The Power Crisis in South Africa: Mining Sector Focus - Implications for the Economy and Labour Market
South Africa’s power crisis has had a negative impact on all facets of life in the country. From the general public and small-scale business, to corporate operations, no-one has been immune to the power cuts which have been hitting South Africa since late-2007.
Economically, the situation has had serious ramifications. From a mining perspective, the industry has been severely affected with electricity availability from state power utility Eskom being capped at 90% of usual demand for at least the next 4 years until the first major new power plant comes online.
This is however seen as the best case scenarios, with previous announcements that the situation as a whole will be in place for at least the next 7 to 8 years. With this in mind, the mining sector, and indeed labour, have been presented with some serious challenges.
PRODUCTION, ECONOMY, LABOUR ALL TAKE A HIT
In January 2008, the mines experienced their ‘darkest hour’ when they were forced to suspend all operations for a full 4 days. According to Eskom, distribution was suspended due to maintenance backlogs and low coal supplies. While estimates vary, the monetary loss over this move was seen to be in the region of approximately ZAR 1.3 billion (roughly US$ 180 million at the time). Looking at year-on-year trends, Statistic South Africa (Stats-SA) show that total average mine production was down 11% at end-January 2008 compared to 12 months prior; gold output alone dropped a massive 17%.
In February 2008, Barclays Capital issued a projection that the power cuts to the mining sector have the potential to curb platinum output in South Africa by 500,000/oz during 2008. Gold mining is in a similar situation. Nick Holland, CFO of Gold Fields and his CEO, Ian Cockerill both anticipate that annual gold-mining production in South Africa could drop to below the 200-tonne level within the next few years - a scenario not seen for over 100 years.
The knock-on effects with regards to overall economic growth are also astounding. According to the South African Chamber of Mines, while the mining industry accounts for only 7% of GDP directly, indirectly the contribution is around 18.4%. This is backed up by prominent South African economist, Mike Schussler, who has stated that the mining industry could directly lose up to ZAR 200 million a day, whilst indirectly this can climb to ZAR 330 million.
Labour-wise the situation is equally dim, with the industry directly employing over 465,000 workers. When the situation started trade union Solidarity warned that smaller margins would ultimately lead to job-losses. This was shadowed by the National Union of Mineworkers who stated that "obviously, companies would shed jobs to cover up for…losses incurred”.
THE BACKLASH
The mining houses have been less than impressed by the situation. In a statement at the time, Anglo American CEO Cynthia Carroll pointed out that as the most affected industry, “mining (should not be singled out) as a target, given its significance today and in the future” - a salient point that should be heeded, especially considering the economic and labour ramifications.
From an overall economic standpoint, the electricity crisis has halted any hopes of achieving the Government’s envisaged 6% GDP growth by 2010. In 2006, it reached 5.4% - the highest in almost 30 years - but when considering the GDP growth potential generated from mining contributions alone, the future does not look good on this front. Any drop in the above-stated 18.4% direct and indirect contribution will inevitably translate into a slowing down of the growth rate.
Similarly, the labour backlash has been a scary one. In a country where unofficial or ‘expanded’ unemployment is hovering around 40% (official is in the region of 23%), every job is needed. Granted, whilst rising commodity prices have maintained baseline earnings for mining houses, simple economic theory states that if workload needs decrease (vis-à-vis lowered electricity allowances) so too will the necessitated labour. According to Dirk Hermann, Deputy General-Secretary, of trade union Solidarity, mining houses Harmony and Gold Fields are planning to retrench up to 5,000 and 10,000 workers respectively - a massive blow to Government job-creation efforts.
On the commodity price issue, global prices for platinum and gold have seen record highs. This is evidently as a result of increased demand from the emerging Asian drivers, but many analysts concur that the upward trend can also be attributed to the power crisis in South Africa. As the premier producer of platinum (accounting for 75% of global output) and second to China in terms of gold production, the country’s impact on the situation is understandable.
Earlier this year, Gold breached the US$ 1,000/oz level (despite settling back down to around the US$ 930 mark at end-March), while platinum now sells for over US$ 2,000/oz. To put this into perspective, in December 2007 - a month prior to the electricity cuts to the mines - gold was trading at around US$ 810/oz and platinum just below the US$ 1,500 mark.
SO, WHAT’S NEXT?
The sector, and the country as a whole, has now come to grips that the power crisis is here to stay for the immediate future. As outlined above, this has placed serious constraints on progress made from mining in terms of employment and economic growth. The next issue however is thus not so much what will the impact be, but rather what’s next? Comments made by various mining houses is that while the situation is undoubtedly a setback, they are in the process of determining provisions to deal with this. As to exactly what these provisions are, one will have to wait and see, but while the years ahead are set to impact South Africa and the global minerals market, the challenges which need to be dealt with should be interesting.
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