Role of the South African Mining Industry in South Africa s Growth and Development Plans

Transcription

1 Role of the South African Mining Industry in South Africa s Growth and Development Plans Back ground presentation to a Harmony Sponsored Investor Forum, 25 March 2013 Roger Baxter Senior Executive: Economics & Strategy Presentation outline The Global Context The Local Context Recognising the industry s potential Why Mining is Crucial to South Africa Unpacking the growth constraints Resolving the challenges RSA Mining Putting South Africa First 1

2 Commodity outlook, short-term stress, long-term growth in demand SHORT-TERM WEAKNESS World economy is recovering from the 1st global recession in 61 years. Recovery is unevenly distributed, with advanced economies sluggish and developing countries growing at a faster pace. The recession in the Eurozone and the soft landing in the Chinese economy has negatively impacted South Africa. LONG-TERM STRUCTURAL FUNDAMENTALS IN PLACE The materials intensive nature of growth in emerging economies will escalate in the next decade caused by continued urbanization and industrialization. Supply will struggle to meet the growth in demand. Companies now focused on value vs growth. The prospects of Commodities at a global level are mostly driven by economic growth SINCE 2008, THE GLOBAL COMMODITIES MARKETS HAVE BEEN HIT BY THE MULTIPLE EFFECTS OF: The W shaped boom-recession-recovery-recession-slow recovery in the EuroZone due to the sovereign debt crisis The slowdown in economic growth in China (towards a soft landing). The V shaped boom-recession-recovery and then continued below potential growth performance of the US economy. BUT PROSPECTS ARE LOOKING UP: Despite ongoing structural issues the Eurozone is expected to post a modest positive growth rate in China s economy has stabilised and is expected to grow at >8% in The US economy is showing positive signs of recovery, with consumer confidence rising. 2

3 The World economy is recovering Economic growth rate in USA, EU and China % GDP growth rate China United States European Union Source: IMF WEO October 2012 Economic weakness in EU zone resulted in downward pressure on the spot price of Platinum GDP is a key driver to Pt GDP - % change Historic GDP & Pt Demand World GDP, % change Year Euro Area GDP, % change Pt Demand (koz) - RH Axis Financial Crisis koz Pt demand Pt demand is mainly driven by carbon emission legislation hence Euro dependence Europe consumes 40% of Pt demand and 40% is used in autocats Platinum has not recovered because its demand most impacted by Euro crisis and increased recycling Automotive producers have reduced load rates and thrifted away from platinum towards palladium Source: IMF, Johnson Matthey 6 3

4 Risks at the Global level remain. Gross public debt as a % of GDP % of GDP Germany Japan United Kingdom United States Source: IMF WEO Oct 2012 Despite the volatility in the short-term, the longterm fundamentals remain for in place for continued growth in commodity demand Long term drivers of the structurally driven commodities boom remain intact:» Trends in urbanization and industrialization appear to be entrenched for the next few decades in China, India and other EMs.» By 2050 another 3 billion people at the global level will urbanize. Most of this urbanization will take place in emerging market economies (UN population division).» The infrastructure expenditure to accommodate global urbanization is significant.» The quantity of minerals required to support this urbanization is significant. 4

5 Rising urbanisation, 3 billion people to urbanise by 2050 (most of the growth in Africa) 7.5 World urban population growth (Billion people) The world is set to urbanise close to another 3 billion people by the middle of the century Urban Pop. China India Other Asia Africa RoW 2050 Urban Pop. Source: UN, McKinsey Fixed investment will mostly be into infrastructure in emerging economies. Fixed investment expenditures % of GDP World Advanced economies Emerging market and developing economies Source: IMF WEO Oct

6 Top 6 minerals, expected greenfield production growth for the period Citibank - growth projects by commodity on a production volume basis, Nickel, 11 Uranium, 1 Copper, 27 Coking coal, 11 Gold, 15 Iron ore, 21 Source: CitiBank Thermal coal, 16 Shifting Risks: The Game is Changing (E&Y) (countries want a bigger share) Skills shortage 2. Industry consolidation 3. Infrastructure access 4. Maintaining a social license to operate 5. Climate change concerns 6. Rising costs (cost inflation) 7. Pipeline shrinkage 8. Resource nationalism 9. Access to secure energy 10. Increased regulation 1. Resource nationalism 2. Skills shortage 3. Infrastructure access 4. Cost inflation Capital project execution 6. Maintaining a social license to operate 7. Price and currency volatility 8. Capital management & access 9. Sharing the benefits 10. Fraud and corruption Source: Business Risks Facing Mining and Metals, , Ernst & Young 6

