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Johannesburg – The positive contribution of the mining sector to GDP during the first quarter is deceiving of the underlying concerns in reality.
This is according to Chamber of Mines chief economist, Henk Langenhoven, who issued a statement on Wednesday ahead of the release of the second quarter production figures.
“The positive seasonal contribution of mining to the economy masks the current precarious position of the South African mining sector,” he said.
Although the mining sector production grew by 12.8% during the first quarter, Langenhoven said that there are concerning trends within the sector.
READ: SA enters recession as GDP contracts for a consecutive quarter
Given the improvement in the global economy, the uptick in commodity process and the rand commodity index improving by over 20%, the positive impact on the sector should have been greater, he explained.
For example, sales or exports should have continued to rise but instead commodity exports declined in the first quarter of 2017. Profits should have improved from a low base and production should have increased by more than 6%. However, employment figures have not improved, nor are there new investments, said Langenhoven.
“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.”
Further looking into the actual figures, quarter-on-quarter value added by mining declined 16%, this is R13.5bn.
“Owing to the massive numbers of jobs lost between 2012 and 2016, around 70 000, the cost of employment is declining,” he said. During the first quarter it decreased by 13% or by R5.124bn from the previous quarter in 2016. This is 38% of the value-add shrinkage, said Langenhoven. Additionally gross operating surplus declined by 18% or R8.456bn, this is 62% of value-add contraction.
With no net investment in the first quarter of 2017, this translates into an 18% drop in profits, he added. Further rising input costs continue to cut into the viability of the sector. “At current prices, more than 60% of our platinum sector is loss-making,” he said.
“If Eskom is granted a near 20% tariff increase as per its recent application, it will push input costs up by as much as 4 percentage points for some mines,” added Langenhoven.
Profit on backfoot
At the Junior Indaba on Wednesday, PwC released its latest annual report on the global mining industry. The report looks at top 40 companies globally.
The report showed that 2016 was characterised as a recovery from the slump in 2015. Efforts were mostly directed to servicing debt, without “significant action” in market capitalisation and valuations, said Michal Kotze, PwC Africa energy utilities and mining industry leader.
The sector only restored global net profit levels to $20bn and capital expenditure was down a record 41% to a record low of $50bn while market capitalisation increased 45$ to $714bn. Further exploration budgets took a knock.
According to research by Standard & Poor’s, exploration within South Africa only accounted for 4% of global exploration, and 13% for the African continent.
The low investment will eventually filter through into production levels, explained Andries Rossouw, energy and mining assurance partner. “If they do not invest now, it will not increase production in future,” he said.
