BOTH the government and Cosatu have enjoined South Africans to refrain from pointing fingers about the mining crisis, which accords with the decision to conduct a commission of inquiry into the Marikana massacre. Obviously one can sympathise with the desire to postpone judgment on the immediate responsibility for the events until all the facts are in. But there is one larger question that needs to be addressed: what went wrong in the mining sector from a broader perspective? And who was to blame ?
This question forms the background to the mining crisis and, in a way, to the massacre too. To the extent that this involves pointing fingers, frankly I believe they should be pointed, because there is no other way to the truth.
It is at least generally accepted that SA’s mining sector has been a shocking underperformer. The mining sector constituted 21% of GDP in 1970 compared to only 6% today. The number of people employed directly has fallen from 660,000 in 1970 to about 440,000 in 2004.
Worse, the shorter-term trends are negative, too. During the commodity boom from 2001 to 2008, the mining industry shrank by 1% a year, compared to growth of 5% a year among the world’s 20 mining exporting countries. This is despite the gold price, for example, going from about $400 an ounce in 1994 to $1,800 /oz. SA’s mining output is lower today than it was in 1994.
There are two general explanations for this decline. The first is the declining ore quality, combined with deeper and therefore more expensive and less profitable mines.
For years, the government waved the warning signs of a declining industry away with the notion that job losses were mainly in the gold industry, which is an ageing industry with declining ore quality.
There is certainly something in this argument as far as the gold industry is concerned. The quality of South African gold ore has declined dramatically, but not to the extent claimed. Compare the margins earned by South African gold mining companies to foreign companies, and they are generally lower than their international competitors, but not by terribly significant amounts. Goldcorp’s net income margin as of its most recent results was 28%, Newcrest’s was 26%, according to Standard & Poor’s CapitalIQ. Compare that to AngloGold Ashanti’s 24% and Gold Fields’ 18%.
Obviously the declining ore quality theory doesn’t go far enough, particularly since it is balanced by significant improvements in ore quantity and quality in other areas.
The second theory is that electricity and other infrastructure shortages have hurt SA’s ability to increase production. There is something in this argument, too. SA’s coal and iron-ore mines are far from the coast, and consequently they are dependent on Transnet to transport the ore to the coast for export. They were already running at just about capacity before the commodities boom began. Combine that with the 2008 electricity crisis, and there was an effective cap on production.
But this explanation also falls short. Much of Brazil and Australia’s iron ore is far from the coast, too, but they managed to ramp up quickly.
The problem, I suspect, goes deeper, and has it origins in the philosophical approach of the administration of Thabo Mbeki. He and his economic advisers held the mining industry in dim regard; generally as backward and an unfortunate remnant of the despised colonial era. Their economic dreams were rooted in large, industrial plants churning out manufactured goods, which is why they extended huge tax breaks to the car industry and specifically excluded it from black economic empowerment.
Not so the mining industry. The primary aim of the Mbeki administration was not to encourage the industry, but instead to try to turn it into a kind of patriotic industrial substrata which would feed the manufacturing sector with raw materials at low margins.
But first the removal of Randlords was required, and hence the listing of Billiton and Anglo American "back home" on the London exchange was approved. This was seen as a giant gesture of economic farsightedness and pragmatism. But actually, it was more like getting rid of the old guard.
This was followed by new legislation which stripped away miners’ rights over ore bodies and a new raft of black economic empowerment (BEE) legislation, compelling them to sell 25% of their equity to the new patriotic political class. From this point onwards, the mining industry was a plaything in the hands of the state, which could whip away its mining rights at a moment’s notice. The industry became, and remains, subservient and docile.
Some of the strangest deals in the history of mining emanate from this period, including the requirement that Kumba supply a foreign iron-ore producer, ArcelorMittal, with ore at an absurdly low rate. This was on the understanding, subsequently ignored, that the company would produce local steel at knock-down prices. The notion was odd, but the plan was clear: mining was to be handmaiden to the industrial powerhouse. Gradually, the big foreign mining houses got the message and invested elsewhere. Anglo has used small mountains of dividends from its South African business to invest outside of SA, partly because SA’s mining administration really didn’t want it to invest locally. Even the foreign newcomers, hoping to pick up assets in the new regime, packed up and left. Finally, nothing could be more symbolic than the decision of the industry doyens, the dynastic Oppenheimers, to part with what remained of their mining investment in SA.
