South African miners are expected to pay about 50% more in fuel costs this month, adding pressure to the industry’s already strained energy budgets as tension in the Middle East continues to disrupt oil supplies.
Minerals Council South Africa chief economist Bongani Motsa warned on Wednesday that the war in Iran will significantly affect the mining sector’s profitability this year, hampering the industry’s ability to capitalise on high commodity prices.
Miners’ average monthly petrol and diesel bill, which normally amounts to R2.9bn, is expected to jump to about R4bn in April and remain elevated as long as disruptions in the Strait of Hormuz continue.
Only a handful of ships have risked crossing the Strait since the start of the war in Iran, according to Reuters, with the recent two-week ceasefire and failed peace talks in Pakistan offering little hope for an imminent end to the conflict.
Diesel-dependent open-pit operations will be hardest hit, particularly at South Africa’s large coal, iron ore and platinum group metal (PGM) operations, where large trucks and earth-moving vehicles form a large chunk of miners’ expenses.
But in the coming months, the effect of the oil shock ― labelled the biggest oil supply disruption yet by the International Energy Agency ― will spread across the whole mining industry as the pressure to hike wages escalates.
“If the war continues, not only will it raise CPI [consumer price index] inflation beyond the targeted midpoint of 3%, but interest rates will also ultimately have to increase,” said Motsa.
“Wages and salaries are the biggest cost element for the mining sector, making up more than 20% of costs. Wage negotiations could be tougher as labour unions are expected to demand higher-than-inflation wage settlements,” he said.
Labour federation Cosatu told Business Day earlier this week that fuel prices and their second-round effects on other prices such as food would be front and centre during wage talks this year.
Economists now expect inflation to jump from 3.3% in March to 4.5% in April after the petrol price hikes implemented at the start of this month, pressuring the South African Reserve Bank to reverse its rate-cutting cycle.
Meanwhile, unions are likely to demand increases that boost workers’ real pay rather than simply keeping track with inflation ― implying wage increases of 6%-7%, said economist Dawie Roodt.
Minerals Council economist Andre Lourens said mining input costs are likely to come under further pressure from the 8.76% electricity tariff hike approved by the National Energy Regulator of South Africa, which came into effect for industrial users on April 1.
“Overall, a return of input cost pressures to their long-term average will depend critically on an end to the conflict and a normalisation of global economic conditions and supply chains,” he warned.
Electricity has been the primary driver of input cost inflation in South Africa’s mining sector for years, making producers at home particularly vulnerable to the present energy shock.
Industry data has shown how two decades of electricity tariffs exceeding the country’s inflation target have crippled energy-intensive subsectors such as chrome, for which more than half of all local smelters have closed in recent years, costing the economy thousands of jobs.
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