We define mining’s potential as pent-up ability that is withheld by forces beyond the industry’s control. We have heard so much about the mineral potential of our country. It is consistently thrown in our faces when we attend international mining conferences and listen to what other countries are achieving with so much less than we have. We must shift from potential to great performance.
This week’s release of fourth-quarter 2023 GDP data by Stats SA provides an opportunity to reflect on the performance of the mining sector, as well as its contribution to the broader economy. Mining operations are not only energy intensive, the sector is also heavily exposed to the freight logistics system. As a result, mining has suffered from record Eskom load-curtailment and Transnet’s rail and port bottlenecks in the last two years.
The sensitivity to these supply-side constraints helps to explain the underperformance of mining relative to other sectors of the economy since 2022. On top of these, the platinum group metal (PGM) and coal subsectors were hit hard last year by sharp price declines of more than 40% for the PGM basket price and 55% for coal.
After contracting by a significant 7.1% in real terms during 2022, mining GDP declined by a further 0.3% in 2023. This compares with growth of 2.4% in 2022 and 0.6% during 2023 for non-mining GDP (measured at basic prices). The challenging environment is further highlighted by the stark decline in the gross operating surplus for the mining sector. This broad measure of profitability emphasises the cyclical nature of the sector.
After significantly outpacing the non-mining sectors in 2021, there was no growth in mining sector profitability in 2022. There was a further notable deterioration in 2023 when the (nominal) gross operating surplus for mining plunged by around 18% year-on-year. In the non-mining part of the economy, this measure increased by more than 8% during 2023, highlighting a large divergence in sectoral fortunes.
The sensitivity to these supply-side constraints helps to explain the underperformance of mining relative to other sectors of the economy since 2022
This was also illustrated in the February budget, which indicated that corporate tax receipts from the mining sector declined by more than R39bn year-on-year in the first 10 months of the 2023/24 fiscal year. Tax receipts from other key sectors of the economy were down by R1bn.
Despite these concerning stats, the mining sector continued to contribute handsomely, albeit not to its full potential, to the South African economy in 2023.
This included:
- Contributing 6.3% to nominal GDP. This is more than double the contribution of agriculture and almost three times that of the construction sector;
- Contributing 13% to total nominal fixed investment in South Africa;
- A contribution of almost 5% to formal non-agricultural employment. More than 475,000 people were employed in mining during the third quarter of 2023. Furthermore, according to Stats SA’s quarterly employment statistics, the sector is one of the few where employment was higher in the third quarter than in 2019 before the Covid-induced crash;
- Compensating employees to the tune of almost R180bn. This was 9.1% more than during 2022, outpacing the 5.4% year-on-year rise in compensation for the non-mining sectors;
- Unreported CSI expenditure, including social and labour plans, which amount to several billions; and
- Contributing 45%-60% to the value of South Africa’s merchandise exports, depending on whether refined products are included.
The diversified nature of the sector helps to explain these standout contributions. As one example, a record high (nominal) gold price helped to support gold mining production in 2023. If the mining sector can add value to this extent despite suffering badly from a lengthy list of constraints, the vast untapped potential of the sector becomes clear.
The partnership between business and government in the National Energy Crisis Committee (Necom) and the National Logistics Crisis Committee (NLCC) is facilitating increased private sector participation in energy generation and the operation of crucial rail corridors and ports. As evidenced from recent progress reports in these areas, this relationship is a critical advantage for the sector and the broader economy.
As the world embarks on an energy transition, South Africa’s mining industry has significant growth potential to produce critical minerals required to enable this transition. The energy transition will be severely stalled without mining and the production of these minerals. Beneficiation of mineral materials rather than “dig it and ship it” is another key opportunity that must be thoughtfully planned for the medium to long term as we address the fundamental challenge of electricity availability and security.
The recent announcement of a preferred bidder to design a new mining cadastral system bodes well for the future growth of the industry. An overview of this proposed system was provided at the recent Prospectors and Developers Association of Canada (PDAC) convention held in Canada. It demonstrated fundamental attributes of the system, including transparency, integrity, fairness and equity in the future application process for prospecting and mining rights. This is a welcome step for the future administration of rights applications in South Africa.
South Africa possesses other advantages compared to its peers that will enable the mining industry to transition from potential to performance. These include the depth of mining-related skills, deep and liquid capital markets, developed infrastructure with the opportunity for enhancement, an independent judicial system, and a functioning democracy that has enabled the leadership pact between business and government.
Business remains open to work with the government of the day, without prejudice or favour to any political party. With all these opportunities and advantages, the mining industry should move from potential to outstanding performance that can stimulate the economy and deliver social benefits and progress that will restore the dignity of our nation.
• Mthenjane is CEO and Pienaar is chief economist at the Minerals Council South Africa
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