While commodity prices have been booming, SA’s mining tonnages have been sliding, with the latest figures showing the output of the mining sector declined for a fifth consecutive month in June. At its current level the sector’s output is not just below pre-Covid levels — it’s hardly better than in 2015.
The numbers confirm the picture highlighted by Minerals Council chief economist Henk Langenhoven, who points to the stark contrast between the industry’s financial performance and its real economy performance.
In essence, the benefits of the commodity price boom of the past few years have gone to shareholders through dividends and to the taxman by way of higher corporate income tax, mining royalties and other taxes. They have lifted the value of SA’s mining exports and helped create a surplus on its balance of payments. They have even added some jobs to the industry.
What improved commodity prices have not done is spark the investment needed to ensure the boom translates into more durable gains for the economy or for the public purse.
The continued dearth of investment is despite the fact that many in the industry continue to be bullish about the longer-term outlook for some of SA’s key export commodities, which stand to gain from continued global supply chain disruptions in the short term and the “green industrial revolution” in the longer term. It’s a puzzle too, because previous commodity booms have translated quite quickly into higher fixed investment. That this one has not is a disturbing reflection on the crippling constraints to mining investment in SA. To some extent it also reflects a global industry issue.
While rand commodity prices took 40 months to recover after the global financial crisis, this time commodity prices increased 140% over just 30 months after their Covid-19 crash, Minerals Council figures show. One would have expected this to have lifted all mining-related metrics. Instead, “the contrast between the value and volume of performance is stark right through”.
It’s not just that commodity prices are expected to come off for the remainder of this year but that the industry is not investing to grow output, and therefore profits and tax revenues into the future
The prices of SA’s four main export commodities — platinum group metals, gold, coal and iron ore — really accelerated from early 2021. Mining profits jumped about 45% in aggregate in the 12 months to April this year. Dividend payouts increased 200% to R100bn over that period, Minerals Council research shows — but that came after dividends to shareholders had stagnated for the previous five years.
The boom was strongly felt on the JSE. It was also strongly felt by the SA Revenue Service (Sars), which experienced a 103% increase in taxes and a 76% increase in mining royalties. The council’s research shows the mining sector paid more than R100bn in company income tax and royalties in 2021, and a further R42bn in employee PAYE and VAT.
That, as we know, was a huge contributor to the revenue windfall that helped the government fund extra social spending and reduce debt in the latest fiscal year. And government revenue figures for the first quarter of the current fiscal year show the company income tax windfall continues, much of it probably from mining.
But the taxman clearly shouldn’t rely on this for the long term. It’s not just that commodity prices are expected to come off for the remainder of this year but that the industry is not investing to grow output, and therefore profits and tax revenues into the future.
In the run-up to the global financial crisis the mining industry was investing about 40% of mining GDP. Now, says Langenhoven, virtually no new construction of mines is occurring. From 1993 to 2020 a 10% increase in commodity prices caused a 7.2% increase in the sector’s gross fixed capital formation — the key measure of investment spending, with investment increasing in the first year after prices improve and continuing high for three years. This time there’s been no such response. Though mining investment has turned slightly positive, most of it has gone into plant and machinery, not into the construction of new mines.
Muted response
This is not exclusive to mining. Nedbank’s latest capital project survey notes that much of the investment spending in the economy is going to plant and machinery, including computers, and is essentially modernisation, automation and digitisation to improve efficiency rather than the expansion of productive capacity.
Nor is the muted investment response, and the financial versus real dynamic, exclusive to SA. PwC’s latest global mining survey finds that during 2021 the top 40 global mining companies increased profits 127% and dividend payouts 130%, but capital spending just 18%. Globally, as in SA, shareholders in mining companies just want the cash after years of dividend drought, and they are reluctant to see companies make the same mistakes they made by overinvesting and overspending in the previous boom. Globally, input costs are rising, and it’s becoming harder to get regulatory and environmental approvals for new mining projects.
All of that is even more pronounced in SA, which in addition erects its own absurd barriers to investment. New mines can be built only if there is new mining exploration, and there is still much scope for exploration in SA. But the department of mineral resources & energy has failed for the past decade or more to provide the functional mining cadastral system that’s required to transparently map and register ownership of exploration permits.
It has failed too to deal with a huge backlog of exploration licences — or the backlog of mining licences, so even those that do have projects on the drawing boards may be unable to get the required licences. Add to that the huge uncertainty about the cost and supply of electricity, the reliability of railways and ports, and the levels of crime and corruption, and it’s not hard to see why mining companies and their shareholders would be reluctant to commit to new long-term projects.
On the bright side, now that the government seems finally to be opening the way to mining companies to generate their own electricity, SA is likely to see a boom in new investment in renewable energy by miners in the next few years. It won’t build new mines, but at least it might help expand SA’s mining output. In an ideal world in which the government tackled the other constraints too, the financial benefits of the commodities boom might start translating into greater real economy benefits.
• Joffe is editor at large.
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