7 Presentation outline The Global Context The Local Context Recognising the industry s potential Why Mining is Crucial to South Africa Unpacking the growth constraints Resolving the challenges RSA Mining Putting South Africa First Perceptions about Mining by RSA s people in general Little link made between role of minerals and the functioning of a modern society. Little credit given to the mining industry for playing a key role in South Africa s economic development over past 130 years, which has transformed South Africa into the most industrialised country in Africa 7

8 Metals and minerals in a Smart Phone Copper (16 grams) ¹ Silver (0.35 grams) ¹ Gold (0.034 grams) ¹ Palladium (0.015 grams) ¹ Platinum ( grams) ¹ Ceramic magnetic switches containing rare earths ² Indium² Titanium dioxide ² Indium tin oxide ² ¹ source USGS ² source NRC critical minerals report Metals and Minerals in a car 960kg iron &steel 109kg Aluminum 22.7kg Carbon +Antimony, barium, beryllium, cobalt, gallium, gold, magn esium, molybdenum, neodymium, indium, palladium, Sulp hur, rhodium, silver, strontium, tin, titanium, tungsten, vana dium, zirconium. 19 kg Copper, 34kg for a hybrid 19kg Silicon 11 kg Lead 10kg Zinc 7.7kg manganese 6.8kg Chromium 4.1kg Nickel 0.4 kg Platinum 8

9 Even a Wind Turbine uses a significant amount of metals and minerals 335 tons of steel 4.7 tons of copper 13 tons of fiberglass 3 tons of aluminum 1,200 tons of reinforced concrete Even a bright smile, even comes from mining. Silica Limestone Aluminum Phosphate Fluoride Titanium Mica Petroleum 9

10 Perceptions and realities about mining Is a Dirt Digger PERCEPTION Is uncaring about the lives of workers and does not pay well Does not care about the environment, communities Poverty at the doorstep of prosperous mines Profits and benefits exported to a small bunch of Capitalists Resistant to Transformation Does not matter to SA- Ingi Saldago- Business Report- Eskom was right to switch off the Mines REALITY Another R300 billion and jobs created in downstream industries 67% reduction in fatality rate, average wages per employee up 12% p.a. Spent R1.4 billion on communities, R4 billion on skills and R25.8 billion in corporate taxes in Shareholders balanced 50% local, 50% offshore, R12 billion in dividends >R150 billion in BEE deals concluded, good progress on all pillars of Charter 19% of GDP, 50% of exports, 1.3 million jobs, 94% of electricity, 17.2% of corporate tax The ANC Mangaung Elective Conference ANC rejects wholesale nationalisation as a policy option. ANC has adopted the National Development Plan as a key strategic area. Over the next five years, the ANC will take decisive and resolute action to overcome the triple challenges of poverty, inequality and unemployment, which are at the heart of South Africa s socioeconomic challenges. The most effective weapon in the campaign against poverty is the creation of decent work, and creating work requires faster and more inclusive economic growth. Using South Africa s natural resources in a manner that benefits the nation as a whole. 10

11 The ANC Mangaung Elective Conference State intervention with a focus on beneficiation for industrialisation is urgently required. The state must capture an equitable share of mineral resource rents through the tax system. Strategic minerals will be investigated and declared. Strengthening of the state mining company. Mining should create safe and decent work, and mineral extraction should not compromise local communities or the environment. There is a need to develop and enhance mineral knowledge linkages. The Chamber of Mines supports the ANC Policy Resolutions A greater degree of certainty is emerging. In a number of areas the how is critically important. Encouraging further beneficiation is an important issue and further work on implementation plans is underway. Energy security can be guaranteed through private sector investment and cooperation between government and the private sector. 11

12 Draft MPRDA Amendment Bill, gives expression to MIGDETT process and ANC Policy Resolutions Consolidate environmental licensing under DMR as the lead authority (move to smart tape away from red tape). Streamline license application system. A strong emphasis on promoting greater downstream beneficiation. Details of the beneficiation implementation plans still being developed. Penalties for non-compliance are increased. Stakeholder engagement process on Amendment Bill underway. Mining taxation review announced The State President and Minister of Finance have announced a review of taxation, including a review of mining tax in 2H13. The Chamber looks forward to engaging government on this important review. Our objectives are to focus on a competitive, stable and predictable mining taxation and royalty system that encourages growth and investment, and fairly balances these industry needs with those of the State. The Treasury has a strong track record of significant engagement with affected stakeholders and pragmatism on competitiveness drivers. The taxation review will need to consider not only direct taxes and royalties, but the plethora of other indirect taxes (including social taxes) that the industry contributes to the country. 12

