Mineweb (Johannesburg)
Stewart Bailey
16 October 2003
The South African gold industry, once the paragon of profitability, has been pushed into the red by a step change in costs and a stubbornly low rand gold price, the unhappy by-product of a strong currency.
According to the latest statistics compiled by the Chamber of Mines, an industry group, the average year-to-date costs of the local gold mining industry are R86,741/kg.The cash earned for each kilogram runs perilously close to average R86,770/kg that mines have had to shell out to extract the gold.
Comparisons with the South African gold industry of three years ago, when the industry was facing wholesale retrenchments and mine closures, are inevitable.
The rand price received for gold in 2000 was R63,214/kg, fractionally below the industry's average production cost of R63,575/kg. The gold sector shed 18,000 jobs that year. This year collateral damage could be worse as the current malaise, caused by the rand and not a single commodity price, threatens the entire mining sector.
Three years later, with gold having ascended to $375/oz, the South African press is awash with commentators baying for the blood of mining executives who have allegedly allowed their companies to become unproductive and inefficient, with costs rising unchecked.
Although the revenue increase since 2000 has been a respectable 37 percent, South Africa's producer price inflation - a broad measure of the rate of increase in the cost of manufacturing across all sectors - has been 32 percent.
So the mining sector's costs have not been horribly out of kilter with the rest of the economy.
The step change in costs has been aided by almost compulsory biennial above-inflation wage increases and hefty price increases from state-owned monopolies. Spoornet, the state-owned rail company is an eloquent example, notching up a 22 percent price increase last year and a 35 percent price increase earlier this year.
The upshot of the unchecked rise in the cost of inputs is that an appreciable part of the South African gold industry will now have to shed jobs not only to stay profitable but also to stay in business. Roger Baxter, chief economist at the Chamber of Mines, says 70,000 gold miners work on unprofitable shafts.
In the broader mining industry, the number of workers on loss-making or breakeven operations climbs to 120,000. Baxter says that although not all those jobs will be lost, mining companies will have to shed some of those jobs to bring the operations back to profitability.
But it is not only jobs that will be cut. Baxter says the mining industry alone has R100 billion in capital projects approved and warns that a tenth of these will be put on hold if the status quo persists. Add to that the R20 billion in foreign exchange revenue that will be lost this year alone as the value of mineral exports plummets, and the potential for ballooning trade and current account deficits increases dramatically.
The solution? Baxter says Chamber is dead against any effort to peg the exchange rate, or any notion of tampering with the independence of the South African Reserve Bank. He says the Reserve Bank could, however, take advantage of the strong rand to bulk up the country's foreign exchange reserves - currency or bullion.
Another priority would be for the government to restructure state-owned business, allowing for competition and greater flexibility in the local economy. Price competition - in water provision, telecommunications and power -- would lower the likelihood of above-inflation price hikes, which in turn would help keep interest rates lower.
Whatever the solution, the current situation looks bleak for a sector that contributes 8 percent of South Africa's gross domestic product, or 12 percent if feeder industries are taken into account. Even the lowest interest rates in 17 years, have failed to precipitate any signs of rand weakness.
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