Two of South Africa’s most important industries in trouble

South Africa’s economy has historically been driven by its large mining sector, which, combined with manufacturing, represented a significant portion of its GDP. 

This has changed in recent years as both these industries have stagnated, and their contribution to economic output has declined, while the retail sector has come to play a growing role in the local economy. 

These two sectors also employ a large part of South Africa’s working-age population, and their struggles over the past two decades have been felt by thousands of local workers. 

Data from Stanlib chief economist Kevin Lings shows that these two sectors have failed to increase their production meaningfully since 2004. 

Lings explained that manufacturing, in particular, was growing strongly in the early 2000s as the country’s economy grew and companies invested in expanding local production. 

This lasted until the financial crisis in 2008-09, after which the sector’s output stagnated and eventually began declining after the Covid-19 pandemic. 

Manufacturing has been particularly hard hit by load-shedding, with businesses forced to invest heavily to just keep their doors open and have been unable to invest in growing their operations. 

Mining output, on the other hand, has been steadily declining since the mid-1980s as the country steadily ran out of gold to mine. 

While platinum mining has grown to replace gold’s role in the South African economy, it has not been enough to offset its decline. 

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. 

Once a mining powerhouse, South Africa’s best years are far behind it, and mining companies have begun cutting jobs to reduce costs and remain profitable. 

In the latest Fraser Institute ranking, South Africa was among the ten least attractive mining jurisdictions due to onerous regulations and lacklustre economic growth. 

Investors have limited appetite for supporting early-stage mining companies or the buildout of a new mine. The added difficulty of operating in South Africa has almost wiped out foreign investment. 

The stagnant output of South Africa’s mining and manufacturing sectors can be seen in the graph below, courtesy of Lings. 

The poor performance of these two sectors over the past two decades has resulted in South Africa’s economy stagnating over the same period. 

These two sectors are major drivers of economic growth and are crucial for employment as they are able to absorb relatively unskilled labour fairly quickly. 

However, there are signs of a recovery, with business confidence gradually picking up after the formation of the Government of National Unity (GNU) in early June. 

In particular, manufacturing sentiment has reacted positively to this and the country’s longest stretch without load-shedding for years. 

While Absa’s Purchasing Managers’s Index (PMI) slid back into negative territory in August, the index tracking expected business conditions in six months’ time remained elevated. 

This index tracked above 60 points for the second consecutive month. A reading of above 50 indicates improvement and growth, while below 50 signals contraction. 

The Bureau of Economic Research, which compiles the PMI with Absa, said this shows businesses expect a strong improvement in the operating environment going forward. 

This will result in greater investment and, thus, economic growth. 

While manufacturing is showing signs of life, South Africa’s mining sector remains under heavy pressure, and its output continues to decline. 

Despite improvements regarding load-shedding and reforms beginning to be implemented at Transnet, low commodity prices and onerous regulations continue to weigh on the industry. 

Volatile labour relations, community disputes, organised crime, regulatory uncertainty, and delays in process applications are some of the reasons global miners do not want to invest in South Africa. 

These issues cannot be solved quickly and have handicapped mining production despite geologists estimating that a rich natural bounty remains in South Africa.