Report by Nomura
We hosted a lunch with Deputy President of the Republic of South Africa Kgalema Motlanthe, Mining Minister Susan Shabangu and Finance Minister Pravin Gordhan at our offices in London to discuss the outlook for the mining sector.
What was said
Initially, the outlook and difficulties of the mining sector in South Africa were outlined by Deputy President Motlanthe. There were some criticism of the management of workers and resulting wage round outcomes by previously entrenched unions which created a gap between workers’ needs and expectations and what unions achieved. This was a fundamental source of unrest and tension that developed in the year before Marikana. So with it the rise of stronger worker committees (outside of union structures in some mines) and new unions in new mineral sectors too.
The emphasis on mining workers finding their own resources through the “living out budget” also creates exposure to the unsecured credit and high rate loans. This, in turn, has clearly increased debt levels significantly among workers and has added noticeably to the recent social unrest. Efforts have been directed towards government negotiation with banks where agreements are in place on first- and second-tier credit levels. The issues lie much more substantially with the micro-lenders, which are harder to monitor. There will be even more emphasis on the government tackling these bodies in future, along with financial education for more vulnerable workers.
In this context, skills development remains a key focus in mining and across the whole economy. The living out allowance also has the effect of workers congregating to live close to each other in “informal shacks”. Further development in resources to these settlements is also encouraged, with water supply particularly important. However, the migrant labour system clearly needs reforms and the government seems to be pushing hard for the living out allowance to be directed towards travel allowances to allow workers to return to their homes in other provinces or neighbouring countries. The example of eight weeks on, two weeks off was mentioned.
Mining output has suffered with the slowdown in Chinese demand (and the lower price this entails) in South Africa. Consequently, it is estimated that 50% of mines are currently unprofitable in the platinum space. However, the government is keen to point out that when the mining sector is disaggregated, coal output is actually relatively healthy, for instance, as is iron ore. The gold sector, being much older, faces much more structural issues.
The government recognises that centralised bargaining clearly has its advantages and disadvantages but has given equal opportunity across unions of various sizes and notably does not discount the smaller ones. There can be issues on many occasions and it is believed to have played a provoking role in the Marikana tragedy with those workers involved feeling overlooked. They are keen to show that AMCU, while certainly dominant in some areas, is less dominant in others. That said, there seems to be no thought of rejecting centralised bargaining to bring the process to a more disaggregated level; instead, the focus is on unions and employers consulting more.
The Department for Mineral Resources is keen to distance itself from the idea that it will form a cartel with Russia on platinum. Instead, it talks about cooperation and mutual benefits from production of PGMs rather than outright price setting.
The need to further push beneficiation against a sceptical mining industry was also made while the new Mineral and Petroleum Resource Development Act amendments were dismissed as a continuation and tidying up of the existing framework.
Industrialisation is a “hot topic” of the moment given questioning of the Deputy President and Ministers from investors, and especially the issue of labour vs capital intensive value added. However, the suggestion was that, although healthy in many respects, industrialisation usually serves to employ less labour at a higher cost. This conflicts with South Africa’s long-term problem of structural unemployment of a large amount of “unskilled” labour. The target remains very much to increase skills of workers in labour-intensive sectors but to also open up new sectors, but the government is cognisant that there is more to do especially around agriculture and with the issue of property rights. On that point the Deputy President made the interesting (and welcome) point that transfer of rights from white to black owners was all well and good, but productive use of land was essential and passing it over to someone who simply wanted to sell it and make a profit was pointless.
The carbon tax implementation is being considered from the angle of sustainability, but clearly will be used so as not to hamper the mining industry – especially given current weakness with high cost inflation.
Infrastructure investment will also continue with no shortage of funding foreseen (with collaboration with the private sector also) and the ability to tap relatively healthy capital markets if necessary.
On fiscal policy, departmental expenditure ceilings are expected to remain which adds flexibility to the National Treasury to keep expenditure under control. That said, near-term fiscal developments were expected to be healthy even with lower growth than originally forecast thanks to still significant under-spend.
The current account deficit has widened last year due to the mining issues. This year, the driver has been the drop-off in exports and the increase in oil prices and capital goods imports.
The overall message was one of an industry under stress but also one that should be more clearly differentiated by sectors. The government is keen to show it is making progress in a number of long-run sustainability areas, such as safety, housing and the migrant labour system, though the issue of long-run restructuring in industries like platinum still seems to be at the back of its mind even if it would see it as regrettable.
We found the message from the Deputy President and Ministers to be one of honest recognition of the problems, and active engagement to solve those issues. However, the dichotomy between stability and competitiveness still seems very stark in a number of areas – stability means investment in other areas such as housing that lowers competitiveness arguably in the short run, stability means keeping a collective bargaining system vs disaggregation of workers and employers that could drive competitiveness. All this still points to the need for further productivity gains in the sector and in particular gold and platinum, though it was interesting to hear about the technological advances that were being developed locally which would partly enable this while still keeping labour employed.
We take the point, however, that the mining sector is not an amorphous whole and the debate is often too generalised. However, that does not negate the fact that upside for the sector in the short run will be down to companies themselves, while government will push mining companies and labour to work together to establish long-run sustainability which may act in the opposite direction in the short run. Mineral prices remain the key to deciding how that balance plays out in the medium run, but it still seems to us that some restructuring must happen after the elections in platinum in particular. The government pushing for labour and mining companies to work together with their involvement “as necessary” perhaps suggests a lack of firm headline-grabbing resolutions yet made.
Overall, we think the government is doing all it can within its current view of the mining sector, but that investors and ourselves have a somewhat different view of the balance between cyclical and structural factors as well as between stability and competitiveness.
We found the Finance Minister to be a little more fiscally conservative than the last time he was with us, likely reflecting both the risks from Fed taper and also the additional wiggle room that he must now have from the still chronic under-spend. The lack of rectification on that therefore seems to us to be a double-edged sword.
This piece was distributed by Nomura as part of the firm’s regular editorial called First Insights