Declining oil prices, interest rate cuts and a stronger rand helped slow the rate of input cost inflation for SA mining companies in the third quarter, though the sector still faces persistent cost pressures.
According to Minerals Council SA’s latest index, mining input costs rose by 5% in the three months to end-September, down from a 6.8% increase in the previous quarter and 7% in the same period last year.
The improvement was partly driven by the rand’s continued strength against the dollar — the nominal effective exchange rate improved 5.9% year on year in September — leading to a marked reduction in the cost of imported intermediate inputs, together with intermediate mining and quarrying inputs.
Further support came from a substantial reduction in crude oil prices, which remained below $80 a barrel over the three months, contributing to a 10.6% reduction in costs related to coke and refined petroleum products in September.
Financing costs were persistently high throughout the third quarter as a result of elevated interest rates, though they eased slightly in September after the Reserve Bank cut its benchmark repo rate by 25 basis points (bps).
With another 25 bps reduction expected when the Bank’s monetary policy committee meets later this month, the Minerals Council said financing costs were likely to continue easing in line with inflation, leaving room for inflationary cost pressures to ease further.
Winter electricity tariffs also came to an end in September, which saw power costs returning to baseline levels after surging in the second quarter following a 12.74% price hike in April.
As winter electricity tariffs ended, electricity costs declined by almost 30% in September compared with the previous month.
Despite these improvements, the mining sector continued to face persistent cost pressures. September’s increase in mining input costs was still three times higher than the headline producer price index, the Minerals Council said.
While electricity costs were down from the second quarter, the rising price of power continued to drive input cost inflation, recording a 10.6% year-on-year rise in September.
Employee compensation, the second-largest component of miners’ costs, also contributed to higher input costs, with wages growing at an average year-on-year rate of 6.9% in September.
“While general inflation is on a downward trend, these elevated wage increases could add to inflationary pressures if they outpace gains in labour productivity, leading to higher unit labour costs,” Minerals Council economist Andre Lourens said, adding that “above-inflation wage increases continue to challenge the sustainability of both the private and public sectors”.
“While year-on-year trends show reduced cost growth for key commodities and inputs, the mining industry continues to face persistent cost challenges, particularly in areas like electricity and wage-driven expenses.
“A stronger currency and favourable oil prices provided some relief for imported and energy-related inputs, but these benefits are offset by high wage costs and core input inflation that remains notably above general inflation levels, he said.
While interest rate cuts will help alleviate some of the pressure on SA miners in the coming months, Lourens said rising fuel costs may add pressure to near-term input costs from refined petroleum products, as the five-month trend of easing fuel costs comes to an end in November.
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