The total market capitalization of the mining industry in South Africa stands at $33.94 billion with an increase of $4.37 billion from previous year of 2017
- Definition / Scope
- Market Overview
- Market Risks
- Top Market Opportunities
- Market Trends
- Industry Challenges
- Technology Trends
- Pricing Trends
- Regulatory Trends
- Market Size and Forecast
- Market Outlook
- Distribution Chain Analysis
- Competitive Factors
- Key Market Players
- Strategic Conclusion
Definition / Scope
Mining is the process whereby the advance metals and minerals are extracted from underneath the surface of earth. Some of the common metals which are mined are gold, silver, diamond, coal, manganese, tantalum, copper, tin, nickel, bauxite (aluminum ore), iron ore etc.
Mining is a very profit-making business as the companies involved in such businesses are usually prosperous and the government of the country also earns revenues whereas the workers receive incentives and attractive wages.
Mostly the metals which are derived from mining are very useful commodities as each one of these are used for production of various goods. For instance, the iron ore is the raw material used to produce steel, silver, gold and diamonds are used in creating jewelries and copper and tin are used in making cookware etc. Thus, all these commodities can be sold to respective industries which require them for production of other goods.
South Africa has a well-reputed image for its mining sector. It is a sole country which is rich in several types of mineral resources and reserved and is also major producer with an estimated worth of $2.5 trillion. It has the fifth largest mining sector in the world.
As of 2017, the contribution of this sector to South Africa’s GDP stood at 8%. Among various types of commodities crude oil and bauxite are not available. This sector is economically important for the country as it is the major foreign-exchange earner with gold solely accounting one third of the total export amounts.
The core strengths of the mining sector in South Africa include a tremendously high level of technical and production expertise, and comprehensive research and development activities.
One of the major reasons that the country has received competitive edge in the world market is due to the innovation in technology that are groundbreaking. For instance, these technology instantly convert the superfine low grade resources to refined high quality unit output.
As South Africa is rich in metals and minerals, 60% of the exports are constituted by mining industry followed by 8 major commodities in which it has competitive advantage and they are:
- Gold- South Africa has 11% of the total gold reserves in the world with 5% of the global gold mining accounted by the country.
- Platinum- About 73% of the total platinum mine production is supplied by single nation: South Africa
- Iron ore- 20% of the mined commodities of South Africa is accounted by iron ore and it has higher export value than that of gold or platinum
- Others- These include commodities like vermiculite and chromium whose large reserves are held by South Africa but due to commodity slump the country is not benefiting much from the exports.
- Diversified- It includes commodities such as coal in which South Africa is ranked at the 6th position for exporting mined coal in the world with 75.4 million tonnes of production annually. Another major metals are copper and diamond where diamond exports in the world is accounted by South Africa at 23% alone.
Illegal mining is one of the activities which is prevalent in the mining industry of South Africa. Every year, the mining of metals especially, diamonds are carried in an illegal manner which is estimated to be more than $490 million every year. In the global scenario, South Africa is the country which is mostly impacted by such activities.
Top Market Opportunities
As new technologies that are used nowhere in the world is being exercised in the mining sector of the country. At present the country has top class processing facilities that is targeted at various resources produced in South Africa such as gold, platinum, carbon steel, stainless steel and aluminum.
The industry can add value to their commodities and increase both demand and price by downstream processing different types of metals and minerals extracted from the mines. Further, wide range of gems besides gold and platinum are available in South Africa which are becoming part of luxury class jewelry and the potential reserves holding these gems are left unexplored. Thus, discovery of these world class deposits can further boost the sector economically.
Recently, South Africa has also shifted their attention to the rare earth mining in the Namaqualand region. In the world market, this sector is currently dominated by China, which controls approximately 90% of the world’s available supply of rare earth minerals.
Rare earth minerals are of considered important as they are the minute particles used in smartphones, high-tech weaponry, electric cars and a host of other electronics. As these tech devices are being manufactured every year in billions of numbers, the demand of the resource is likely to stay for a long time.
The South African mining industry has embraced the innovation and technology very well. The emerging technologies are adopted by number of mining companies. One of the most used technology at recent times is the remotely- maneuvered drones used to survey opencast mines.
Similarly, various other techniques such as autonomous drilling, proximity devices, collision awareness systems for mine vehicles and trucks and other mobility solutions are few examples.
Use of technology has definitely improved the quality and efficiency of mine extraction of the companies in South Africa and due to this the commodities extracted here are demanded highly and also increasing number of investors in the industry.
As of 2017, the expected capital spending in the mining sector in the upcoming four years will reach $10.18 billion. The capital expenditure in a more favorable environment for another three years is expected to add an amount of $ 8.56 billion.
Thus, the capital expenditure which is foretasted is 84% higher than that at the present. This would not only induce the developments in the industry but also generate more employment creation, almost 48000 people.
