The world’s deepest precious metal mines, along with huge iron ore and coal mines, offer an unexpected boon to a South African economy slowly recovering from its biggest decline in a century.
Rising demand and prices for raw materials, including platinum group metals, iron ore, manganese and coal, are driving record profits for mining companies and propping up government revenues. This also applies if the decade-long dwindling production and the reluctance of investors to build new mines affect the prospects for the industry.
“Last year we were concerned about the lack of space to support the economy amid the severe impact of the pandemic,” Elna Moolman, a South African economist with Standard Bank Group Ltd., said in an interview. “The recovery in demand for raw materials and their prices is very supportive of the economy.”
President Cyril Ramaphosa said last week the sector would play “a significant role” in accelerating South Africa’s recovery from last year’s coronavirus-induced slump.
The mining industry is often the focus when South Africa’s economic situation wanes. Its gold industry – once the largest in the world – underpinned the country’s transformation into the most industrialized economy on the continent.
The sale of gold bars dampened the economy against the effects of the oil price and dollar collapse in the 1970s and resulted in massive capital outflows a decade later as international outrage against apartheid rule. The commodities boom in the 2000s provided the Treasury with a war chest to withstand the devastating effects of the global financial crisis.
Production in the mining industry increased by 18.1% in the first quarter compared to the previous three months and thus contributed to stronger growth than forecast. The sector accounted for 9% of gross domestic product in the reporting period.
According to the Minerals Council South Africa, an industry lobby group, the mining industry, which employs more than 451,000 people, represented 8.2% of GDP last year.
Revenue for the fiscal year ended March exceeded budget estimates for the first time in five years as the industry fueled an increase in corporate tax collections and resulted in the main budget falling below projections.
This has reduced the amount of debt offered at its weekly auctions for the second time since March, and bodes well for its plans to generate a primary surplus in budget year 2024-25 and stabilize debt at 88.9% of GDP the following year .
Exports of the world’s leading platinum suppliers of platinum group metals rose 40% in 2020 despite Covid-19 halting operations and cutting production, the national statistics agency reported in April. Sales of PGMs, which are encouraging their use in automotive auto catalytic converters due to stricter emissions regulations, were $ 13.3 billion amid a rally in palladium and rhodium prices.
South Africa’s terms of trade – a measure of export prices relative to import costs – rose 12% last year and more than 20% since late 2018 as the global economic recovery from the pandemic increased demand for raw materials. according to HSBC Bank Plc economist David Faulkner.
The trade profit is “one of the strongest gains on record, with past experience showing how South Africa’s macro-wealth can be affected by cheap commodity prices and a friendly external background,” Faulkner said in a note. “The result was a time of calm, relief and rally.”
Still, a failure by the Ramaphosa government to use the commodities rally to drive a series of reforms and attract investment to fuel growth and create new jobs could offset recent fiscal gains. The South African Reserve Bank predicts that the commodity price rally could be temporary.
While mining output has declined to pre-lockdown levels, challenges ranging from inadequate power to regulatory uncertainty limit the industry’s full potential, according to the central bank’s quarterly bulletin released on June 29.
“These are economic challenges that require sustained political action to reverse them,” said Faulkner. “They are also leaving South Africa with financial weaknesses that could be exposed if the recent surge in metal prices proves temporary or risk appetite turns sour.”