Future Direction of Mining in South Africa

Transcription

1 Future Direction of Mining in South Africa Presentation to Wits University Mining Student Conference 27 July 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 (lower demand and prices) LONG-TERM STRUCTURAL FUNDAMENTALS ARE POSITIVE The materials intensive nature of growth in emerging economies will continue in the next few decade caused by continued urbanization and industrialization. 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 STABILISING: 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 >7% in The US economy is showing positive signs of recovery, with consumer confidence rising. 2

3 PWC Annual Mining Report Titles 2005 Enter the Dragon 2007 Riding the wave 2008 as good as it gets 2009 When the going gets tough 2010 Back to the Boom 2011 The game has changed 2012 The Growing Disconnect 2013 A Confidence Crisis The Global Mining Industry is currently struggling: In for the top 40 mining companies: Revenues are flat at $731 billion. Net profit has halved (down 49% to $68 billion). Companies have had to issue $108 billion in debt, so gearing has risen from 13% to 24%. Capex is down 21% to $110 billion. Market values have fallen by 20% in early There are 5 new CEOs at top 10 companies. While China accounts for 40% of metals demand There is a crisis of confidence. 3

4 The World economy is slowly 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 8 4

5 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 are positive for growth in commodity demand Long term drivers of demand 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 will remain large. 5

6 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

7 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) 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 7

8 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 8

9 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, Sulphur, rhodium, silver, strontium, tin, titanium, tungsten, vanadium, 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 9

10 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 the cosmetics and makeup are made from minerals Talc Mica Kaolin Calcite Titanium dioxide Zinc oxide 10

11 Even a bright smile, even comes from mining. Silica Limestone Aluminum Phosphate Fluoride Titanium Mica Petroleum 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 R20 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 18% of GDP, 50% of exports, 1.3 million jobs, 94% of electricity, 17.2% of corporate tax 11

12 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. The ANC Mangaung Elective Conference State intervention with a focus on beneficiation for industrialisation. Equitably sharing the rents. 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. 12

13 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 the how is taking place. Energy security can be guaranteed through private sector investment and cooperation between government and the private sector. 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 13

14 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 Mining - The Essential Core Of SA Economy Creates 1.35 million jobs ( direct & indirect). Accounts for about 19% of GDP (9% direct, 10% indirect & induced). Critical earner of foreign exchange >50%. Accounts for 20% of private investment (12% of total investment). Attracts significant foreign savings (R1.4 trillion/ 29% of value of JSE). 2012, R20 billion & R5.6 billion in royalties. R437 billion in expenditures, +/- R389 billion spent locally. R93.6 billion spent in wages and salaries 50% of volume of Transnet s rail and ports 94% of electricity generation via coal power plants 15% of electricity demand About 37% of country s of liquid fuels via coal R4 billion spent on skills development R1.4 billion spent on community investment 14

15 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 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 15

16 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. 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 16

17 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 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. 17

18 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 >320 MT by 2020 to satisfy Eskom, replacement & 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. A high road is very possible for South Africa s mining sector Two scenarios were developed for the forward looking scenarios Production growth Current constraints are relieved Constrained by current bottlenecks Low road B A C D High road Source: McKinsey Costs grow at historic rates Cost increases are reduced to half of historic rates Cost Management 18

19 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. The prices for gold and platinum have plunged in 1H2013. Costs have continued to rise too quickly (electricity prices have trebled in the past 5 years). 61% of gold mines are loss-making and 59% of platinum mines are loss-making at current prices. The industry was hit by a wave of unprotected strikes last year and by the unfortunate Marikana tragedy. The industry has faced infrastructure constraints (shortages of electricity, rail and water). The industry has faced bouts of policy uncertainty (the nationalisation discussion, the review of mining taxation, the possible introduction of a carbon tax, etc.) 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 19

20 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%). 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. 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 20

21 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 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 MIGDETT Mining Growth Strategy, 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. 21

22 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 22

23 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 23

24 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), but some areas require further work (environmental licensing, strategic minerals, beneficiation, etc.). 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. A country taxation review is scheduled for 2h13. 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 24

25 Resolving the challenges in the mining sector Very strong level of commitment in MIGDETT and Deputy President s Mining Dialogue process by industry, government and labour leadership to resolving the challenges. Signed a stability and peace accord with all the stakeholders in the mining sector. Most of the stakeholders have signed the Framework Agreement for a Sustainable Mining Industry (June 2013). Engaging all stakeholders including government, unions, the investment community, local communities and other parties. Commission of enquiry into the Marikana tragedy. The mining industry is making a positive contribution The industry is making significant progress on the Mining Charter targets and is committed to Putting 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 (R93 billion paid in wages in 2012). R20 billion paid in corporate taxes in Industry is procuring significant % locally. 25

26 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 African Mining Industry of the Future? Governmentand trade unions: proud of and fully supportive of the mining industry and acknowledge industry as important for the country Investors regard industry as a good investment destination Skilled workforce, transformed, productive, decent wages and non-discriminatory, safe & healthy workplaces Key exporter Key earner of foreign exchange Key taxpayer Creator of decent jobs Developer of skills Key contributor to economy Constructive Partnerships built on TRUST Management not only focus on profits, but provide decent jobs, play positive role in mining communities and sensitive to environment 26

27 What is the mining sector doing to help resolve issues? The Mining Company Leadership through the Chamber have agreed to Putting South Africa First What is the mining sector doing to help resolve issues?. The industry is demonstrating it is a good corporate citizen: Demonstrating positive role industry does play in economy & society. Upping game in areas where industry lags. The Chamber is building cooperative relationships with key stakeholders 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 Improving SHEC performance 27

28 Conclusion Mining matters for the growth, development and transformation of South Africa 28