challenge
If the bullion price stays at its current level for any length of time, South Africa could face even more severe unemployment, report Donna Block and Mungo Soggot
One of the first major challenges for the Mbeki presidency will be the potentially massive ramifications for South Africa’s economy stemming from the collapse in the price of gold, which this week dipped to a fresh 20-year low.
Economists have warned that if the gold price stays at current levels for more than a few months, local gold producers could be forced to retrench thousands more employees, having already ditched 100 000 during the past three years.
The price dropped to as low as $259/ounce this week – a substantial fall from its levels of about $300/ounce at the beginning of the year.
As Thabo Mbeki begins his presidency next week, his commitment to eroding South Africa’s massive unemployment rate could be seriously undermined by the potentially devastating effect of a fresh wave of job losses that could have a far-reaching impact on many other areas of the economy.
Mbeki could be faced with mounting calls from the mining industry to roll back labour and mining legislation that restricts the way in which mines can operate – moves which are unlikely to go down well the African National Congress’s trade union allies.
Most South African mines have successfully streamlined their operations to cushion themselves from the impact of the steadily declining gold price. However, in the current price range, many local mines are now left with little room to manoeuvre where cutting costs are concerned.
Mines were this week coy about the potential impact on jobs, but conceded that the number of South African mines classified as “marginal” – which essentially means barely profitable or loss-making – has almost doubled since the beginning of the year.
Roger Baxter, head of economics at the Chamber of Mines, said four of the 16 mines monitored by the Chamber were classified at the beginning of the year as “marginal”.
Baxter said that by last week another five mines had slipped into the “marginal” category because of the further drop in the gold price since the beginning of the year. (These figures exclude those mines which “hedge” against the gold price, by using the financial markets to lock into a future fixed gold price.)
“If we don’t get some changes soon, we could have mine closures,” Baxter said, adding that if current price levels are sustained for more than two to three months, there could be a “tremendous” impact on employment in the sector.
Economists say many other areas of the economy also stand to feel the ripple effects of the weakening gold sector, which accounts for about 18% of South Africa’s export earnings.
Tony Twine, a director of Econometrix, said: “The gold mining industry has been losing jobs since 1989. This is not new. But the latest price movements add a horrible twist to the situation as regards jobs on mines, and jobs dependent on mine wages – the spaza shops, the taxis and so forth.”
Twine said the ramifications stretched further into the scores of industries that fed off, supplied and invested in the gold sector.
Twine said that although gold mining companies had over the past decade succeeded in lowering their operating costs to ever decreasing levels, “there must be a finite limit. I rather suspect that many of the mines are rather close to that now.”
Baxter said that while average costs had declined, South Africa still lagged behind other producers when it came to improving productivity levels and costs.
In 1997, he said, South African production costs including costs averaged about $342/ounce, compared with $331, $296 and $287 for Australia, Canada and the United States respectively.
Last year, after undergoing painful and widespread restructuring, South Africa managed to push its average cost down to $273/ounce. But this was still above those of the other gold producers, and higher than the current actual price of gold.
Alan Smith, executive officer for the South African operations of Anglo-American’s gold mining arm, Anglogold, said that the drop of the gold price during the past 18 months had put the company “in a different playing field. However, we took strategic decisions which are helping us at the moment. We have a very successful hedging programme which provides us with the opportunity to look at the gold price and where we are headed.”
Smith said that he believed the gold price had a natural level of about $300/ounce, towards which it would eventually gravitate. “I don’t yet know what the effect [of the price fall] will be on the economy,” he added.
Despite the potentially huge economic implications of the falling gold price, foreign gold analysts complain that South African producers have downplayed the crisis and been excessively sanguine about it in an attempt to protect their share prices.
The erosion of the gold price has been driven mainly by widespread fear among investors that the world’s central banks, which sit on massive gold stockpiles, could sell off their reserves at a moment’s notice and flood the market.
Baxter said that the reality was somewhat different, and that most central banks – including those of Italy, France, the US and Germany – had explicitly stated they intended to hold on to their reserves. He said that even the recently proposed sale by Britain over the next five years did not represent a significant proportion of the world’s annual gold supply.
Britain’s sale warning came hot on the heels of the International Monetary Fund’s proposal to sell some of its gold stocks for Third World debt relief.
John Lutley, president of the Gold Institute in Washington DC, said recently that South African producers had demonstrated a “cavalier” attitude to the current situation.
“We are very concerned about our mining operations in the US and the impact this will have on employment in the mining industry and our trade balance. We wish South Africa would become more vocal,” said Lutley.
Kelvin Williams, a representative of Anglo- American, said the gold market had been coping very well and the gold price was starting to rise when the “ill- considered”decision by the Bank of England to sell off some of its reserves changed circumstances once again. Williams said it is inappropriate to compare South African producers with their North American counterparts.
Baxter said the irony was that underlying physical demand remained strong – an observation confirmed last week by the World Gold Council, which said demand for jewellery remained strong. The council’s chief gold analyst, George Milling-Stanley, said recently that demand for gold in the first few months of 1999 had surged.
Nevertheless, the Bank of England’s announcement that it would sell off half its gold stock in July triggered a $30 drop in the gold price, reflecting the enormous negative sentiment that has mounted against the once illustrious metal.