JOHANNESBURG (miningweekly.com) – Positive international macroeconomic trends over the last few months should have had a greater positive outcome for the local mining sector than the 12.8% improvement recorded in the first quarter, as reported in Statistics South Africa’s (StatsSA’s) latest gross domestic product (GDP) statistics, the Chamber of Mines (CoM) said on Wednesday.
Considering that the global economy seems to be on the mend, albeit slowly and commodity prices seemingly having bottomed out and some starting to improve, digging deeper into these numbers reveals very concerning trends, said CoM chief economist Henk Langenhoven.
“The positive seasonal contribution of mining to the economy masks the current precarious position of the South African mining sector,” he pointed out.
Based on these drivers, sales of local commodities should have continued to rise, even if only in ‘landed’ rand terms – when the interplay with the exchange rate is taken into account; profits should have started to improve from the very low base – 2015 returned losses of nearly R40-billion for the sector; and, based on StatsSA fourth quarter financial surveys, they did.
Langenhoven further highlighted that Increased production should have followed, given better prices, even if only on the back of the low value of the rand, as mining production improved by nearly 6% during the first quarter and was fairly widespread across the different minerals.
However, employment numbers are not improving, paired with virtually no new investments taking place.
“In fact, 2016 gross and net fixed investment showed strong declines. So the potential positive impact of mining improvements on the economy have not materialised.
“Digging deeper into the numbers reveals a desperate situation: the annualised 12.8% growth figure published derives from a first quarter improvement of 3% on the fourth quarter of 2016 – which is a 4.5% improvement on the first quarter 2016 – the 3% quarter-on-quarter improvement would yield 12% growth over 12 months,” he explained.
Langenhoven further said that looking at the actual (nominal) numbers, a completely different picture emerges. Quarter-on-quarter value-add by mining declined by 16% or R13.5-billion. “Again, these numbers are easily explained.
“Owing to the massive numbers of jobs lost between 2012 and 2016 – around 70 000 – the cost of employment is declining; during the first quarter, it decreased by 13% or R5.12-billion on the last quarter of 2016. This explains 38% of the value-add shrinkage. Gross operating surplus, which includes depreciation, declined over the same period by 18% or R8.5-billion. The latter explains the 62% fall in value-add.
“Further, we can assume that there was virtually no net investment in the first quarter, so the 18% decline actually represents an 18% drop in profits. When this number is superimposed on the historically reported profits in the quarterly financial surveys, the long-term trend of profitability falls back to the average of the last ten years, indicating that mining is simply not recovering,” Langenhoven pointed out.
He said the numbers begged an explanation. “To recap: global economic growth has started to improve, as have commodity prices. Better prices should prompt more commodity exports from SA, but Stats SA reports that commodity exports actually declined during the first quarter.”
Estimates are that this drop was nearly 8% on the previous quarter. The net effect of lower volumes despite higher prices explains some of the profit pull back.
The further reason for the latter could possibly be derived from cost increases. The intermediary input cost index, excluding labour costs for mining, has been running at 13% a year over the last ten years, and although the rate of increase has declined slightly, input costs are continuously eroding viability. At current prices, more than 60% of the platinum sector is loss-making.
“These dynamics show the uncertainties faced by South Africa’s mining industry. It is particularly telling that the improved performances of both agriculture – better rains and mining – better commodity prices – were driven by exogenous factors over which neither domestic economic policies nor any endogenous (internal) demand factors had any influence,” said Langenhoven.
“Sadly, all indications are that this recession is of South Africa’s own making. Even the correlation between South Africa’s downgrades and the government’s debt-to-GDP ratios testify to the broader truth of this statement.
“Continued mining policy uncertainty and allegations of regulatory malfeasances within the minerals regulatory authority will continue to undermine recovery,” he concluded.