While an increase in mineral output saw SA’s mining GDP improving in the first nine months of the year, the sector’s real contribution is constrained by its lack of profitability relative to other industries.
In the first three quarters of the year, SA’s mining GDP increased by 0.7% year on year — an improvement from the 0.5% contraction recorded for the first three quarters of 2023. Due to this growth, real mining GDP for the full calendar year is set to increase for the first time since 2021.
In the same period however, mining sector profits declined 0.9% year on year, in stark contrast to the profits of non-mining sectors, which were up 5.8%, according to Stats SA’s gross operating surplus figures.
Mining profitability remains under pressure, putting a dampener on the sector’s ability to contribute positively to SA’s economic growth and real GDP outcome, largely due to the sector’s high input costs and logistics challenges.
While declining oil prices, an interest rate cut and stronger exchange rates helped slow the rate of mining input cost inflation in the third quarter, these costs continue to run above general inflation, increasing by more than three times the headline producer price index in September.
This is because the relief provided by a stronger currency and favourable oil prices is offset by high wage costs and core input cost inflation “that remains notably above general inflation levels”, said Minerals Council SA economist André Lourens.
The cost of electricity, which has consistently been the primary driver of input inflation this year, rose 10.6% year on year in September, while employee compensation, the second-largest component of miners’ costs, grew at an average year-on-year rate of 6.9%.
Transnet’s rail and port inefficiencies continue to put pressure on miners’ profitability, either by constraining export volumes or forcing them to resort to more costly road transportation, putting a squeeze on margins.
While these factors are to some extent influenced by SA’s regulatory bodies, government agencies and private companies, much of the pressure on profitability has been out of their control, given the role low commodity prices played this year.
The price of coal, for example, remained virtually flat for the first three quarters of the year at about $105/tonne, down significantly from its 2022 peak.
Most significant has been the sustained low basket price of platinum group metals (PGMs) — the biggest subsector of SA mining. Breaking down the latest third-quarter GDP figures in a report last week, Minerals Council CEO Hugo Pienaar said, “some lift in profits is only expected once PGMs prices start to rise from current depressed levels”.
“There has been more optimism of late that this could be imminent, as constrained PGM supply growth in SA and some uptick in global PGM demand from the global vehicle industry should lift sentiment and prices,” Pienaar said.
However, “a risk to this view is if [US president-elect] Donald Trump undermines global trade growth by launching another trade war with key countries/regions such as China and Europe,” he said.
Encouragingly, the World Platinum Investment Council has forecast a third consecutive platinum market deficit next year, which is likely to fuel the depletion of above-ground stocks, in turn supporting a lift in PGM prices.
While the mining sector’s GDP growth boosted SA’s real GDP by 0.1% points in the third quarter, Pienaar said that it was unable to lift the overall figure, which declined 0.3% in the three months to end-September.
With SA’s real GDP growth surprising to the downside in the third quarter, Pienaar said “we will need to wait for 2025 before the real benefits from the absence of load-shedding, increased confidence, as well as lower inflation and interest rates start to kick in”, adding that much-needed further progress at Transnet will also drive faster mining and overall real GDP growth in the future.
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