13 RSA mining sector hit by unprotected strikes The industry was hit by a set of unprotected strikes in Platinum, gold and iron ore were all affected by the strikes. A confluence of factors contributed to the situation in certain areas such as Rustenberg: Weak local government High growth in urbanisation High levels of poverty and unemployment Inter union rivalry, etc. About R15 billion in production and sales was lost due to these strikes in Marikana tragedy Illegal strike 50 people killed in August 2012 Front line news around the world (SA s image as investment destination tarnished) Contagion to rest of mining sector Rand weakens Commission of enquiry appointed Sector moves quickly to calm down the situation and engage key stakeholders Industrial unrest impacts platinum, gold and iron ore sectors 13

14 The recent negative news items have resulted in volatile exchange rate Presentation outline The Global Context The Local Context Recognising the industry s potential Why Mining is Crucial to South Africa Unpacking the growth constraints Resolving the challenges RSA Mining Putting South Africa First 14

15 Role of Mining often Underestimated Key foundation industry (enabled SA to become the most industrialised country in Africa) Large employer of semi-skilled and skilled workers Critically important NET generator of FOREX Significant multipliers into the rest of the economy (large procurement, investment and wage spender) Equally important, very large magnet for foreign investment inflows (which help fund current account) Significant contributor to transformation in the economy The linkages of mining to the economy First round impact: GDP R59 billion or 2.3% of GDP Jobs Mining s direct contribution: GDP R230 Billion or 9% of GDP Jobs Indirect impact GDP R42.7 billion or 1.7% of GDP Jobs 149,898 The Induced Impact: GDP R136,1 billion or 6% of GDP Jobs 496,319 The Total Contribution of Mining to the Economy GDP R468 billion or 18.7% of GDP Jobs 1,353,383 (16.6% of total employment) Source: Quantec & IDC, 2010 data 15

16 Downstream beneficiation is far bigger than people think! About 99% of RSA's cement is made locally from locally mined products 80% of RSA's steel is made locally from locally mined iron ore, chrome, manganese, coking coal 30% of RSA s liquid fuels are produced from locally mined coal 94% of RSA's electricity is produced from locally mined coal Most of our domestic chemicals, fertilisers, waxes, polymers, plastics, etc., are fabricated using locally mined minerals & coal 13% of the world's platinum catalytic converters are made in RSA, and so on Overall another R300 billion in sales value and > jobs are created in the downstream beneficiation industries. Extra value is being created where the commercial opportunities exist Side-stream beneficiation is a significant industry in its own right Significant industries have developed to provide goods and services to the mining sector: The Johannesburg Securities Exchange was established in 1887 and is the world s 22 nd largest exchange. Financial and legal services were started to support mining and now accounts for 20% of GDP. Significant education, skills development and knowledge cluster has evolved and developed around mining. The development of infrastructure (rail, ports, electricity, etc.) is still dominated by demand from mining. A significant manufacturing sector still supplied goods into mining, steel, mining equipment, explosives, etc. Overall, this industry is significant (2.3% of GDP and > jobs) and has become a big exporter into the rest of Africa. 16

17 Minerals & Metals In South Africa: A Significant Value Added Cluster Mining is one of the most extensive and best developed South African industrial clusters Extensive sciences & technology network/research Broad expertise in geoscience Large exploration expertise Large number suppliers of equipment and services World class educational and skills development systems and institutions Sophisticated financial institutions (JSE, banks, legal) Large scale smelting and refining. Exploration Geoscience Suppliers Smelters Refineries Science Technology Mining Professional schools Governance Policy Equity financing South Africa has significant geological potential Global rank South Africa,is not mature mining real estate! The country still has significant geological potential South African reserves for key minerals, 2008 PGM's Manganese Chromium Gold Alumino-Silicates Vermiculite Vanadium Zirconium Minerals Titanium minerals Fluorspar Antimony Phosphate rock Nickel Uranium Lead Coal Zinc Silicon Iron ore % of global Source: DMR/USGS 17

18 Mining has significant potential If growth constraints can be removed mining can: Grow at 3% to 5% p.a., resulting in a much more balanced country growth rate (double size of mining by 2028). If mining had grown at same pace as rest of economy between 1994 and 2011, it would have increased the country s growth rate to 3.9% from 3.2%, a significant difference. At a 5% growth rate, the mining industry can increase exports and reduce the savings-investment constraint. Add another to direct jobs. Rough growth potential of some of the bulks: Iron ore could double production within 5 to 10 years to >100 million tons (MT) per year by Employment could rise from to people. Biggest constraints: rail Coal production has to rise from current 254 MT p.a. to 355 MT by 2020 to satisfy Eskom, Sasol & exports. Jobs could increase from current to by Biggest constraints: rail, regulatory issues (environmental). Manganese could double/treble production from the current 7.2 MT to 15MT/20MT by Employment could rise from current 5879 to > in this period. Biggest constraint: lack of access to efficient cost competitive heavy haul rail These three bulks could significantly increase their export earnings and GDP contribution and add about jobs, if the constraints are resolved. 18

