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The Current State of Mining in South Africa

04 December 2013, 14:47

The fall in demand for platinum, increase in production costs and proliferation of worker strikes have South African mines fighting to stay afloat. 

The state of mining in South Africa more often than not seems somewhat chaotic. Information provided to the public tends to include mostly its negative aspects and downfalls, where overviews of their continual losses due to worker strikes have us believing the mines are struggling to keep head above water.

In truth, there are a number of factors affecting the current state of mining in the country and worker strikes are not necessarily the biggest issue at play. As the world has begun to resort to recycling platinum supplies for re-use, the demand for South Africa’s platinum resources is decreasing, making SA’s status as the world’s largest source of primary platinum a characteristic that no longer reaps the benefits it used to.

Decreased platinum demand

Steven Frost, director and chairman of SFA Oxford, recently stated that since 2009, the demand for SA’s platinum supply has gradually fallen from about 70% to 50%, forcing mines to rethink the cost of production of the mineral.

Allan Seccombe reports that the reason for this decrease in demand is the increase in alternative supplies. Firstly, there has been a growth in metal supply from countries that have an excess of inventory. Secondly, the continued tendency to recycle worn-out auto catalysts (the devices that convert harmful gases in car exhausts so as not to pollute the environment) and jewellery, has resulted in a quadrupled recycled supply over the past decade.

Back in 2000, only about 14 000kg of recycled platinum was put back into the market per year – an amount that has risen to nearly 56 000kg today. That is 42 000kg of platinum that is no longer sourced from the mine itself, meaning that South Africa is currently grabbing at the short straw in terms of platinum demand. Despite supplying about three-quarters of the world’s platinum, the country’s influence on price has taken an exceptional dip.

As the cost of producing platinum has tripled in South Africa since 2003, the country is also struggling to stay at the same level of profitability as countries such as Russia, North America and Zimbabwe, which have only seen a 1.4 times to double cost increase.

South African mine shafts are getting deeper, costing mines a great sum of money, and unions such as the National Union of Miners (NUM) and the Association of Mineworkers and Construction Union (Amcu) are continually demanding wage increases for mineworkers. This could potentially strip South African mines of their efficiency due to costs rising at an unprecedented rate.

Worker strikes

The first worker strike of this year at Zondereinde mine in the Limpopo Province cost Northam Platinum Limited about R192 million in lost revenue. According to Business Day Live, the current wage strike is still on the go after four weeks, and has lost the mine an estimated R200 million in income. Northam has also had to borrow money from various sources in order to keep production afloat, and at present has reached a limit to funding facilities. This strike has expended the operating margin at Northam.

The National Union of Mineworkers (NUM) currently represents about 80% of the 6 900 mineworkers at Zondereinde. Though Northam has already spent up to R1,13 billion on wages in 2013 up to the end of June, NUM demands an average wage increase of 61%. At this point Northam can only promise up to 9%. Recent reports reveal that if Northam were to agree to workers’ demands, it would run at a loss, leaving the future of the mine at stake.

The chief negotiator at NUM stated that workers are willing to forfeit year-end bonuses in order for the wage increase to take effect. The problem, however, is that year-end (November and December) is usually the most productive time of the year as workers plough in extra effort to be able to earn their year-end bonuses. Were their bonuses forfeited, this production push would no longer be in practice.

In the end, Northam is already R2.2 billion in debt due to the construction of Booysendal, which the company is set to repay by 2016. Should double-digit wage increases be granted, the repayment of Northam’s overall debt would extend far beyond 2016.

The future of SA mining

The cost of producing a product directly affects the price at which it sells. If the cost of production in South African mines keeps increasing, it is safe to say that its loyal buyers may very soon move to new suppliers with lower costs. Neighbouring country Zimbabwe is a strong supplying contender owing to its low production costs and platinum-rich resources and because of this, it has a good chance of beating South Africa as a major supplier. In light of this, it has been noted that reputable mining companies are broadening their focus across the continent in order to provide mining equipment to other countries aside from just South Africa. 

If South Africa is going to continue being a player in the rank of top supplier, it will need to rethink its financial strategies and adapt to the current changes and demands. If not, it will undoubtedly start to lose rank until a suitable plan is in place to help it climb back up again.

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