Who will put out the fire?

Despite semantic acrobatics, the mining industry, which provides 60% of South Africa’s export revenues is in crisis. Strikes, wage increase demands, higher production costs and low global prices are all contributing to the dire situation. Is there a way out? Tom Nevin has been finding out. When many in South Africa’s mining sector were losing […]


Despite semantic acrobatics, the mining industry, which provides 60% of South Africa’s export revenues is in crisis. Strikes, wage increase demands, higher production costs and low global prices are all contributing to the dire situation. Is there a way out? Tom Nevin has been finding out.

When many in South Africa’s mining sector were losing their heads, Kuseni Dlamini was keeping his. “We can solve our mine problems,” he said. The former head of Anglo American operations acknowledges that “there is indeed a crisis, and it is largely of our own making. We know on the back of it there’s a global crisis that we can’t do anything about, but domestically I believe the crisis is controllable and containable. But we need will and commitment to step up to the plate, come up with solutions that can restore confidence in the industry – not just among international investors, who are very important, but among South Africans and among all people on the continent as well.”
Dlamini, now chairman of the giant Times Media conglomerate, concedes that nearly a year after the deadly Marikana confrontation between striking miners and police, change has been slow. In Dlamini’s view, four pressing challenges need attention if South Africa’s global competitiveness is to be salvaged.
“First,” he says, “is the volatility of the rand. A volatile exchange rate makes business planning difficult. In the ultimate analysis, it is not a question of whether one favours a weaker or stronger rand. It is a question of appropriate stability of the exchange rate.”
Second, he argues, is the declining growth rate, now projected to be anything between 2% and 2.5% from the initial 2.7%. “Growth breeds growth. It also encourages bullishness and underpins positive investor and consumer sentiments. Decline breeds negative investor and consumer sentiments, hardly helpful to our economy or society.” Third, the increasing unemployment problem is exacerbated by a lack of global competitiveness. “And fourth, labour instability in parts of the mining industry is very unhelpful. It must stop. The country needs a new era of sustainable labour peace and stability to improve its global competitiveness.”
The problem facing the South African platinum extraction industry is that while it is number one in the world, it has powerful pretenders to contend with.  Other big producers are ready and willing to snatch South Africa’s global customers should delivery become patchy and unreliable. Zimbabwe and Russia’s less-liberal labour relations keep a tighter rein on production and pose a definite threat to sales with less risky output deliverables while South Africa’s mineworkers have caused 18 months of havoc with pay demands and both legal and illegal strikes and walkouts.
Since diamonds were discovered in South Africa in 1867, and gold a few years later, mining has been the pulse of the country’s economy. These days, while it accounts for around 6% of economic output, it contributes 60% of export revenues and is amongst the country’s biggest private employers with over half a million employees, each supporting eight to 10 dependents. At 80% of global reserves, South Africa leads in global platinum production and is the world’s fifth biggest producer of gold.
Although other mining sectors are coming under worker agitation threat, it is platinum that is taking the brunt of the assault.