For the Mbeki administration, this bet could not have worked out worse. Not only did the commodities boom make mining in itself an attractive industry, but the advent of Chinese and Asian industrialisation undercut local manufacturing. And the poor administration of mining licences gave rise to absurd results, huge delays, and rampant corruption. The apogee was the decision to grant a licence to a fly-by-night company in an existing mine which had transparently photocopied an application by another bidder. SA’s labour-friendly legislative regime has helped to make labour relations chaotic. And on top of that, a new tax was added which is worth about R6bn every year to the fiscus.
All of these measures have gradually weakened South African mining to the point where the industry is really on its knees. To its credit, the National Development Plan recognises the problem: "… over the past decade, domestic mining has failed to match the global growth trend in mineral exports due to poor infrastructure, alongside regulatory and policy frameworks that hinder investment". Fine, but it does not specify the details.
Lots of culprits for the mining crisis stand accused. Thuggish policing is obviously one. The mining industry’s lack of attention to the social conditions in mining areas is another. Poor leadership by the Zuma administration is a third. Former ANC Youth League leader Julius Malema’s economic ignorance and political opportunism also figure.
I would like to point one more finger: at president Thabo Mbeki and his administration.
THERE is a lively, to put it mildly, debate going on about Woolworths’ policy of designating certain posts for certain races. Woolworths argues, correctly I think, that they are complying with the law; none of the advertisements absolutely excludes whites. And the law is designed explicitly to favour blacks as a rectification measure.
Personally, I find racial quotas odious, but given the unique history of SA, it’s a forgivable exception to the rule. You have to sympathise with young South Africans who have to negotiate this bewildering maze, but on the other hand, the Commission of Employment Equity has just found that whites constitute 65% of all top management posts, (3% down from last year), compared to 8.5% of posts occupied by blacks.
That is a huge imbalance, and until this balance evens out, it is hard to argue whites are being particularly hard done by. It must be said, this is all a well-trodden path.
One really cannot satisfy all constituencies here, but I think there is a way to get closer to a more just outcome. Years ago, a group of academics dubbed the Harvard Group were asked to make recommendations on the South African economy. Many of the recommendations have found their way into policy, or at least into government thinking.
Their recommendation on BEE was that they supported the notion in a broad sense. But they also recommended that companies should be very free to implement the kind of BEE measures that suited their business best. Their other recommendation was that genuinely new enterprises should be free of BEE requirements in order to underline the notion that BEE is a rectification measure, not racial social engineering. In other words, that BEE should be apartheid’s antidote, not its mirror image.
So, if the argument in favour of racial quotas is based on benefits acquired during apartheid, it seems unfair to prejudice companies that transparently did not exist during that era.
The ANC does worry that it has lost support from racial minorities; this may be one way to get them back, and to demonstrate that the party’s commitment to nonracialism is genuine.
ON THE subject of new businesses, it is great to see Aspen Pharmacare CEO Stephen Saad is a member of the hallowed top 10 on the Sunday Time s Rich List. It seems to me South Africans are not sufficiently awed by what Saad and his colleague, Gus Attridge, have achieved.
Aspen is a great example of how fast frontiers change in business, and how it is possible to start an international business from SA, even in a field commonly thought to be the exclusive domain of the first-world giants and the larger developing nations. The company’s current market cap of just under $8bn is, of course, way off the big pharmaceutical players, but it puts the company right in the mix of the big generic players, a little less than Watson and Mylan.
Most extraordinary is how fast the company has grown: Saad and Attridge started the company in 1997. Perhaps equally importantly, Aspen has become one of the few South African companies to crack the Australian market, where its unit seems certain to become the largest contributor to turnover and profit soon, although its Latin American and African businesses are growing fast too. Amazing.
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