The worldwide surge in inflation has helped SA. Higher prices for our mostly metal and mineral exports have boosted the profits of our miners and the taxes and royalties collected from them. In real terms, represented by the mining sector prices ratio (the mining deflator to prices in general, represented by the GDP deflator), these price trends have never before been as helpful.
The price-to-cost ratio in the SA mining sector is now even more favourable than it was in 1980, when the gold price rose from $35 to $800 an ounce and gold mining was by far the largest contributor to total mining output and revenues. Real mining prices rose 60% between 2015 and 2021.
They have improved by three times since 1996. These real prices and profits have a highly predictable influence on mining output and mining’s share of GDP, which has doubled from 4% in the late 1990s to 8% now. There could and should be far more mining revenue, output and employment to come.
The prices of commodities and metals used in industry are more than 60% higher now than pre-Covid, having increased by 8% this year alone. They are now back to where they were in 2010, when Chinese stimulus in the wake of the global financial crisis had a highly favourable influence on demand for metals and their value, a force that faded as supplies responded.
There are more profits and tax revenues to come given the continued advance of industrial metal prices since 2021, sadly further stimulated by Russia’s war on Ukraine and encouraged over the long run by a more disciplined global mining sector investing heavily in cleaning up rather than producing more.
The revenues and profits realised by the SA mining sector have helped add about R200bn, a meaningful extra 15%, to the original estimate of national budget revenues of R1.352-trillion in 2021/2022. The extra revenue helped reduce government borrowing in that budget year by about R136bn. More important is that tax revenues for the 2022/2023 fiscal year have been revised higher by a further R141bn, of which a further R77bn is earmarked to reduce the government’s borrowing requirement.
These revenue estimates may again prove too low, which would be further good news, especially if it leads to growth-stimulating tax rate cuts rather than more spending. The prospect of permanently higher metal prices has already had important effects on the value of the rand and the JSE, both of which have more than fully escaped the influence of a stronger dollar and weaker global equity markets.
The disappointing news from the SA mining front is how little is being added to capital expenditure (capex), and even less to exploration budgets. The capex-to-revenue ratio is running below average, while exploration spend has all but vanished. The objective of policy should be to reverse these unpromising trends.
The most promising opportunities lie in the exploration for and development of gas and oil. Important discoveries have been made recently off the southern coast of SA on the maritime boundary of Namibia and SA. The Venus 1 discovery by Total is the largest ever of gas and oil in Africa. This follows Shell’s significant Graf1 find in the same area. The adjacent Block 1 in SA waters is a further opportunity, and the Kudu gas prospect can still be realised.
The opportunity for Europe to replace Russian gas and oil with Southern African resources — closer to Europe than Siberia — is sure to be promoted actively. It will never be more obvious. SA needs a mining and exploration agenda for growth. That is, an internationally competitive set of regulations to encourage miners and drillers to get on with bringing valuable resources to the surface.
Introduced without the distractions and diversions that often come in the form of competing empowerment demands that complicate and delay development, this could achieve growth and the transformation of the opportunity set for all South Africans. Carpe Diem.
• Kantor is head of the research institute at Investec Wealth & Investment. He writes in his personal capacity.
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