Mines save South African economy

The world’s deepest precious metal mines, along with giant iron ore and coal pits, offer an unexpected boon to a South African economy that is slowly recovering from its sharpest contraction in a century.

Rising demand and prices for raw materials, including platinum group metals, iron ore, manganese and coal, are generating record profits for mining companies and boosting government revenues. Even then, decades of declining production and reluctance by investors to build new mines are jeopardizing the industry’s prospects.

“Last year we were concerned about the lack of space to support the economy amid the severe consequences of the pandemic,” said Elna Moolman, South African economist at Standard Bank Group Ltd., in an interview. “The recovery in demand for raw materials and their prices is providing very strong support to the economy.”

President Cyril Ramaphosa said last week the “important role” the sector will play in accelerating South Africa‘s recovery from last year’s coronavirus-induced crisis.

The mining industry often takes center stage when South Africa’s economic fortunes collapse. Its gold industry, once the largest in the world, has been the foundation of the country’s transformation into the most industrialized economy on the continent.

Bullion sales shielded the economy from the impact of the collapse in oil prices and the dollar in the 1970s, and a decade later, international outrage against the apartheid regime led to exits. massive amounts of capital. The commodities boom of the 2000s provided the Treasury with a war chest to withstand the devastating effects of the global financial crisis.

Mining industry output jumped 18.1% in the first quarter from the previous three months, supporting more than expected growth. The sector accounted for 9% of gross domestic product during the period.

Last year, the mining industry, which employs more than 451,000 people, accounted for 8.2% of GDP, according to the Minerals Council South Africa, an industry lobby group.

Fiscal year revenues through March exceeded budget estimates for the first time in five years as the industry drove higher corporate income tax collections and led to a main budget deficit lower than expected.

This allowed the Treasury to reduce the amount of debt on sale at its weekly auctions for the second time since March and bodes well for its plans to achieve a primary surplus in fiscal year 2024-25 and stabilize debt to 88.9% of GDP the following year.

Exports of platinum group metals from the world’s major platinum suppliers jumped 40% in 2020, even as covid-19 disrupted operations and reduced production, the national statistics agency reported in April. Sales of PGMs, which are in demand because stricter emission rules stimulate their use in automotive catalysts for vehicles, netted $ 13.3 billion amid rising prices for palladium and rhodium.

South Africa’s terms of trade – a measure of export prices relative to import costs – have increased 12% in the past year and more than 20% since the end of 2018, as the global economic recovery from the pandemic increased demand for commodities, according to HSBC Bank Plc economist David Faulkner.

The windfall is “one of the biggest gains on record, with past experience highlighting how South Africa’s macroeconomic fortunes can tilt on favorable commodity prices and an external environment. favorable, ”Faulkner said in a note. “The result was a period of respite, relief and coming together.”

Nonetheless, a failure by Ramaphosa’s government to take advantage of the rally in raw materials to accelerate a series of reforms and attract investment to boost growth and create new jobs could thwart recent budget gains. The South African Reserve Bank predicts that the rally in commodity prices may be temporary.

While mining production has rebounded to pre-lockdown levels, the industry’s full potential is constrained by challenges ranging from inadequate electricity supply to regulatory uncertainty, according to the Central Bank’s Quarterly Bulletin released on June 29.

“These are economic challenges that will require sustained political action to reverse,” Faulkner said. “They also leave South Africa with balance sheet vulnerabilities that could be exposed if the recent rise in metal prices turns out to be transient or if risk appetite deteriorates.”

Katy F. Molnar