19 A high road is very possible for South Africa s mining sector Two scenarios were developed for the forward looking scenarios Production growth Source: McKinsey Current constraints are relieved Constrained by current bottlenecks Low road B A Costs grow at historic rates High road Cost increases are reduced to half of historic rates Cost Management C D But RSA mining has not met its potential RSA mining missed out on the last commodity boom with a - 1% p.a. decline in mining GDP between 2001 and 2008, versus 5% growth rate in top 20 mining economies mining sectors. Sector has been affected by a set of unprotected strikes. Investor confidence in RSA mining and RSA economy has been affected. RSA only accounts for 3% of new Greenfields projects in next decade (versus 38% share for Australia) despite having world s largest in situ value of mineral resources. The largest component of mining, platinum mining, is experiencing significant challenges with about half of the industry being marginal at current prices. 19

20 Presentation outline The Global Context The Local Context Recognising the industry s potential Why Mining is Crucial to South Africa Unpacking the growth constraints Resolving the challenges RSA Mining Putting South Africa First South Africa: Going for Sustainable, Balanced and Labour Absorptive Growth Progress has been made to get the economy back on to a higher growth path (3.2% 1994 to 2012). However, SA s labour participation rate at 42% is low vs peers (~61%), its unemployment rate is too high (>20%), its levels of income inequality are very high (Gini coefficient 0.59) & too many people are caught in the poverty trap. Government has now placed the creation of meaningful employment as a central objective of economic policy. All parties recognise that higher levels of sustainable, balanced and labour absorbing economic growth is key to reducing unemployment Government has developed the National Development Plan and the New Growth Path focusing on economic growth and employment creation. 20

21 While South Africa s growth rate has risen to 3.2% p.a , it is just too slow to meaningfully tackle unemployment & poverty South Africa Too much of the economy s recent growth has been driven by credit fuelled non-tradable demand side, & tradable export sectors have languished South Africa: Contribution to GDP in real terms, nontradable vs tradable sectors of economy (real terms) R'millions Non-tradable sectors Nontradable Tradable Source: StatsSA 21

22 The Only Way that South Africa can reduce its high unemployment rate is through more balanced growth and the growth of the key export sectors (e.g. mining) RSA cannot solve its unemployment and poverty challenges on the basis of an advanced economy American growth model (credit fueled, consumer driven, import intensive and imbalance creating growth in the non-tradable sectors). All parties recognise that higher levels of sustainable, balanced and labour absorbing economic growth is key to reducing unemployment (i.e. get tradable export sectors to boom). Government has developed the New Growth Path focusing on economic growth and employment creation. To ensure more balanced and higher levels of growth & job creation the country needs its tradable export sectors to grow at a much faster pace THIS IS WHERE MINING FITS IN. Mining has a very large employment, foreign exchange earning and GDP multipliers. The New Growth Path and National Development Plan both recognise the critically important role that mining can play in growing investment, exports, GDP and the multiplier effects. 22

23 Presentation outline The Global Context The Local Context Recognising the industry s potential Why Mining is Crucial to South Africa Unpacking the growth constraints Resolving the challenges RSA Mining Putting South Africa First Competitiveness drivers of mining Inherent potential Natural resource endowment Human capital/ skills Geographical factors Competitiveness drivers Market context Factor market efficiency Industry structure Enabling factors Infrastructure Ease of doing business Social licence Security of tenure Rule of law Macroeconomic stability Regulatory environment Regulatory and legal requirements Institutional capacity Product demand Accessibility of markets Domestic demand International demand Competitiveness threat Mixed picture Competitive advantage The key threats to competitiveness of SA mining are: Infrastructure (electricity, rail) Policy uncertainty and some challenges in regulatory framework Social licence to operate 1 Human capital/ skills Institutional capacity 1 Dealt primarily in sustainability and transformation workstreams SOURCE: McKinsey & Company Rapidly rising costs 23

