Patience and perseverance key to industry recovery in South Africa
The mining production data released recently by Statistics South Africa for October painted a gloomy picture of the sector, despite the positive contribution the sector made to the economy in the third quarter of 2016 and the hopes of a commodity rebound worldwide.
Annual production (12 months) fell by 4.6percent by the end of October. If the renewed weakness shown by the October decline (-3percent) in September is anything to go by, then the full year contraction may be even stronger. As at October (10 months) the sector’s production already declined by over 5percent this year. Relative to the peak production volumes at the beginning of 2005, the sector has now contracted by nearly 25percent.
Of the different mineral groups, only iron ore (+5.2percent) and coal (+8percent) production increased in October relative to September. All the others declined by between 5percent and 10percent. Due to the large increase in production of platinum group metals in recent months, it was the only group that recorded growth (+2.2percent) when measured over 12 months. However, it too recorded much lower production in October (on September) and may very well also show contraction by the end of the year.
Growth in mining production depends mostly on demand for its (exported) products emanating from growth in the international economy. South Africa exports close to 50percent of its minerals to western, eastern and southern Asia; with China’s growth forecast at a steady 6.5percent and Japan at about 0.5percent until 2018, not much acceleration in demand should be expected from those parts of the world economy. However, with better growth expected in the US (1.9percent rising to over 2percent) and the EU (around 1.6percent) (up to 2018) some improvement could be expected, albeit small. South Africa exports around 20percent of its production to the EU and about 10percent to the Americas.
The latest sales data for minerals is (hopefully) an early indication of some positive feedback into the South African mining sector. The considered view is that it is much too early to come to such a conclusion, especially when the impact of ever rising domestic production costs is discounted. An improvement in the situation cannot come too soon though as employment numbers continue to fall. The latest (second quarter) official employment data (Statistics South Africa) shows a decline in half year numbers of 6.4percent (from 488,746 to 457,585) and a decline of 5.3percent over 12 months.
All indications are that commodity prices are bottoming out this year and mild worldwide growth would lift prices over time. It is also true, however, that the exchange rates of commodity exporters usually strengthen (all other things being equal) when their export prices improve, which may neutralise some of the expected price windfalls.
There seems to be some hope that neither demand nor prices will fall further, but to engineer the recovery will take much patience and perseverance.
This report has been compiled by Henk Langenhoven, Chief Economist at the Chamber of Mines
Get in touch with our editor Dale Benton at [email protected]
DRC selects Fortescue to develop giant hydro project
Democratic Republic of Congo's (DRC's) government said on Tuesday Fortescue Metals Group would develop the Grand Inga hydroelectric power project, including a 4,800-megawatt dam that has already been committed to Chinese and Spanish developers.
Fortescue to develop dams for world's largest hydroelectric project
Australia's Fortescue confirmed it was in talks with Congo to develop a series of dams that could become the world's largest hydroelectric project, but it said no formal binding agreement had been concluded.
Fortescue's involvement is the latest twist in Congo's decades-long quest to expand Inga, whose two existing dams - completed in 1972 and 1982 - have a combined installed capacity of nearly 1,800 MW.
The proposed expansion of six more dams would bring capacity to over 40,000 MW, roughly double the size of China's Three Gorges dam, currently the world's largest. Total development costs have been estimated at up to $80bn.
In 2018, a Chinese consortium that includes China Three Gorges Corporation and a Spanish consortium that includes AEE Power signed a deal with Congo's government to develop the third dam, known as Inga 3.
Ground has yet to be broken on Inga 3 because of questions over its financial viability. Alexy Kayembe De Bampende, President Felix Tshisekedi's top infrastructure advisor, said the project would now be led by Fortescue.
"Fortescue will be the sole operator for the entire Grand Inga (3 to 8). Chinese & co are welcome to join Fortescue," he told Reuters."There has been discussion between Chinese (Three Gorges) & AEE and (Fortescue) since last year to work together."
Three Gorges and AEE Power did not respond immediately to requests for comment.
DRC's Grand Inga green energy project will create hundreds of thousands of jobs
In a memorandum of understanding signed between Fortescue and Congo in September 2020, Fortescue "acknowledges the existing potential rights held on Inga 3 by third parties".
"In the event that, for any reason, such rights to develop Inga 3 become available, the government of the DRC undertakes to secure for Fortescue Future Industries an exclusive first option to develop Inga 3," it said.
A senior official at the government's Agency for the Development and Promotion of Grand Inga (ADPI), speaking on condition of anonymity, said the ADPI had not been involved in the talks with Fortescue.
Fortescue chairman Andrew Forrest met Congo President Felix Tshisekedi on Sunday to discuss the project. Forrest said Fortescue would use the energy from Inga to produce hydrogen to export around the world.
"The capital cost of this will be many many tens of billions of dollars and direct and indirect employment will be in the hundreds of thousands," he told reporters.
Fortescue has said it plans to fund the majority of its green energy projects off its balance sheet, investing about $1bn a year of its own money.
Fortescue's statement was made in response to an article in the Australian Financial Review.
Meanwhile, Fortescue has teamed up with Hatch, Anglo American and BHP, to form a Green Hydrogen Consortium focused on ways of using green hydrogen to accelerate decarbonisation within their operations globally.