As beneficiation debate rages, experts insist focus must be on niche sectors, upstream manufacturing

JOHANNESBURG (miningweekly.com) – The contentious debate surrounding South Africa’s beneficiation strategy and how best it should be undertaken has been placed under the glare of the spotlight again and has served to intensify tensions between government and the mining industry over continuing mineral policy uncertainty.

The debate flared up again in February follow- ing Mineral Resources Minister Ngoako Ramathlhodi’s announcement at the Mining Indaba that government intended to investigate the possibility of imposing developmental pricing on key strategic minerals and compelling producers of precious metals to sell at reduced prices.

Developmental pricing would be lower than the already-agreed-to “mine gate price”, essentially an export parity price less transport, which was a hard-won concession on the part of mining companies during discussions on the drafting of the Mineral and Petroleum Resources Development Act (MPRDA) Amendment Bill in 2013.

Government intends to use developmental pricing to enforce the beneficiation of the country’s still extensive mineral resource endowment, a mechanism it believes will stimulate the South African economy by diversifying sectors, enhancing the quantity and quality of exports, and creating decent employment.

However, industry considers developmental pricing to be a substantive issue as it implies that mining companies will be forced to subsidise downstream manufacturing companies.

In this regard, Anglo American CEO Mark Cutifani told Mining Weekly earlier this year that the fact that the mining industry would be expected to provide effective subsidies to underpin mineral beneficiation, which was essentially inefficient and uncompetitive, beggared belief.

“In mining, we know very little about the resources we mine and we have to make large capital decisions on limited knowledge. If we then have to be the supporter of downstream inefficiency, we are setting ourselves up for failure.

“Let me be clear: it is not that the mining industry does not support beneficiation, but the laws of economics are simple and all-powerful,” he commented.

While the issue of subsidised downstream beneficiation may be extremely sensitive, especially given the fact that South Africa’s mining sector is generally struggling under a myriad of challenges, and is invoking heated responses from stakeholders, the consensus amongst mining analysts is that South Africa lacks the competitive advantage for broad beneficiation, with or without subsidies, to be an ultimately successful strategy.

Speaking to Mining Weekly, Deloitte & Touche industry leader for mining Tony Zoghby suggests that the world has become far too competitive for South Africa to take up the mantle of downstream beneficiation. With its high working costs, inefficient labour productivity, and constrained and expensive infrastructure, South Africa cannot expect to compete against much cheaper and more efficient manufacturing jurisdictions.

“If beneficiation is going to be viable, downstream processes in South Africa have to find ways of becoming more efficient and productive rather than sitting back and surviving on the basis of developmental prices. That model is unsustainable,” argues Zoghby.

In terms of the spectre of developmental pricing, EY’s sector leader for mining and metals in Africa, Wickus Botha, insists that if government applies the “stick” principle, it could achieve a compliance response from industry.

“The stick method could result in limited job creation as it will be undertaken as a compliance initiative. However, if government provides some incentives for the establishment of downstream manufacturing, companies and entrepreneurs will be more likely to embrace such opportunities, which will result in the stimulation of growth in terms of jobs and the contribution to the economy,” says Botha.

He continues that legislation, in the way of enforced subsidised beneficiation, will not trump global competitiveness and entrepreneurship.

“If we are serious about kick-starting the economy, creating jobs, and lifting the overall standard of living, it needs to be recognised that it is not only legislation that will get us there. “What is needed is incentives that will make the establishment of downstream manufacturing operations more attractive,” says Botha.

“If the fundamentals don’t all add up and you force an economy down a particular path in the way of subsidised benefication, despite that sector being uncompetitive in terms of costs and skills, it is likely that another part of the economy will require fiscal stimulation or financial support.”

However, despite being largely uncompetitive in the global manufacturing context, Botha insists that there is definitely opportunity for South Africa to be successful in highly niche sectors, provided such beneficiation is incentivised and not mandated.