As the coal sector has been a consistent performer it is expected to have 42% increase in investment but only 31% employment contrast to gold mining which is going to have 62% employment creation but only 31% capital expenditure. Also, the platinum group metals are expected to experience rise in 46% capital expenditure. Rising capital expenditure and employment creation is expected to boost the mining industry to another level.
As platinum and gold are both luxury class commodities and decrease in prices of these commodities have put pressure upon the mining companies that are extracting these precious metals. The effect of decrease in prices has further impacted the market capitalization of these companies.
Although, companies have tried to keep the costs low as possible but the decrease in number of unit of extraction of gold and platinum has further increased the costs that has led to negative margins and is hindering the sustainability of these companies.
The Iron Ore grades continue to decline which threatens the position of the country to determine how much of the minerals are economically extract able. Indeed it cannot be operated if the extraction of resources create huge costs that which later on cannot be realized if the expected price is not met.
Another major problem that exists with the mining industry in the country is regarding the capital allocation which is inefficient, with cost over-runs that have been typically of the order of 20%- 30% on major projects.
Another obstruction is created by the expensive yet inadequate and unstable electricity supply, and by capacity limitations on links from mine sites to export terminals additional costs are being incurred.
Mining industry keeps adding value to all the stakeholders. However the return distributed to the shareholders is quite less in comparison to the returns distributed to other stakeholders.
Employees get a 40% share from the return in form of incentive and wages followed by government who receives royalties, taxes and payrolls with 19% of share but the shareholders receive only 2% of the return. Due to this fact, investors’ do not realize any great prospect with investing in mining industry.
Another major challenge for the industry is to manage costs. Where the number one driver of costs within the industry is the labor wages. The number of companies involved in the sector are agreeing to increase the wages over three year period because the employees have greater bargaining power and employee turnover is something that the companies want to avoid to possible extent.
Other cost drivers of the industry such as retrenchment costs, transportation, utilities have also experienced increase on an annual basis.
The Mandela mining precinct is a collaborative project of the government with the Council of Scientific and Industrial research to revive the falling mining industry of South Africa and improve the technological base of mining in the country. The various technological means through which the industry will be showing competitive advantage and have manufacturing capabilities are to be launched soon and they are:
- Digital gaming: The site of Mandela Mining Precinct in Melville also contains an experiential mining game which has been developed to understand the critical challenges being faced by the industry and how it actually works in a system. The simulation game will help companies to look for real solutions which are most effective in a similar context that is formed in the game by creating a replica of the actual mine. This game also includes rock falls and creates risky situations which will help to train the laborers to respond accordingly.
- Robots: The robotic technology is intended to be used in the extraction in mine because the safety issued are one of the major risks involved in mining industry. The Precinct is on its way to develop robots that can be sent inside the mine to measure a number of risks that could exist before the actual extraction occurs. For instance, the hazardous gas that could be present in the mine can be detected prior, a video footage can be incorporated within the robot to view the actual sightings inside the mine. These robots reduce the number of people required inside the mine and further lessen the amount of transportation and electricity consumed at present.
- Seeing through rock: This is an interesting technology which has been gaining attention of the researchers at Precinct because it enables a see-through or radar technology which can be used to predict the composition of the rock and what lies beneath. As South Africa was the leader of the radar technology during World War II, the precinct is heading to collaborate with industry, government and universities to enable this technology in the mining sector.
- Using digital means: It will enable the environmental monitoring inside the mine such as that of the air quality, noise and dust gas. A digital system which is integrated with the machine used in extracting will allow the real time information about the movement of rocks and allow efficiency of the extraction process.
- Mining without explosives: The traditional mining is too risky business as the explosives are used to break the rocks which sends out toxic fumes but the alternative procedures may include drilling holes or cutting the rocks and these technologies are expected to be economically feasible as well as lead to higher resource exploitation. This will not only maximize the utilization but will also not require people on hand to operate which could make abandoned mines sustainable again.
The only commodities which have experienced an increase in value are coal and iron ore and the growth of the prices are noted since January 2016. The price of iron ore has remained volatile over the period of time but is foretasted to remain stable for few coming years since 2018. Similarly, the price of gold has remained stable over past 2-3 years but has been identified with marginal decrease since June 2018.
The average price of platinum has decreased by 5% and is trading at 35% below the price in which it was trading during January 2015. The decrease in price of this metal has been compensated by increase in other similar metals such as rhodium, palladium, nickel and chrome.
The four major revenue generating commodities for South Africa are iron ore, coal, platinum and gold among which coal is the number one performer followed by iron ore whereas the platinum has declined and is trading at the 2003 level index in terms of price.
During the Mining Indaba at the Cape Town International Convention Centre (CTICC) held in February 2018 the Mineral resources minister Mr. Mosebenzi Zwane and Trade industry Minster Dr. Rob Davis promoted the mining sector of the country hugely.
