The platinum mining industry has been beset by strike action and is therefore nervous about a possible resource rent tax on strategic minerals such as coal and platinum.
ANC delegates were locked behind closed doors this week, debating possible changes to economic policy against a backdrop of swirling global uncertainty.
Fighting off the remnants of factions that seek to nationalise South Africa’s mines, the delegates were nevertheless interrogating a policy that radically reimagines our minerals sector. This, at a time when global commodity prices are beginning to feel the pressure from shrinking growth forecasts.
It is clear that there may be protracted and difficult discussion to come between the ruling party and the mining sector after the end of the ANC policy conference. That is, if the Chamber of Mines’ response to the ANC’s policy discussion document on state intervention in the minerals sector is anything to go by.
It has become increasingly evident that blanket nationalisation of South Africa’s mining sector is not on the cards, but neither is it going to be “business as usual” anymore, as one senior conference delegate put it.
There are a number of proposals in the state intervention document that will result in contention between the sector and the ANC in the months to come. This is bolstered by the fact that the interventions proposed in the report are more pragmatic than a wholesale takeover of private mining operations, the extensive criticism of them notwithstanding.
Resource-rent tax
Not least among the ideas put forward is the proposed introduction of a resource-rent tax and more intervention in minerals sectors deemed “strategic”, including coal, platinum, iron ore, coal, oil and gas, uranium, limestone, as well as nitrogen, phosphates and potassium.
Unlike a more generic tax on profits, a resource-rent tax proposes a 50% tax after what is deemed a normal return on investment. This threshold of return is outlined in the report as being in the order of 15%.
In its response document, however, the chamber described the resource-rent tax recommendation as “unwelcome and insupportable”. It said that under the “prevailing conditions, the introduction of additional taxation obligations would have several negative consequences, among them a further downward slide in the competitiveness of the domestic industry”.
It said that with a targeted collections figure of R40-billion, the resource-rent tax would hamper the “ability of the industry to invest [and] future growth will be seriously impaired, resulting in further contraction and the resultant loss of jobs and contribution to the fiscus”.
Rather than deal with the report’s recommendations through party channels, the chamber called on the ANC to endorse a proposal that ongoing discussions of mining industry issues, including those raised by the report’s committee, take place through the mining industry growth, development and employment task team.
The team is led by Mineral Resources Minister Susan Shabangu and includes leaders from business and labour. The Mail & Guardian understands, however, that the chamber’s response has not been warmly received.
Good returns
Depending on where one looks, however, the resources sector is not a booming monolith. Although iron ore and coal companies are reaping good returns, the picture is not as rosy for other producers, such as those in platinum.
In addition, media reports indicate that steel major ArcelorMittal South Africa is operating at 70% capacity.
But it is unclear how much weight the woes inherent in the cyclical nature of the mining industry hold against the imperative to see more of South Africa’s mineral wealth benefiting the majority of its people.
The M&G understands that monopoly pricing in a number of sectors has been a major issue in discussions, as has the likelihood of greater of regulatory intervention to address this. What form this could take is unclear, however.
But the report argues that the major raw-material feedstocks into manufacturing that have experienced monopoly pricing practices include steel and polymers.
It says steel must be supplied to our economy at competitive, or export parity prices. To this end, iron ore “should be classified as a strategic mineral” and mining licences should “obligate local sales at cost plus”, with local customers for ore such as ArcelorMittal South Africa obligated to apply export parity pricing to its steel products.
According to the report, the second most important feedstock into manufacturing is polymers (plastics), which are sold by Sasol into the local market at monopoly prices. Aside from compelling Sasol to sell products at more competitive prices, consideration should be given to extending liquid fuels price regulation to polymers and other coal-to-liquid or gas-to-liquid co-products.
It goes further to suggest that the state and unions form a special-purpose vehicle to secure a controlling influence over Sasol “to promote developmental outcomes”.
Through a platinum lens
Platinum has been a darling of the minerals sector for a number of years. But, once an industry that was arguably a prime candidate for a resource-rent tax, it has been hit by a storm of trouble in recent months.
A resources analyst at Stanlib, Kobus Nell, said that, given the state of the platinum sector, a resource-rent tax “would be a tough ask now”.
Although platinum prices have been relatively good in the past five years, the sector has been hit by declining grades, increasing costs from sources such as labour and electricity, while the market has experienced oversupply. Demand from the European Union, a key market for the metal in the form of catalytic converters, is also expected to be poor as the sovereign-debt crisis continues.
The two largest platinum suppliers, Anglo Platinum and Impala Platimum, have over the past five years experienced compound annual growth in costs at a rate of between 16% and 19%, according to Nell.
A number of companies are also facing the prospect of mining ore bodies that are more difficult and expensive to reach, because the better-yielding “low hanging fruit” is reaching the end of its lifespan.
Critically, underlying industrial demand had not been enough to support the aggressive expansion in production that took place in the early 2000s, Nell said.
The industry has also experienced experienced increased recycling of platinum. Recycled platinum now makes up about 20% of all supply, according to Nell, and it continues to grow. There has also been greater substitution of platinum in industrial process, including the use of other platinum group metals such as palladium.
South Africa has mothballed about 130 000 ounces of capacity with the closure of Aquarius Platinum’s Marikana and Everest mines and the Zandfontein section of Eastplats. Labour unrest at Impala Platinum cost between 150 000 to 200 000 ounces. The price had, however, not reacted markedly to these developments, an indication of the “extent of the oversupply”, Nell said.