In which year did SA business confidence reach its highest point on record? That was the pop quiz question put to the audience at this week’s 80th anniversary conference of the Bureau for Economic Research (BER).
The BER calculates the business confidence index each quarter from surveys in which it asks hundreds of business people across a range of economic sectors a simple question with a yes or no answer: “Are you satisfied with prevailing business conditions?”
The index edged up to 35% just before the election after a few quarters of decline, so just more than a third of business people were satisfied. Economists will be closely watching the next quarterly survey to see if confidence picks up, which would suggest the economy and investment will pick up too. The index hit a record low of 5% in the midst of the Covid-19 lockdown, when the only satisfied business people were retailers that could continue to trade.
But the answer to the pop quiz question is 1980. The business confidence index (which goes back to 1970) went over 90% that year. Older South Africans may remember the economic euphoria of 1980. The gold price surged to a record $850/oz on runaway global inflation and geopolitical risks. Johannesburg was still a mining town where the gold price and gold shares drove sentiment and economic prospects.
Now the gold price keeps hitting new record highs at more than $2,400 and no-one takes much notice. The contrast captures some of the huge changes in SA’s economy and its mining sector. But it is also a reminder that gold still matters to the world, and to SA — and that even if SA has mined out much of its gold, there is still much else it can and should be looking to mine.
The mining sector was 21% of the economy then, compared with 6% now. The 1980 surge in the gold price and in confidence helped to drive economic growth to 6.6% that year, a rate it has not seen since. And as it turned out, it provided just a very temporary reprieve for an economic model that was already in trouble, and got into a lot more trouble later in the decade when financial sanctions began to bite.
Meaningful contribution
As it turned out too, the gold price bubble didn’t last long. Central banks in advanced economies got inflation under control, gold started to lose its “safe haven” status, global output climbed but demand among investors and central banks declined and by 1999 the gold price reached a record low of $250.
Meanwhile SA, which at peak in 1970 accounted for two-thirds of global gold production, started running out of gold, at least gold that was viable to mine. It was overtaken by China as the world’s largest producer in 2007; now it only just makes the world’s top eight.
Minerals Council SA economist Hugo Pienaar has shown that while the mining sector’s output declined by an average annual 0.4% since 1994, if the stark decline in gold production is stripped out the sector grew by an average 1.3% so it made a meaningful contribution to overall economic growth over the period. Chrome and magnesium have shown stellar output growth; platinum group metals, coal and iron ore have grown too.
But ironically perhaps, gold is now SA’s one mineral export whose price is booming, with the prices of most others sharply off the peaks they reached in the recent commodity boom. In rand terms, gold is now trading at more than R44,000/oz, and it was even higher when the rand was weaker. As it’s turned out, gold still has that “safe haven” status.
It is seen as a safe haven against inflation, so the global inflationary episode of the past four years revived it. Investors traditionally go into gold on fears that inflation could spiral out of control; their appetite traditionally dwindles when inflation subsides and central banks start raising interest rates, because there’s more opportunity cost to holding gold, which yields no interest.
Strong demand
But it is also a safe haven against war and geopolitical risk in general, and there’s been plenty of that lately. Added to that is that central banks have been buying gold aggressively in the past few years. It’s a response in part to financial sanctions against Russia, which made some central banks more wary of keeping their foreign reserves in dollars or euros or yen. Many emerging-market central banks had relatively little gold in their reserves anyway, so they’ve been diversifying their portfolios.
The World Gold Council’s latest report shows demand reached its highest level yet in the second quarter. That reflected record central bank buying in the first half of the year, but it was also driven by strong demand from investors.
On some estimates SA only has about 30 years’ gold reserves left so we should be making the most of it. Gold still employs more than 93,000 people and is one of SA’s top five export earners, as well as a significant contributor to tax revenue.
Producers of bulk commodities such as iron ore have had to cut output because Transnet can’t rail it to market; gold has the advantage that it goes out by air. But SA’s gold producers still have to face all the myriad other troubles besetting the sector, such as high electricity and other input costs, inadequate infrastructure and crime. The scourge of illegal mining tends to be particular to gold because the metal doesn’t necessarily need sophisticated smelters and refiners to process.
Financial results from mining companies in coming weeks will provide a window into how the sector is doing.
But SA’s mining failure is not so much about the inevitable decline in its gold output over the decades but about the fact that it hasn’t done nearly enough to develop all the other minerals it could and should, especially while the world is in search of critical minerals to support the green transition. The sector urgently needs licences to explore, and an environment that’s attractive to investment in new mines and new miners.
Business sentiment no longer hinges on mining as it once did and that’s a good thing: SA’s economy is much more diversified than it once was. But it needs to grow much faster, and a thriving mining sector is one ingredient.
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