24 Enabling factors: Ease of doing business SA favourably ranked in top quartile. Infrastructure at a general level SA s infrastructure is ranked as reasonable, but specific constraints have emerged (rail & electricity) Social license to operate (safety, health, environment, etc.,) - important component of the industry s long term license to operate. Macroeconomic stability the country has adopted prudent macroeconomic policies, but volatile exchange rate is a challenge. Political stability SA is a stable constitutional democracy. Technological readiness SA ranks in 3 rd quartile, but firm level technology absorption is in top quartile. Business sophistication SA ranked favourably in 2 nd quartile. Innovation capability SA ranked favourably in 2 nd quartile, with quality of R&D & scientific research organisations in top quartile. South Africa is ranked 39 th easiest place to do business (out of 185 economies) Good Bad 24

25 South Africa has excellent policy potential assuming best practice The country s mineral laws are congruent with global best practice (MPRDA, taxation system and Royalty Act). Recent policy uncertainty regarding the nationalisation debate has been negative (but is now resolved). Unfortunately, this uncertainty is reflected in the 2013 Fraser Institute Survey which ranks South Africa in position 64 out of 96 countries. An MPRDA Amendment Bill has been released for public comment (significant engagement is taking place). A country taxation review is scheduled for 2h13. Infrastructure challenges/opportunities: Example of Rail Only 13% of SA s freight is carried by rail, but more than half of Transnet s business is bulk commodities. Coal exports on Coalink line in 2012 only back to 2005 levels and below installed capacity of 74 MT and 90MT capacity of RBCT. Cost effective rail capacity critically important for growth of the coal, manganese and ferro-chrome sectors. Getting rail right presents significant opportunities for unlocking growth in bulk commodities. Mixed messages from Transnet they believe bulk exporters are cross-subsidised by other users. 25

26 Despite having 80% of the world s HG manganese, RSA supplies only 15% of supply % of global Global manganese basins and production China Brazil Australia South Africa Other reserves Share of global production Input costs are increasing at a very rapid pace A large proportion of the input costs are driven by administered prices such as electricity & water or by international pricing (steel and diesel). Between : Electricity prices to the mining sector has risen from 18 c/kwh in 2007 to 61 c/kwhin This is a significant 238% increase. Diesel costs have risen by an average of 15.7% per annum on the back of higher international oil prices (up 69.3% overall). Reinforcing steel prices have increased by 15.3% per annum in the same period (57.5% in total). Average remuneration paid per worker employed in the RSA mining sector grew by 12% per annum between 2007 and 2012, nearly 5 percentage points higher than producer inflation. 26

27 Inflation in input costs has simply been too high (and mostly out of control of the miners) Cost inflation affecting the mining sector, average annual increase in costs, 2007 to 2012 (Source: StatsSA, CoM EAU) Electricity prices for mining Pgm mining cash costs per 4e ounce Diesel Reinforcing steel Labour costs Structural steel Cement Total producer price inflation rate Mining machinary Presentation outline The Global Context The Local Context Recognising the industry s potential Why Mining is Crucial to South Africa Unpacking the growth constraints Resolving the challenges RSA Mining Putting South Africa First 27

28 Resolving the challenges in the mining sector Very strong level of commitment in MIGDETT by industry, government and labour leadership to resolving the challenges. MIGDETT Platinum Task Team looking at short term and long term solutions to challenges faced by PGM mining sector Commission of enquiry into the Marikana tragedy. Signed a stability and peace accord with all the stakeholders in the mining sector. PGM sector investigating move to collective engagement on wages. Engaging all stakeholders including government, unions (including AMCU), the investment community, local communities and other parties. The mining industry is making a positive contribution The industry is making significant progress on the Mining Charter targets and is committed to Placing South Africa First. Industry is contributing significantly to community development (R1.4 billion last year), but can make this more effective in terms of better partnerships. Other role players have just as important role to play (such as local government) in service delivery and community development. Industry spent R4 billion on skills development and training (excluding the skills levy). Average wages in mining lift the average for all workers (R89 billion paid in wages in 2011). R25.8 billion paid in corporate taxes in Industry is procuring significant % locally. 28

29 Presentation outline The Global Context The Local Context Recognising the industry s potential Why Mining is Crucial to South Africa Unpacking the growth constraints Resolving the challenges RSA Mining Putting South Africa First What is the mining sector doing to help resolve issues?. The Mining Company Leadership through the Chamber have agreed to Put South Africa First 29

30 What is the mining sector doing to help resolve issues?. Getting its house in order: Demonstrating positive role industry does play in economy and society. Upping game in areas where industry lags. Developing a positive contribution model: Improving effectiveness on issues such as community development through establishment of regional processes. Engaging with relevant movers and shakers on key issues: Mining industry s potential contribution to the NDP Competitiveness Labour market stability Community investment Environmental taxation Improving SHEC performance Conclusion Mining matters for the growth, development and transformation of South Africa 30