South Africa’s golden lie

The financial strength of South Africa’s mining sector is masking a deepening productivity crisis, leading to a “growth illusion”.

In other words, the sector has failed to translate its financial wins from factors such as commodity rallies into productivity gains, due to internal inefficiencies and external constraints.

One of the biggest drags on the local mining industry is the gold sector, which has seen its output decline by 84% since 1994.

In a recent research note, the Bureau for Economic Research’s Robert Botha, in collaboration with Economic Research South Africa, explained that this sectoral decline has been a long time coming.

Botha explained that the long-term performance of South Africa’s mining sector is defined by a significant structural decline that began in the 1970s.

“This era was characterised by a two-speed phenomenon whereby a collapsing gold sector, once the backbone of the economy, dragged down aggregate production volumes,” he explained. 

He said this could be clearly seen in South Africa’s structural failure during the global “Missed Super Cycle” between 2001 and 2008.

While countries like Australia reaped the rewards of increased Chinese demand during this period, through mining investment and GDP gains, South Africa largely missed out.

In fact, South Africa’s mining contribution actually shrank during this period. Notably, this was not due to geological shortcomings, as the country had and still has a bountiful mineral wealth. 

Rather, it was driven by domestic policy transitions, particularly the promulgation of the Mineral and Petroleum Resources Development Act, which shifted the sector from private mineral rights ownership to state custodianship.

This fundamental shift in South Africa’s mining sector, which also dealt with shifting empowerment targets around the same time, introduced significant market shocks and proved to be a drag on the industry’s growth and investor confidence.

The steady decline in investor confidence in South Africa relative to its emerging-market peer, Botswana, as tracked by the Fraser Institute, is shown in the graph below.

Broken backbone

Botha emphasised that, despite these struggles, the mining industry continues to form a critical part of South Africa’s economy, contributing 6% to nominal GDP and approximately 50% of total merchandise exports.

Mining is also a notable source of state revenue, contributing between 6.5% and 10.9% of total national revenue through royalties and taxes such as PAYE and Corporate Income Tax.

Furthermore, the sector remains an important source of employment, supporting thousands of direct and indirect jobs throughout the value chain.

It is estimated that the sector’s employment multiplier is 10, meaning for every employment opportunity created in the mining sector, there are 10 created in other sectors.

However, despite the industry’s financial importance, Botha said the sector’s contribution is increasingly threatened by a “growth illusion” and a deepening productivity crisis.

He explained that, while nominal figures are supported by high commodity prices, production volumes have trended downward since 1994.

Notably, this decline in production has been mainly driven by a sharp decrease in gold production, which saw an 84% reduction in output over the past three decades. 

However, Botha pointed out that if gold production is excluded, the rest of the sector actually grew by 41%, which reveals a “stark divergence in sub-sector performance”.

“The sector faces a significant ‘Capital Productivity Paradox’, where rising investment in sustaining capital fails to yield higher output due to internal efficiency losses and external constraints like rail bottlenecks,” Botha explained. 

“Combined with a digital deficit and a disconnect between wages and labour productivity, these structural challenges have led to a 11.55% decrease in the sector’s real size from 1994 to 2024.”

In other words, there is a disconnect between the sector’s financial performance, which is heavily reliant on cyclical factors like commodity prices, and its underlying operational health, which is deteriorating.

As the mining sector deteriorates, so does its economic contribution, with the sector actually detracting from economic growth over the past three decades.

In real terms, the sector achieved an average annual growth rate of -0.29% between 1994 and 2024. 

Over this period, the sector actually exerted a drag on the overall performance of South Africa’s economy, subtracting 0.02 percentage points from overall GDP growth on average annually.

The first graph below shows how the South African mining sector’s output has changed over the past three decades, as well as the significant negative impact of the gold sector on total production.

The second graph shows that this has led to a decline in the mining sector’s size in real terms over the past three decades.