Both of them discussed about the importance of benefaction of the country’s mineral resources to augment the South African economy. Notable progress has been made in this context particularly a prototype to conduct the process has been built by partnering with a local titanium and bus body manufacturer called Busmark.
Another program called the Broad-Based Black Economic Empowerment’s Equity Equivalence Investment Programme (EEIP) initiated by the government will spend over R1.3 billion into a leading manufacturing company of mining equipment’s called Caterpillar will further empower local mining enterprises over period of next ten years.
About 3,900 jobs both direct and indirect are expected to be created through this partnership. Another Initiative called InvestSA where the government will support investors to invest in the sector and provide them with favorable conditions. Further, the investors are also expected to be honest and stay in legal boundaries to receive full partnership of the government.
Government of the country has been supporting investors and mostly local mining companies within the country. The partnership of mineral resource and trade department launched Junior Miners Program in 2017 which has helped to bring over 50 junior minors into the sector.
Further through the Mandela precinct project, the government will continue to further promote the country’s mineral strength with the support of Research & Science and Technology by displaying the robotic technology.
Market Size and Forecast
The total market capitalization of the mining industry in South Africa stands at $33.94 billion with an increase of $4.37 billion from previous year of 2017. However, the figure was much higher in 2016 with $39.43 billion respectively. In regard to the various types of commodities mined the revenues were as follows:
- The highest revenue earning commodity was coal with $ 9.79 billion,
- Secondly, the platinum commodity mining earned revenue of $ 6.83 billion,
- Thirdly, the gold segment earned revenue of $5.63 billion,
- Fourthly, Iron ore earned $ 4.43 billion,
- The fifth position was grabbed by the Manganese which earned $2.75 billion in revenues and
- Finally the chromium earned $1.55 billion in revenues as of 2018.
At present the entire mining industry of South Africa is sustained by the coal and manganese revenues. Coal is the leading commodity in the industry at present. Further the segments gold and platinum have shown decline of 4% and 5% in market capitalization along with 2% decline in revenues from both the segments.
The commodities such as coal has increased its share in total revenues by 1% and manganese by 2% respectively. Besides these commodities there is one particular commodity which is the iron ore and its market capitalization has increased by 7% in 2018 which reveals that there is greater potential for the industry to thrive contributed by the increasing demand of this metal.
Distribution Chain Analysis
The mining activities within South Africa is mostly concentrated in the North-east region of the country. Further, the highest number of mines are that of gold followed by coal. The mines present in the country extract up to 20 different metals/commodities.
The most significant factor for the Mining industry to thrive in South Africa in future would be because of the innovation that the country is leveraging into this sector.
Innovation is giving the country’s mining sector an edge in the global standpoint. The awareness of the importance of technology usage and the readiness of companies to use the technology is driving the productivity of sector.
The risks such as increasing costs are all mitigated if the companies adopt to the new technologies. Mining sector alone compromises of 12% of total industrial investment and is likely to increase in near future as it is one of the top ranked economies in Africa to have a solid technology absorption which increases its competitiveness. The country is available with the future technology and excellent team of researchers and scientists.
The mining industry of South Africa is becoming technology savvy in all the components such as exploration, mining, mineral processing, benefaction, associated health and safety issues, and environmental issues.
Thus a value chain is created if all the components embrace technology in operations. As drill and blast mining are the major risks associated with the mining industry, the mechanized mining is one concept which will reduce the risk to the labors and efficiently extract minerals from mine.
Alternative extraction mechanisms are being developed in South Africa and if these are implemented then overall productivity and competitiveness of the sector will rise bringing in more investors into the sector and also increasing the investments of local companies offshore. The mechanization will also help to explore mined left unexplored and help the industry to increase its financial as well as global standards.
Key Market Players
As of 2018, according to the market capitalization the top 10 players in the South African Mining Industry are follows:
- Anglo American Platinum
- Kumba Iron Ore
- Exxaro Resources
- AngloGold Ashanti
- Gold Fields
- Northam Platinum
- Impala Platinum
Up till present the mining industry has been facing issues of volatile currency, labor productivity and high running cost issues which has hampered its potential to attract foreign direct investment. South Africa as a whole had received a level down credit rating which led the investors perceive that doing business in South Africa is unfavorable.
However, the outlook of the industry seems to be improving from here because of the new leadership in the government. The positive changes are likely to happen only if the companies focus on retaining employment, ensuring fair distribution of the country’s resource to the citizens of South Africa. A more transparent regulatory platform will definitely balance the investment in mining within the country and overseas.
Commodities in mining all over the world have some or the other challenges but the opportunities that lie behind are huge and these can be tapped with changes such as technology use and innovation. Once again, the country can become the leading commodity based countries in the world if it leverages onto the strategies mentioned above.