SA has a comparative advantage in beneficiation only if the refineries and manufacturing downstream from the mines pay less than world prices for raw and refined inputs. This approach was a pillar of pre-1994 industrial policy. It largely fell into decline however, after the commercialisation of the originally state-owned refineries at Sasol, Eskom and Iscor (which split into Amsa and Kumba Iron Ore), while the opening of the economy from 1989 facilitated exports of raw ores.
In a competitive market, prices should tend towards the unit cost of production plus a normal rate of return. Typically however, mines and large refineries do not face substantial domestic competition for local customers. They can thus charge international prices to downstream manufacturers despite that consistently exceeding the normal rate of return. In effect, even when mines are price takers on international markets, they are often making monopoly rents at home.
When international mining prices spike, as they have in recent years, they let local mines make windfall profits. The cost falls on the refineries and metals manufacturers. The government has to decide whether these windfall profits should only benefit the mines or be partly shifted to local manufacturing firms, which typically add more value, employment and technological capacity to the mining value chain.
Government tools to reduce costs
Government has a range of tools to encourage or require local mining and refining companies to supply lower-cost raw materials to manufacturers. They have however, rarely been applied in recent years, mostly due to intense opposition from the mines and refineries.
The government could require that mines and refineries meet the needs of their domestic customers first, at a competitive price, before they can export. In practice, SA has only applied this approach to scrap metal. It achieved a big reduction in costs for the steel mini-mills, which rely primarily on scrap.
The lower cost was apparently passed on, at least in part, to downstream customers. The measure was opposed by scrap producers, many of whom manufacture steel products and sell scrap as a byproduct. Amsa has also argued that the measures unduly benefited its competitors, since it does not benefit from a similar arrangement for the iron ore on which it relies.
The government could impose export taxes to make it comparatively profitable to sell to domestic customers at below-world prices. This kind of measure has run into opposition from importing countries and free-trade advocates, including the World Trade Organisation, as well as the mines themselves.
Challenges to implementation
The government could leverage its control of Transnet, which is crucial for the iron ore, coal, chrome and manganese mines, to incentivise lower-price sales to downstream manufacturing. This has however, not been attempted, in part because Transnet relies on the mines for two-thirds of its rail income, and in part because it would be hard to monitor any agreements that resulted.
The competition authorities have periodically tested assertions that Sasol and Amsa abuse their dominance in domestic markets to overcharge customers. In 2016, they reached a settlement with Amsa that included a R1.5bn fine and an agreement to keep its margin on flat steel products sold locally at 10%. As with Transnet however, monitoring implementation has proven difficult. The Competition Commission also has the power to undertake market inquiries, which could analyse pricing for other mining value chains.
Long-term economic growth and building industrial capacity require a strategic use of our minerals. To succeed however, government agencies have to develop the capacity to assess the claims of the winners and the losers in the process, even when faced with fierce lobbying.
• Makgetla is a senior researcher with Trade & Industrial Policy Strategies.
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