On 2 December, six West African heads of state stood up to the IMF at a conference it organised, arguing that development will come to a standstill if the Bretton Woods institutions do not change their approach.
South Africa miners need price swings just to stay afloat
An unpredictable cost-base is forcing South African miners to cross fingers and hope for higher prices
At least 15 mining firms in South Africa have received notices of strikes to be held this week in support of miners at Sibanye-Stillwater on strike over wages and job cuts, according to Minerals Council South Africa.
- The Association of Mineworkers and Construction Union (AMCU) has been on strike at Sibanye’s bullion operations since mid-November.
- AMCU represents the majority of workers at the country’s platinum mines. AMCU president Joseph Mathunjwa has threatened to shut down South Africa’s gold, platinum and coal sectors.
Yann Alix, head of Ashurst Africa in London, says that the news is “very serious indeed”, and will undermine one of South Africa’s key sectors. The companies are likely to contest the legality of the strikes, which will lead to “a long drawn-out process, costing a significant amount of money,” he says.
AMCU has also appealed Competition Tribunal approval of Sibanye’s deal with Lonmin, which the companies say will minimise job cuts. The appeal is set to be heard April 2.
Strikes now rarer, but more costly: In a broader perspective, the picture is brighter. The Mandela Initiative found in 2017 that the number of days lost to strikes in South Africa had considerably decreased since 2000. But when workers strike, they do so at greater time-cost to firms and gross value-added cost to the economy.
- Cost inflation and gold and platinum weakness meant that South Africa’s mining industry was loss-making in 2018. Labour is the biggest cost driver in the South African industry, PwC says in its SA Mine 2018.
- Companies affected include AngloGold Ashanti, Harmony Gold, Anglo American Platinum and Lonmin.
- According to Minerals Council South Africa, 71% of gold mining operations in the country were either marginal or loss making in 2018. More than 60% of South Africa’s platinum mining industry is loss-making or marginal, the council says.
- Labour costs in mining have been increasing faster than inflation, whilst revenue from metal sales has been declining due to low platinum prices, Minerals Council South Africa says.
- The prospect of further strikes “does not bode well” for South Africa’s January mining production figures due March 14, according to the Bureau for Economic Research at Stellenbosch University in South Africa.
A previous strike in 2014 led to platinum companies and the AMCU agreeing to a pay increase spread over three years. Anglo American Platinum sold four mines and two joint ventures because of the strike. The dispute involving 70,000 workers lasted 21 weeks, cost the industry 24bn rand ($1.7 bn), and resulted in 1.3m ounces of lost production, according to Mining.com.
Economic impact: The strikes come at a bad time for South Africa, which faces a general election on May 8, financial and operating difficulties at public electricity utility Eskom and pressure on its last remaining investment grade rating at Moody’s.
- If Moody’s follows S&P and Fitch in downgrading South Africa to sub-investment grade, the country would be removed from the Citi World Government Bond Index, forcing asset managers to sell their bonds.
- The South African economy remains “subdued”, hampered by challenges in mining production, low business confidence and policy uncertainty, the World Bank wrote in January.
“None of this is particularly helpful in the context of other ongoing issues in South Africa,” Alix says. Capital may be driven elsewhere, he says. “Investors will always be reluctant to invest in unstable markets.”
Are miners having to bet on higher prices? The spreading of the strike action shows the risk that South African miners who are unable to rein in labour costs are effectively betting on higher future prices for gold and platinum.
Mining companies can control costs, but not market prices. JP Morgan has forecast that gold will increase to reach $1,460 in 2020. Somewhat optimistically, the World Platinum Investment Council predicted that 2019 would see a “low level of mining disruptions” in South Africa this year. The council sees 2019 demand growth of 2% on investment and industrial interest.
Bottom line: In the light of the spreading strikes, then, investors with exposure to South African mining may need favourable metal market scenarios just to stand still.