South Africa’s missed R150 billion opportunity

South Africa benefitted immensely from a global commodity boom in 2021 and 2022, with mining companies posting record profits and making significant contributions to the country’s fiscus. 

However, over the past two years, it has become increasingly clear that the country missed out on a big opportunity to boost its foreign exchange earnings and economic growth thanks to the commodity boom. 

In its 30-year macroeconomic review of South Africa, the Bureau of Economic Research (BER) flagged this missed opportunity and showed that the country’s exports have declined since 1994. 

This is despite favourable export prices due to the weakening of the rand versus the dollar and a steady increase in commodity prices. 

South Africa’s mining industry is one of the few to benefit from a weaker currency, as its exports become much more valuable in rand terms. 

Thus, with the rand weakening from just over R3 to the US dollar in 1994 to around R18 per dollar in 2024, the sector’s exports should have increased significantly in value. 

Coupled with a commodity boom in 2021 and 2022 as the global economy emerged from the pandemic-era lockdowns, South Africa’s exports should have skyrocketed. 

However, they did not, due to deteriorating logistics, load-shedding, and regulatory uncertainty, which limited the mining industry’s output. 

The BER said the commodity boom should have strengthened South Africa’s role in the global export market and as a key node in the global supply chain. 

Ores and metals, which experienced the boom, make up around 27% of the country’s exports, compared to the global average of 6%. 

This should have resulted in South Africa taking up an outsized share of the global export market. However, its share remained flat at 0.5%. 

The inability to capitalise on the commodity boom has had significant consequences for the South African economy. 

The government lost around R52 billion in tax collections due to the inability to export minerals and commodities. At the same time, mining companies reported significant revenue declines and began to cut jobs. 

The graph below shows South Africa’s failure to capitalise on the commodity boom, showing a slight decline in the country’s share of global exports since 1994. 

The main reason for this decline is South Africa’s deteriorating logistics and port infrastructure, with the Minerals Council of South Africa estimating these challenges cost the country R150 billion in exports during the commodity boom. 

A study by the GAIN Group, a boutique consultancy firm focusing on rail freight, put the losses due to Transnet’s problems at R353 billion. 

According to GAIN, South Africa’s economic growth of 0.5% for 2023 could have been over ten times higher at 5.4% if Transnet operated at full capacity. 

The impact could have been even worse if commodity prices remained close to the highs of the commodity boom. 

The calculated cost to the South African economy includes the failure to achieve potential exports, the impact of inefficient logistics resulting in higher costs, and other indirect impacts from lost revenue on the economy. 

However, there is a longer-term issue of declining mining output from South African mines in general. 

Data from the Reserve Bank shows that the country’s mining sector has failed to grow its output meaningfully since 2019. 

While the mining industry still contributes significantly to the economy, employing over 477,000 people, this contribution is much smaller than it was even five years ago. 

The Reserve Bank said the decline in mining output is due to high operating costs, regulatory uncertainty, inefficient logistics, and electricity disruptions. 

Simply put, South Africa is now viewed as an unattractive mining investment destination, with the Fraser Institute ranking it among the ten least attractive mining destinations. 

The long-term decline in mining output is shown in the graph below.