South Africa is starting to come down from its commodities-induced high.
On the back of the global financial crisis, prices for some of our most bountiful minerals and metals have plunged and the country’s resource-reliant economy is bleeding money and jobs.
The National Union of Mineworkers (NUM) is expecting to take the fight to the trenches, anticipating tens of thousands of job losses.
Fellow trade union Solidarity has already received notice from Canadian uranium producer Uranium One regarding the retrenchment of more than 1 000 employees at its Dominion operation.
The world’s largest ferrochrome producer, a joint venture between Xstrata and Merafe resources, announced production cuts of 29% by shutting down six of its local furnaces earlier this week. AnlgoPlatinum announced in October that, due to the fall in metal prices, the scheduling of all its capital projects is under review.
The country’s junior miners, already starved of capital, are suspending their listings plans, because investors are scared of taking risks.
”We’d like to see a situation in which retrenchments are avoided,” said NUM spokesperson Lesiba Seshoka. ”We had a commodity boom and the companies should have set aside some of the profits so that when times are hard, like now, they can cope.”
Seshoka said he understands that Lonmin, the producer of platinum group metals, plans to retrench 16 000 workers and that DRD Gold plans to close its underground operations on the East Rand.
DRD Gold retrenched 200 workers at the beginning of the year.
James Duncan, spokesperson for DRD Gold, said operations on their East Rand mine have been suspended due to high underground water levels. Duncan says ”early estimates indicate that solution [installation of water pumps] will be costly and could take up to 18 months to install”. He said should these be confirmed, some workers may have to be retrenched.
Barnard Mokwena, spokesperson for Lonmin, said he was ”shocked” by the figures being thrown about. He pointed out that the company was ”considering restructuring because of the stringent conditions” under which it, like other companies is operating.
”We are considering ways to survive under these conditions.” He said the company will not make an announcement until it has followed due labour processes.
According to the Chamber of Mines the country’s mines contributed 7% of GDP but when industry multipliers are included that figure rises to 18%. Mining added R162-billion to SA’s merchandise exports last year. This represents 32% of the total, but if beneficiated products like catalytic converters are included this increases to over 50%.
Mining employs around 500 000 people and contributed about R21-billion in taxes.
Growth consultancy Frost & Sullivan says this wealth also filters through the broader economy in demand for goods and services.
Furthermore, as mining houses halt projects in the pipeline, these delays could ”cause a mismatch between long-term supply and demand fundamentals and thus lay the foundation for a future commodities bull market”, it said.
Wonder Nyanjowa, metals and mining analyst at Frost & Sullivan, argued that local banks will tighten credit, making it difficult for companies to fund their capital-intensive business. Credit will also dry up for BEE deals in the sector as banks become unwilling to fund them.
Experts in the sector are always quick to remark that commodities function in cycles: they regularly swing from boom to bust and back again. Many are sure the slump is part of such a cycle, although global markets make it difficult to say how bad such a slump will be.
Ursula van Eck, auditing director at BDO Spencer Steward, says demand for South African resources is inextricably linked to demand from India and China.
Following the global market crisis, demand from these countries may ”taper off” but she is confident that this demand will remain, especially now that China plans to inject $585-billion into its economy to maintain growth.
Van Eck, like Frost & Sullivan, foresees a problem as investment in prospecting and exploration dries up. Projects like these have long lead times but a dearth of investment now could lead to a lack of new mines in the future.
There is an opportunity for further investment in Africa now, argues Van Eck. ”South Africa is still a springboard into the continent.”
But can China, even with its massive rescue package, maintain its appetite for Africa’s resources?
According to Dawie Roodt, chief economist at the Efficient Group, Chinese growth has been fuelled by demand for manufactured goods in the US and Europe.
”Demand for Chinese goods is decreasing,” says Roodt. ”Now the whole world is waiting to see if the Chinese can be turned into consumers to fill the vacuum left by the US.”
The massive fiscal injection could well do this, he says, but it will not be instant and will also require a cultural shift for the Chinese people.
In some parts of the country, people save as much as 50% of what they earn. The trick is to get them to start spending that, says Roodt.
Media reports suggest that China’s decision to begin spending does not bode well for the US. To fund its programme it will need to sell off the more than $1-trillion it has in US securities. This in turn could see the cost of the US bail-out plan increasing. But it’s not just mining feeling the effects of recession — the textile industry is also suffering.
”Demand is down both domestically and on export markets,” says Brian Brink, executive director of Textile Federation, the industry’s umbrella body.
Brink says severe trading conditions aggravated by undervalued imports has caused a number of mills to announce their closure either immediately or over the next few months, leading to job losses.
”The weak rand should assist exports but this will be almost totally countered by the depressed market conditions in the developed world markets.”
Not all gloom and doom!
While the market for commodities has taken a turn for the worse, chief economist at the Chamber of Mines Roger Baxter says the demand for resources from emerging economies such Brazil , India and China (BRIC countries) will resume once the financial crisis begins to ease.
Despite ”price reversion”, says Baxter, commodity prices are still about 100% higher than they were at the start of the boom in October 2001. And while global growth has slowed, the structural factors driving the BRIC economies have not disappeared.
However, Baxter says that in the short term, things will get tougher. Large companies are likely to cut back funding for short-term projects. Junior miners, who source much of their capital overseas, are likely to find that credit is scarce and expensive due to the financial crisis.
Mining globally is facing a number of problems that the mining industry refers to as the six Ps, he says. They are people, power, procurement, permitting, projects and politics, and in each of these areas companies are facing similar problems. Skills are scarce, energy is a concern, procuring capital equipment is expensive and has long lead times for delivery.
South Africa could not take advantage of the recent boom due to various constraints, he says. The current slowdown, however, may give the mining industry a chance to get its ”ducks in a row” so that when commodities go back into an upswing — the industry is production ready.
