Mining capital must play ball to save the sector
I recently stuck my head in a hornets’ nest by co-writing a report on the platinum sector.
The report found that over the past 14 years the three major platinum producers – Amplats, Implats and Lonmin – enjoyed profits well in excess of the average of the JSE’s 40 biggest companies. During the boom years of 2000 to 2008, operating profit margins were more than double the JSE Top 40 average and “return on investment” was periodically 10 or 20 times higher than what is considered by experts as more than fair in South African mining.
We also discovered that labour received a thin slice of the pie.
The distribution of “value added” (which can be thought of as the monetary value left after paying for all the costs of production) was skewed in favour of shareholders.
Wages accounted for just 29% of value added during the boom, and 38% during the period as a whole, whereas the economy-wide average is 51%.
During the boom, shareholders of Amplats and Implats made a killing, enjoying a slice of the pie equal to or greater than the entire wage bill.
There can be little doubt that this industry contributed to South Africa’s persistent and severe levels of inequality.
Amid the humdrum of number crunching, broader issues that were not fully tackled in the report loomed: How best to harness our mineral resources to the benefit of both the workers and the country as a whole? And how does the likely post-strike restructuring of the platinum sector tie into this?
Like all valuable questions the answer is complex, but two broad themes stand out.
The first relates to the need for coherent industrial policy that harnesses South African mining for broad-based, job-creating industrial growth. This can be done, for example, with downstream mineral beneficiation, expansion of our capital goods sector that supplies mines, investment in research and development, or using mining infrastructure for the benefit of those nearby.
To some extent all of these exist already, but there is much greater potential. Through strategies such as these, the mining sector would generate an industrial structure that could create jobs and transform and sustain itself even after the mineral deposits are depleted.
A “living wage” is a social necessity but some level of mechanisation is a likely outcome of growing labour costs, although Lonmin’s abandoned attempt to mechanise some mines in the late 2000s should cause industry’s claims of inevitable labour displacement to be viewed with some caution.
Mechanisation is not necessarily bad for South Africa, so long as it is managed as part of a package of industrial policies and new jobs are created in capital goods sectors. It also has the potential to minimise very low-skilled, unhealthy and dangerous work such as mining.
But the question of mechanisation draws attention to a global phenomenon: that the steady march of technological advance may mean the chronic unavailability of sufficient employment for the world’s working-age population, at least in the manner that work is currently conceived – that is, as a 40-hour (or more) work week.
Progressives and the labour movement can either wage a reactionary rearguard battle against this inevitability, or embrace it and attempt to control the outcome. The latter requires rethinking modes of fiscal intervention and the redistribution of society’s collective wealth that is generated through industry.
This is the second, broader theme that emerged from the research. Incentives to produce must exist but there is no reason why gains during a commodities boom, such as that in platinum between 2000 and 2008, should predominately benefit shareholders and mining executives.
Altering the low wage structure of the economy by radically increasing wages will have broader spin-offs, for example for the 10 dependants that each striking platinum miner, on average, supports. But ultimately, on its own it is unlikely to bring the decent housing, transport and healthcare that the striking workers justifiably consider their due.
Only significant redistribution of society’s collective wealth, government provision of a radically improved “social wage” and necessary welfare, and a managed transformation of the industrial structure can ensure this.
On a global level, tax structures need to be overhauled so that capital cannot flee hither and thither to avoid paying its due, and a global minimum wage needs to be instituted (adjusted appropriately for country-specific factors and living costs). Equivalent global agreements exist, for instance, regarding trade and intellectual property rights; the difference is that these agreements overwhelmingly favour big business.
The question is therefore not one of feasibility but of the global balance of forces, and the extent to which the interests of the world’s poor majority are represented – or, most often, not represented – by their elected leaders.
On a local and more immediate level, the profits and super-profits of South African mining provide a potential fiscal revenue stream. Limpopo holds 80% of the world’s platinum-group metals and for as long as a mining house can make a fair return on its investment, then the platinum will be mined.
Possible fiscal interventions include direct participation in mining by state-owned mineral corporations, publicly owned equity in existing private mining houses, joint ventures with mining capital, nationalisation and an array of taxes, rents or royalties. Almost all resource-rich countries, including Australia, Canada, the United States, Botswana, Brazil, Chile and China, use some combination of these.
South Africa currently has lenient policies in terms of which mining companies pay moderate royalties and standard corporate taxes. Overall, the country has a comparatively low average tax rate of 25%, ranking 130th in the world.
There should be rigorous debate about the most appropriate fiscal intervention. In our research, the super-profits garnered by the platinum industry during the boom raised the possibility of instituting a resource rent tax. This would mean that profits earned above a fair rate of return – 15% has been proposed as providing a reasonable margin above the risk-free rate – would be heavily taxed.
Royalties, which tax output irrespective of profitability, could then potentially be reduced. This would allow companies to remain comfortably profitable while windfall profits – earned on the back of global commodity booms, not on the basis of some special effort or innovation – could accrue to a special state fund.
The ANC’s seemingly abandoned 2012 policy document State Intervention in the Mining Sector (Sims) argues that such a sovereign wealth fund could be used to finance skills and mining development, regional development and fiscal stabilisation during downturns. This is one of the many sensible suggestions made in the Sims report.
Alternatively, this sovereign wealth fund could finance a significant redistribution of wealth. One avenue would be through enhancing the social wage – for instance, the improved provision of transport, housing, healthcare and basic utilities – which would improve lives and relieve wage pressure.
Another avenue is the instituting of a basic income grant, an unconditional cash grant distributed to everyone, the level of which could be tied to the size of the pot available in the sovereign wealth fund, thereby giving everyone an incentive to grow the economy. A basic income grant could absorb many of the current grants, although it would need to be considerably higher.
Putting money into the hands of the populace, instead of into the pockets of a few wealthy local and international shareholders, would greatly spur domestic demand. As long as this is coupled with government policy aimed at growing South African businesses to service people’s needs, it could truly revive the domestic economy.
None of this can be implemented overnight and the detailed modelling exercise in Sims of how much fiscal revenue can viably be derived from the mining sector should be updated. This stretches into other subsectors, such as iron ore, which are in the midst of a global commodities boom.
In addition, changes to the taxation structure in other sectors would need to be considered in tandem, including the potential for special taxes in the financial sector.
In the short term, the likely restructuring of the platinum sector in the wake of the strike makes co-ordinated intervention with a long-term plan in mind essential.
What the strike throws into sharp relief is the need for both improved wages and conditions, and a managed, orderly restructuring of the sector. An unmanaged transition to higher wage structures could involve foreign imports of equipment and a chaotic sell-off of marginal mines.
Such a disorderly restructuring could mirror that of the gold industry in the 1990s that led to a precipitous decline in investment, gold extraction and employment on the mines, which has not abated despite a booming gold price from 2005 onwards.
Government needs to chart a way forward for the sector as a whole, and progressives need to mobilise behind a viable, long-sighted vision that speaks to the realities of the current moment. Mining capital will need to be forced to play ball. Finally, the public debate needs to deal with the broader issue of how best to manage our mineral resources to ensure that all can enjoy the benefits they bring.
Gilad Isaacs is an independent economist and researcher. He is the co-author, with Andrew Bowman, of the report Demanding the Impossible? Platinum Mining Profits and Wage Demands in Context.