“The time has come and passed for South Africa wanting to participate in the low-cost, high-volume sectors of manufacturing. We have to find niche areas that suit our economy, expertise and specialism, rather than pursuing beneficiation that has been mandated with a broad brush.”

He suggests that such niche areas may include the development and manufacture of nuclear technology and equipment, platinum fuel cell technology, and renewable-energy technology.

FOCUS ON UPSTREAM
While niche downstream beneficiation could be a viable option for South Africa, Dr Paul Jourdan, who participated in the drafting of the African National Congress’s State Intervention in the Minerals Sector (Sims) policy document, argues that government should focus more effort on upstream manufacturing as it is actually more important for the economy in the long-term for two reasons.

South Africa has a well-established upstream manufacturing sector, which was established more than 100 years ago to support the rapidly expanding mining industry along the Witwatersrand.

“Firstly, upstream manufacturing is engineer intensive, agile and is able to reinvent itself. That means upstream is not dependent on mining; when the mines are exhausted, businesses can either import their input materials or reinvent themselves entirely,” Jourdan tells Mining Weekly.

“Secondly, downstream beneficiation is dependent on the availability of mineral resources and once such resources are depleted, either the businesses have to close or import feedstock.”

However, Jourdan continues that the most important downstream mineral feedstocks globally are steel, at about 1.5-billion tons a year, and polymers, from fossil fuels, at about 300-million tons a year.

“Both of these go into the South African economy at inflated prices – import parity pricing – severely constraining manufacturing growth. “If government and industry can find a way of ensuring export parity pricing, or competitive pricing, of the critical intermediate mineral-based feedstocks into the rest of the economy, it would go a long way towards boosting beneficiation.”

In similar vein, Botha adds that, should government implement developmental pricing, such an initiative would diminish the economic viability of mineral deposits and would provide no incentive to bringing new mines into production.

“If developmental pricing is introduced, existing mines will be allowed to run to the end of their life but will not be replaced by new projects. So, if manufacturing businesses are established on a forward linkage or beneficiation basis, those companies would then have to import feedstock at normal free market prices once the existing South African mines are exhausted, making those businesses no longer viable,” says Botha.

In terms of upstream manufacturing, Botha insists that government’s thinking is beginning to lean towards encouraging local content procurement, which would facilitate the growth of that industrial sector.

“The industry is beginning to warm up to the idea that, perhaps, a better way of stimulating economic activity is through the procurement of locally produced goods and equipment,” elaborates Botha.

“I think that government will enforce a certain level of content procurement and mining companies are likely to rather support this initiative than intervention in their offtake market.”

MINERALS POLICY CERTAINTY
While support for local content procurement and the facilitation of niche beneficiation may help to stimulate South Africa’s economy, Zoghby insists that the real solution to South Africa’s mining and economic woes is ensuring minerals policy certainty.

“What is required is certainty in our minerals policy, more investor-friendly policies and incentives for mining companies wanting to invest in South Africa, as well as an easier operating environment. It is this that will enable new capital to be attracted to the investment-starved industry,” states Zoghby.

“If the mining industry grows and is successful, other industries that both support and are a spin-off from the sector can feed off that success, and thereby stimulate economic growth. However, burdening the goose that lays the golden egg to support other industries that will eventually have no market, because of a contracting mining sector, will ultimately prove detrimental to the future of South African economy.”

“The senior officials within the Department consistently tell the sector and investors that our policies are stable and transparent, and we are ‘open for business’, but these statements are almost always followed with a ‘but’,” adds Botha.

However, certainty over South Africa’s minerals policy is not likely to be assured in the short term with the MPRDA Amendment Bill having been referred back to Parliament and Ramathlhodi’s announcement in February that his Department intends to test the legality of the Bill in the Constitutional Court before it is promulgated.

In the meantime, government is reportedly planning to launch a mining Phakisa lab, which may be an ideal opportunity to thrash out a common national mining development roadmap.