Mining production slowed ahead of lockdown, worse figures to come

Mining production had already started slowing down ahead of the nationwide lockdown instituted to slow the spread of Covid-19, data from Statistics South Africa shows.

Production for February 2020 increased 7% year-on-year, according to data released on Tuesday. The largest positive contributor to production was coal, followed by platinum group metals (PGM) and gold. But the industry produced 1% less than in January.

Mining production has been decreasing gradually, down 2.7% for the three months ended February 2020. There was almost no mining activity when the lockdown kicked off on 26 March, with only selected mining operations allowed, such as coal mines supplying Eskom to ensure energy security as well as necessary care and maintenance at some plants.

Increase in sales

Mineral sales, however, increased 18% year-on-year for February, with the largest growth in sales reported for PGMs, followed by gold and iron ore. In the three months ended February 2020, the seasonally adjusted value of mineral sales was 5.1% higher compared with the previous three months, Stats SA's report read.

In recent weeks, most commodity prices have continued to surprise on the upside, with gold at its highest in seven years. "I am quite amazed at how well most commodity prices have held up. Gold usually rises with world panic. But it's gone up higher than we thought," said mining analyst Peter Major. "Commodity prices on the whole have done better than any of us expected," he added.

Mines had to close due to the lockdown and both demand and supply volumes also dropped.

"They almost balance each other out," Major said. "And if supply falls more than demand there is a possibility of suppliers charging higher prices. If only half the mines produce, then they can charge what they want if demand falls less than half of what it was," he said. Supply was definitely being curtailed from late March onward, which always helps prices," he said.

Worse to come

While higher commodity prices bode well for SA's economy, things could be better, said Major. He noted that gold mining industry has shrunk terribly in size (by over 80%). "I don't know why the government isn't helping mines to open up more. These things bring in dollars and jobs," he said.

February's data might be positive, but it is also outdated. Major said SA's mining sector will have worse figures for March and much worse for April and possibly May as well.

Investec economist Lara Hodes also noted that the February figures do not reflect the full impact of the Covid-19 restrictions in place domestically, but the global supply chain disruptions and reduced international trade likely influenced February's performance.

Hodes explained that electricity supply disruptions during February also likely weighed on production levels. "The mining sector, as a highly energy-intensive industry relies on consistent, affordable electricity supply to operate optimally."

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