Dark clouds gather over South Africa’s largest employers

The historic backbones of South Africa’s economy, mining and manufacturing, are coming under increasing pressure as their output has been declining consistently for the past two decades. 

This was revealed by Stanlib chief economist Kevin Lings, who outlined some of the most significant challenges South Africa faces at the asset manager’s InPerspective webinar. 

The decline of South African mining and manufacturing has become particularly prevalent in the past few years, with elevated levels of load-shedding crippling the sectors. 

Output and employment in these sectors also declined, which is crucial for absorbing South Africa’s unemployed population. 

These sectors are crucial in tackling unemployment in South Africa, as they can quickly absorb relatively unskilled labour. 

However, these sectors have stagnated since 2004, with manufacturing output increasing marginally and mining declining. 

This two-decade decline cannot be attributed to load-shedding alone and points to a much more fundamental reason – a lack of confidence in the South African economy. 

Declining business confidence in the country since 2006 has resulted in many companies preferring to keep their cash in the bank rather than invest in manufacturing capacity. 

Eighty percent of respondents to the RMB/BER Business Confidence Index (BCI) survey reported being satisfied with prevailing business conditions in 2006, compared to only 32 percent last year.

Lings said this is one of the key reasons South African corporations are sitting on R1.4 trillion in excess cash rather than investing it in the local economy. 

Another issue is the lack of policy certainty. South Africa has no clear and permanent macroeconomic plan to provide investors with clarity and the ability to make long-term investments. 

More concerning data can be found in the Reserve Bank’s quarterly reviews, which indicate that only 77% of the country’s manufacturing capacity is used. 

This shows that there is a lack of demand for products in South Africa’s weak economy and poor consumer confidence. 

The below graph, courtesy of Lings, shows the stagnation and decline of South Africa’s two most important employers. 

Decline in mining output

The decline of mining output in South Africa has also been entirely self-inflicted, with unpredictable policy, threats of nationalisation, and infrastructure bottlenecks hobbling the industry. 

In effect, South Africa has gone from one of the best mining jurisdictions in the world to among the worst in less than three decades. 

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.

Mining analyst Peter Major at Modern Corporate Solutions explained that this decline is almost purely down to regulatory uncertainty. 

Major said that mining is incredibly sensitive to uncertainty. It takes decades to develop a mine and generate a return on investment, so this requires long-term clarity and certainty regarding regulations and policy. 

“The simplest explanation is that you had an established mining law and protocol system on how to develop and run mines and who owned them,” Major said. 

“That had been built up over 150 years and was working pretty well. It made us the number one mining country on the planet.”

“When the new administration took over, it decided to try to totally revamp mining law in South Africa and copy what other African nations did,” Major said. 

“It said, ‘We will nationalise these mines and take them back. They are no longer private property but are the state’s property.’” 

“You can imagine. You put billions into projects for 100 years and are now threatened with state ownership. New investment just stopped. Exploration and expansion just stopped. Why put money in something the state owns?” 

“They were also changing legislation non-stop. You first had to have a BEE partner that owned 25%, and that quickly increased to 30%. And then, they said 70% of the money you spend had to go to BEE suppliers.” 

“As if nationalising property was not enough, they put on all these horrendous conditions that drove capital away,” Major said. 

As a result, South Africa now has 6,152 abandoned mines for which the state is theoretically responsible, but it does not have the resources or skills to manage them. 

“The ANC did not realise the consequences of their actions. They are now abandoned mines that could have been generating billions of dollars for the local economy if things were just left the way they were.”