South African economy at “tipping point” as mining industry falters

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South Africa’s once powerful mining industry, renowned for returning massive profits, is battling to attract investors as companies hit by violent labour strikes and rising costs struggle to stay in business.

South Africa’s once powerful mining industry, renowned for returning massive profits, is battling to attract investors as companies hit by violent labour strikes and rising costs struggle to stay in business.

The country, which has the most advanced economy in Africa with the second largest gross domestic product after Nigeria, built much of its infrastructure with taxes collected from powerhouse companies like Anglo American, Lonmin and Impala Platinum.

But mining bosses say the ongoing strikes, a fall in commodity prices, constant power outages at the state energy company Eskom and the rising cost of having to dig deeper into depleted ore bodies has soured investor interest.

“We are no longer vitally important in anybody’s mining portfolio and capital is very difficult to get,” Rick Menell, a former mining boss and now chairman of Credit Suisse South Africa, said at a meeting of mine bosses in Johannesburg earlier in October.

Gold mining companies say production has halved to around 168 tons in the past decade, with employment levels declining by around 30 per cent to 119,000 jobs.

The platinum industry, which has been decimated by labour unrest, is in a similar position.

Mining bosses, who spoke to dpa at the October meeting, believe a turning point for the industry came in August 2012 when 34 striking miners were gunned down by the police at the Marikana platinum mine.

The story made headlines around the world and investors, already wary of the ongoing strikes and calls by a popular youth leader Julius Malema to nationalize the country’s mines, are keeping their money in more stable investments with higher returns and lower risk.

Investors have also been put off by a royalty tax of seven per cent for unrefined minerals and mining charter that requires that 26 per cent of mining companies be owned by black South Africans.

The South African Chamber of Mines, which represents the industry, says that 50 per cent of mining operations are making losses and foreign direct investment (FDI) is proving increasingly difficult to attract.

Mining, it says, contributed 14 per cent to FDI in 2013, compared to 25 per cent in 2010.

Much of the blame for the industry’s waning fortunes has been placed on trade unions for forcing up the wage bill and increasing operating costs. Labour makes up around 50 per cent of operating costs for the country’s mines, according to the chamber.

To reduce costs companies are retrenching thousands of workers. Platinum producers Lonmin, Anglo American Platinum and Impala Platinum have clashed with unions and the government over their plans to shed jobs.

The latest spate of retrenchments in the industry which contributes seven per cent to the GDP, comes with unemployment at 25 per cent, slow economic growth and rising inflation in South Africa, where mining has always been a massive employer for unskilled workers.

Around 25 years ago the country made up 40 per cent of the world mining industry, Jim Rutherford, the non-executive director of mining powerhouse Anglo American said at the meeting.

That figure has now fallen to four per cent, with mining making up one per cent or less of the world’s equity markets.

South Africa’s mining industry is “statistically irrelevant” for investors, Rutherford said.

“Where investors do not see the prospect of return, they become cowards and won’t invest,” Rutherford said.

Many mining companies are increasingly using robots and state of the art drills to haul out metals.

It is a costly process but it is hoped that mechanizing, which involves a far smaller and highly skilled work force, will lower production costs and reduce losses caused by strikes.

With pressure building from students for free tertiary education and ambitious plans to roll out national health insurance and upgrade energy infrastructure, South Africa’s biggest mistake has been its failure to use its precious metals to diversify its economy, Efficient Group economist Dawie Roodt told dpa.

“We wasted two commodity cycles and it’s unlikely we will get another one,” he said.

“The money we made was misused by government by bloating the civil service with overpaid workers, on social grants for 17 million people and on wasteful projects like the 250 million rand upgrade of the president’s home.”

Without its precious metals and with its manufacturing industry in shreds after years of being undercut by cheap Chinese imports, the country’s economy has reached a “tipping point,” said Roodt.

“The agricultural sector is in the middle of a drought, tourist numbers are falling because of strict visas laws. The economy is in big big trouble. And now with the mining industry shrinking, our economy has nothing left to rely on.”

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