South Africa’s most iconic industry running on luck

South Africa’s mining output has steadily declined over the past 15 years, with the sector only growing as a result of price increases. 

This is unsustainable in the long run, as prices do not rise forever, and commodity prices, in particular, are extremely volatile. 

Furthermore, while South Africa’s mining sector may benefit from rising prices in the short term during commodity booms, it does not reap the rewards it should. 

The sector and the economy more broadly would benefit significantly more if it produced and exported more of the minerals the world demands, which it has in abundant deposits. 

With the United States and China battling to secure supplies of crucial minerals, many of which are found in South Africa, the country has the opportunity of a lifetime to secure billions in investment. 

Symmetry’s chief investment strategist, Izak Odendaal, explained that the stagnation of South Africa’s mining industry has occurred when demand for its products has soared. 

StatsSA’s latest data shows that South African mining production was negative in the fourth quarter, with it likely pulling down overall GDP growth. 

However, Odendaal said the bigger trend is that there is no trend, with mining volumes having flatlined for the past 15 years. 

He explained that this is unsurprising, given the tough operational and regulatory environment. This environment has been coupled with poor labour relations. 

On the other hand, mining sales have increased sharply on the back of record precious metals prices. This is good for the trade balance, the fiscal balance and the South African financial markets. 

“The problem is that you cannot rely on price as being the only driver of sustainable growth in an industry, especially when commodity prices are particularly volatile. Volume growth is needed, too,” Odendaal said.  

He explained that this will require policy reforms and a much closer working relationship between industry, unions and government.

The graph below, courtesy of Odendaal, shows how South Africa’s mining output has stagnated and declined over the past 15 years, while prices have soared.

Missing out on billions

The declining output of South Africa’s mining industry means that the country has missed out on tens of billions in potential exports amid a precious metals boom. 

Once a global mining powerhouse, South Africa is now one of the worst jurisdictions in which to operate a mine amid onerous regulations, labour disputes, and a stagnant economy. 

In the case of some precious metals, South Africa has also effectively mined out its reserves, leaving it with dwindling resources that are increasingly expensive to extract.

South Africa has risen and fallen with the cycles the mining industry is characterised by, with it offering a substantial opportunity to boost tax receipts and investment in times of rising prices.

In times of declining prices, the industry is beset by significant impairments and thousands of job losses as miners fight to stay afloat to capture the next bull market. 

The excess profits and taxes the industry generates in a bull market have long been seen as a catalyst for sustained economic growth and fiscal health. However, this money is often misspent on short-term consumption and not long-term investment.

South Africa is the beneficiary of the ongoing precious metals boom, with prices being pushed higher amid elevated geopolitical uncertainty and a shift away from the dollar by central banks. 

Odendaal has previously explained that South Africa has benefited immensely from such booms in the past. However, this time around, the benefits are remarkably thinner. 

In the 1970s, when a comparable bull run occurred in precious metals, South Africa was the world’s largest gold producer and reaped handsome rewards from a surging gold price. 

Today, gold production is 90% lower, mainly because most of it has been mined out over the past 100 years. Around a third of all the world’s gold was extracted from the Witwatersrand Reef. 

South Africa is no longer the biggest producer in Africa, with Ghana and Mali competing for the top spot on the continent.

However, the surge in the gold price has been coupled with soaring platinum group metals prices. South Africa is the largest producer of these metals. 

This will provide sizeable bonanza for the local gold mining industry, which should translate into increased tax revenue that can stabilise the government’s deteriorating finances – if used correctly.