufacturing which stands in the way of creating an integrated economic base for the country.
Yet cooperation could include such elements as agreed pricing arrangements, limited and selective protectionist measures applied by government, cooperation in skills development, positive procurement in favour of domestic industry, and taxation policies to encourage localisation.
The Chamber of Mines argues that their firms should remain within their “core competencies” and that the era of vertical integration within one firm is past. Paradoxically, this leaves room for local firms to move in (rather than foreign suppliers), provided that there is cooperation. The argument that mining is a function of comparative advantage (and is therefore a natural heritage) also logically leads to the conclusion that the links to the rest of the economy must be a major consideration, including the needs of manufacturing.
In any event, a rigorous examination of the value chain will indicate where the potential for local intervention may be maximised at any point in the production process from extraction to fabrication in order to become a significant multiplier. Or, if the capability is not available steps may be taken to correct this, for example by government support for infant industries, by expediting special training, etc.
Government intervention needed
South Africa must take full advantage of the presence of large mineral deposits where there is proximity government intervention can turn this to advantage. Intervention can reduce land transportation costs, promote local procurement and incentives, and ensure that local input costs are contained.
The tax regime should also favour local industry. In other countries in Africa, foreign firms have been provided with favourable tax breaks and other incentives such as no value added tax (VAT) payments, and this has worked against local firms. Furthermore, some foreign firms use their power to extract excessive economic rents beyond reasonable returns and exploit the local workforce, whereas local firms are more easily regulated by government.
Since markets in minerals are generally imperfect due the cartels dominated by multinational monopolies, developing countries need to be vigilant to protect the national interest.
Government is responsible for laying out the necessary infrastructure such as energy supply, roads, water, rail, ports etc but these facilities should not only be in favour of foreign firms which export raw ores, but also for the support for domestic firms in the value chain. This has been neglected in South Africa in the past.
The licencing of mining to foreign firms may be a problem. Since minerals in South Africa are formally public property, under the control of government, conditionalities should be prescribed such as providing a portion of mineral assets for beneficiation by historically disadvantaged firms and their communities, local procurement etc.
Licences should specify the quantities allowed for export, prices for domestic users, environmental protection, and all socioeconomic factors. Above all, there must be full acceptance that minerals are a depleting resource, so downstream considerations should be taken seriously and industrial capabilities built in to ensure a sustainable economic future.
The current debate in South Africa about state intervention can be accounted for by the failure of mining to enhance the further industrialisation of the country and give adequate attention to the living conditions of its workers as Cyril Ramaphosa has pointed out.
The State Intervention in Mining Sector (SIMS) report of the ANC examined international practice in Brazil, Chile, Venezuela, Botswana, Namibia, Zambia, China, Malaysia, Norway, Finland, Sweden and Australia and is probably the most comprehensive study in this area yet.
The main message from all this research seems to be that we need to break away from the notion that mining is an enclave industry which must be treated as a generous benefactor to be treated with kid gloves. On the contrary mining exploits a country’s endowment, which is ephemeral, and whose potential multiplier effect must be realised while it is thriving, not when it is in decline. This is best realised by rigorous analysis of the interface between mining and industrialisation.
Prof. Ben Turok is a Member of Parliament of the Republic of South Africa and a consultant to the United Nations Economic Commission for Africa (UNECA); he has published extensively on mining across Africa in New Agenda: S A Journals of Social and Economic Policy.
This article was published in Great Insights Volume 2, Issue 2 (February-March 2013)