Unrest, not crisis?
However, mineral resources minister Susan Shabangu concedes to labour unrest in the sector but hesitates to call it “a crisis”. She points out that the number of mines increased from 993 in 2004 to nearly 1,600 in 2011 and that associated revenue had grown from R98bn ($9.7bn) in 2004 to R370bn ($37bn) by the end of 2011. Employment in the industry had grown from just under 449,000 people in 2004 to more than 530,000 in June 2012.
“This performance is factual and demonstrates the vibrant nature of the South African mining sector,” she stresses, “and this continues to provide opportunities for both local and international investment.”
While conditions and pay rates are cited as the main causes of the labour unrest, the rivalry between the long established National Union of Mineworkers (NUM) and the fledgling Association of Mineworkers and Construction Union (Amcu) are cited as fuel to the fire, and this has led to deadly skirmishes over union turf on the platinum belt in northwest South Africa.
Trouble boiled over when the government-allied NUM lost thousands of members to Amcu, the more militant newcomer.
In quick order Amcu became the dominant labour union force and NUM found itself on the back foot. As production suffered and world platinum prices continued to decline, a major player in the area, Anglo American Platinum, announced a plan to cut 6,000 jobs.  
The unrest began to spread across the mining industry with negotiations called in the gold and diamond mining sectors. NUM declared it would seek pay increases of 60%. De Beers is facing walkouts at its diamond diggings countrywide.
Kuseni Dlamini calls the divisions within the union movements as “not helpful at all to stability in the industry”.
Hilton Tarrant of MoneyWeb financial news observes that the array of union representation gives the mining industry a problem of new dimensions. “Up to now,” he says, “the industry was represented by one organised front.
“More recently with different unions entering the fray, and becoming more dominant in some mines and some sectors, this becomes a lot more complex. You are no longer dealing among three spheres – business, government and labour – it’s almost as if there is a fourth sphere, because labour is so divided.”
Dlamini agrees: “Labour is divided, but that’s not unique or indeed new that a labour space has been contested by more than one union; Solidarity and Uwasa are recent examples.
“The difference is the friction. The rivalry we are seeing between the newly formed Amcu and the NUM makes life difficult for mines to operate in a stable and peaceful environment. It’s something I believe must be ended and can indeed be ended.”
The government is showing resolve with a drive to resolve the crisis headed by Deputy President Kgalema Motlanthe.  
Sean Ashton, fund manager at South Africa’s Anchor Capital, believes the crisis is not just about labour. “A lot of the current problem is linked to labour, given that is the bulk of the costs of most of these businesses – around 50% to 60% of their operating costs.
“I think it really stems from the fact that from the first five years of the last decade, you had rampant PGM prices in rand terms rising 20% per annum. That disguised a lot of ills and allowed mines to continue operating with 15%-odd cost increases, a lot of which was labour, which resulted in margins actually rising and peaking at some 45% gross margins in 2008.
“Since then the cost increases have become entrenched and continued at much the same rates while productivity, if anything, has gone backwards and prices certainly have trended sideways. So those peak margins have collapsed and the result is that the industry broadly is probably close to break-even and certainly, on a free-cash-flow basis,
burning cash”.

Clashing languages
The question also arises whether South African mining’s reputation for competitiveness is being dented in the current slew of difficulties.
Dlamini maintains that in substance South Africa is very competitive.
“If we look at the substance of our regulatory regime and our policies, they are sound. But what are missing are consistency, certainty and predictability,” he says. “We are also missing confidence in the regulatory system and in the policy framework. Government is talking one language and business is talking another. And of course there is now the labour aspect. We need to have a common language with which to speak about the South African mining industry, and that language has to be common among all leaders, whether you are a labour leader, a business leader or a government leader.”
He believes the competitiveness of the South African mining industry is at stake, given the prevailing instability.  And that is threatening not only the mining industry, but the South African economy as a whole. Government, mining and business leaders need to talk South Africa up and make sure that, as leaders, they constantly reinforce confidence.
Dlamini says the issue of mine labour instability heads the list of priorities to be tackled. “I’m highlighting it because it’s one we can control. The volatility of our rand is a challenge that is shared by global forces. Of course domestic forces do play a role, but there are certain forces that we cannot control. The growth issue is also very important to me. I think we can do better on growth. Without it we will not have stability, we’ll not have jobs.”
The jobs issue, is the other challenge Dlamini considers highly important. “For a country like ours, with a population of 53m people, to have an unemployment rate of 25.2% – whereas Japan has got 127m people and they’ve got an unemployment rate of 5% – we should be doing better with the resources we have.”
The massive amount of infrastructure that is planned in further developing the
country by building schools, houses and other social needs should be leveraged to create jobs for South African people, Dlamini believes.
‘I believe that leaders in the mining industry are stepping up to the plate.  We are seeing them talking to the unions and we must encourage leaders from the union movements to also come to the party by having a common sense of purpose and direction and vision in terms of how to lead the workers.”

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