Mining boom coming – but South Africa may miss out

South Africa risks missing out on the next commodity boom as onerous mining regulations and Transnet’s poor, albeit recovering, performance handicap the industry. 

The last commodity boom from the end of 2020 to mid-2022 was extremely fortuitous for South Africa and effectively plugged a hole in the country’s finances. 

Record earnings from mining companies resulted in them paying billions in corporate tax and employing thousands more South Africans. 

However, as with any boom, this did not last forever and was followed by a bust. Mining companies have come under immense financial pressure in the past 18 months, cutting jobs and delaying expensive new projects. 

This has also resulted in them paying far less tax than during the boom period, straining government finances. 

Old Mutual Wealth investment strategist Izak Odendaal said the next commodity boom will come and warned that South Africa is not prepared to take advantage of it. 

For now, China’s challenged economic growth outlook has put pressure on commodity prices, notably iron ore. 

Even the oil price has barely reacted to new geopolitical risks. Gold has been the outlier, trading near new record highs as Fed rate cuts loom.

However, commodity prices are cyclical and will recover eventually, with longer-term tailwinds from the green transition and rising global infrastructure spending driving up demand. 

Even the AI boom is as much a commodity story as a computing one since large data centres must be built, wired with copper, and powered with immense amounts of electricity.

“Nonetheless, South Africa cannot sit around and wait for the next commodity boom. It needs to improve economic growth internally by making it easier to do business,” Odendaal said. 

“When the commodity cycle does eventually turn, the country must be ready and not miss out again due to stifling mining regulations and inadequate infrastructure.”

If it doesn’t, Odendaal warned that unemployment will not decline much from the staggering 33.5% reported by Stats SA last week. 

“The correct metaphor for the local growth, inflation and policy picture is not one of a landing but rather a case of light at the end of a long, dark tunnel.”

The collapse of South African mining

Earlier this year, Odendaal noted the deteriorating operating environment miners experience in South Africa, leading many to abandon large-scale investments in the country. 

Odendaal said one cannot avoid the fact that South Africa is viewed as an unattractive mining destination. 

The challenges are massive, including volatile labour relations, disputes with surrounding communities, organised crime, regulatory uncertainty, unreasonable delays in processing applications and infrastructure bottlenecks. 

The Fraser Institute, based in Canada, conducts an annual survey on the attractiveness of different countries as mining jurisdictions. These days, South Africa ranks among the ten least attractive mining destinations.

The financial ecosystem that supported junior miners in years gone by has also largely disappeared. 

Local investors have limited appetite for supporting early-stage mining companies, and global investors have little appetite for investments in South Africa. 

Little exploration is done despite geologists estimating that a rich natural bounty remains. 

The evidence is in the form of declining mining production—the volume of stuff pulled out of the ground—over the past twenty years. 

Excluding gold, which is largely mined out, makes the picture somewhat better, but not much. 

In contrast, Australia, not facing the same physical and institutional bottlenecks as on this side of the Indian Ocean, has managed to steadily double output over this period.

Since 1994, mining output has declined by a steady 0.4% annually, with gold, in particular, falling off a cliff and declining by 85%. 

Increased production of chrome and manganese has been able to offset this somewhat, increasing by 8.2% and 8.4% annually since 1994. 

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