Representatives of the local mining industry have voiced support for the SA Reserve Bank to lower its inflation target to 3% after operating costs fell to historic lows in recent months.
The Minerals Council SA’s latest data shows an improved operating environment for local mining houses in August, with input cost inflation easing to a historically muted 1.3% year on year.
Input costs rose just 1.4% in July after a downwardly revised 1.3% in June, pointing to a fundamental shift in the cost structure of the mining sector post-Covid, said Minerals Council economist Andre Lourens.
Input costs were “now tracking much closer to headline PPI for final manufacturing goods than in previous years”, Lourens said.
“This signals a more competitive and resilient cost base for the industry,” he said in a note earlier this month.
Rand and cheaper oil drive relief
The more hospitable operating environment is due to an amalgamation of easing interest rates, a stronger rand and declining oil prices. Those helped offset rising water supply costs, the primary driver of mining cost inflation in August as a result of municipal tariff hikes in July, and a 5.9% year-on-year increase in labour costs.
The Reserve Bank has cut the repo rate three times this year, taking the benchmark rate to 7% from 7.75%, which drove a 10.6% drop in financing and insurance costs in SA’s mining sector in August compared to the same period a year earlier.
- A 3% inflation target would anchor prices and boost investor confidence.
- Mining’s low cost inflation shows alignment with monetary goals.
- Stable prices could lower borrowing costs and strengthen the rand.
Meanwhile, the rand firmed almost 3% against the dollar in August, extending a 6% year-to-date rally, resulting in lower import costs for miners.
The local currency has continued to strengthen since August, reaching its best level in more than a year in early October, while oil prices — a critical component in operating costs — have also moderated to the lowest level in more than four years.
Big step forward
The lower-cost landscape is an important step forward in terms of SA mining’s standing among foreign investors as the local industry battles trade wars and logistics bottlenecks while seeking to boost its export potential.
The industry is urgently trying to arrest a decline in foreign investment as low levels of capital expenditure have heightened calls for the state to keep water and electricity costs in check while protecting the industry from illegal mining and regulatory uncertainty.
This policy shift is reflected in the ongoing lack of cost pressure on mining inputs. At present the only significant driver of mining input costs remain electricity and labour.
— Andre Lourens, Minerals Council economist
The subdued cost environment mirrors global and domestic inflation trends in recent months, said Lourens, with headline consumer inflation and producer prices for final manufactured goods also at multiyear lows in August.
“This context is precisely why the SA Reserve Bank has chosen to target the lower end of its inflation band, aiming for 3%,” Lourens added.
“With inflation pressures already muted, the Bank sees an opportunity to anchor inflation expectations at a lower level without risking economic growth.
“This policy shift is reflected in the ongoing lack of cost pressure on mining inputs. At present the only significant driver of mining input costs remain electricity and labour.”
Reserve Bank governor Lesetja Kganyago has repeatedly called on the National Treasury to lower the country's inflation target to 3%, the bottom end of its current target range and a level which proponents argue is more in line with international peers.
Treasury is yet to declare a formal policy shift, but at its July monetary policy committee meeting the Bank signalled a firm intention to lower the target after August's consumer inflation eased to 3.3% year on year from 3.5% in July and core inflation remained at 3.1%.
The persistently benign inflation picture does not appear to be in conflict with SA’s economic growth projections, with the Bank revising its 2025 growth forecast to 1.2% from 0.9% previously.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.