South Africa: More Upstream, Less Downstream Beneficiation
By Ross Harvey
South African mining data released recently reveals a 4.6% year-on-year production contraction to October. Coal, iron ore and gold were most heavily afflicted, while platinum group metals recovered from their 2014 slump with growth of 26.5%.
The rand continues to take a beating on global markets, presumably ahead of an expected credit rating downgrade by Fitch of South Africa’s sovereign debt. While this should make global exports of raw materials more attractive to consumer markets, the mining sector is hamstrung by rising domestic costs and global secular stagnation. Is the industry likely to recover?
As a mining jurisdiction, South Africa’s score (relative global rank indexed out of a maximum of 100) has fallen from 56.1 in 2011/12 to 52.6 in 2014 on the Fraser Institute’s Investment Attractiveness Index. The country ranked 64th out of 122 competitors in 2014, being eclipsed by Tanzania, Namibia, Botswana, Burkina Faso, Ghana, Madagascar and the Ivory Coast. Ireland came first. The Index is constructed by combining the Best Practices Mineral Potential Index, which rates regions based on their geological attractiveness, and the Policy Perception Index, a composite index that measures the effects of government policy on attitudes toward exploration investment.
An important caveat, however, is that respondents consistently indicate that policy factors account for only 40% of their investment decision.
This is often overlooked, especially as South Africa’s policy regime is regularly cited, domestically, as an explanation for declining exploration investment expenditure. However, in a commodity price downturn and global secular stagnation (a massive slump in total factor productivity growth in the world’s major consumer markets), it is this 40% that can make all the difference between attracting investment or not.
China, a major consumer of Africa’s raw minerals over the past decade, is shifting its economy away from export-led manufacturing into services and greater domestic consumption. While this is crucial for China to rebalance its overheated economy, it means that the demand for products like coal and iron ore, in which South Africa is rich, will necessarily be on a new (lower) price trajectory.
But greater emphasis on consumption, strongly encouraged in China’s 13th Five-Year Plan (2016-2020), will mean greater demand for products like copper and platinum group metals, inputs into high-end technology products such as tablets, smartphones, solar panels and catalytic converters. If South Africa wants to ensure that its geological attractiveness translates into investment, policy reform is all-important, as is intelligence gathering about the composition of future global mineral demand.
The Africa Mining Vision advocates ‘thinking outside the mining box’ and ‘opening out mining’s enclave status so that Africa can move from its historic status as an exporter of cheap raw materials to manufacturer and supplier of knowledge-based services.’ Unfortunately, in South Africa, that kind of sentiment tends to be interpreted in a narrow way, with a resultant over-emphasis on metallurgical downstream beneficiation as the road to inclusive growth. This is understandable to the extent that Africa has been an exporter of high-bulk, low-value commodities and an importer of high-value, low-bulk products.
These ‘policy doldrums’, as Turok calls them, are hurting the long-run growth potential of South Africa’s mining industry.
A new SAIIA paper agrees that South Africa requires rapid mining policy reform that will cohere with the National Development Plan’s calls for greater stability and predictability (along with less definitional ambiguity and ministerial discretion). The paper also interrogates the arguments that have been offered in favour of downstream beneficiation, and suggests that greater emphasis needs to be placed on upstream and horizontal linkages. Perhaps more importantly, South Africa has to move into a different ‘product space’ that is less directly dependent on mining, as minerals are ultimately finite. This idea has been best articulated by Ricardo Hausmann.
The concept of a ‘product space’ describes the network of relatedness between products – the ‘similarity of inputs required by a certain activity including everything from particular skills, institutional and infrastructural requirements, technological similarity and the like’. He gives the example of Chile, which exports salmon, and Malaysia, which exports microwaves. If the microwave industry entered trouble, it’s ‘relatively easy to redeploy your capabilities from microwave ovens into many other electronic products’. With salmon farming, this is not the case. Ultimately, we have to move away from the idea that, because we have iron ore in the ground, we should necessarily be producing steel.
Perhaps we should rather be investing in industries that can harness skills that have been developed in mining. The difficulty of course is that the options in that respect are not obvious – mining has put South Africa into a difficult product space with few related products.
The SAIIA paper concludes that: ‘Mineral rents could provide the impetus for upstream technology and product development, but the mining industry has to be allowed to grow first.’
Ross Harvey is a senior researcher on the resource governance programme of the South African Institute of International Affairs.