Neva Makgetla
25 June 2008
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Johannesburg — SA IS in danger of losing its day job. We've moonlighted with manufacturing, but mining still lies at the core of the economy. Now we have electricity cuts that target the mines.
The end of the rolling blackouts makes it easy to forget that the mines are still hurting. Six months ago, Eskom imposed a 10% cut on major users, virtually all of which are mines or smelters. Most mines remain at 90% of their December level, with only a handful allowed up to 95% to avoid major job losses.
The latest gross domestic product (GDP) data show the implications. In the first quarter of the year , mining output dropped by a fifth, despite historically high world prices for metals. As a result, economic growth slowed from more than 5% last year to 2,1% in the first quarter of this year. The data for April report some recovery in mining but the index for output in volume terms remains 5% below last year's levels. And the level of recovery is exaggerated because April this year included three more working days than the same month last year.
Mining supplies well over half of our exports, so difficulties in the sector directly burden the balance of trade. Total export volumes fell 8% in the first quarter of this year , the largest fall since 2000. The drop was partially offset by a 5,6% uptick in the terms of trade -- the relative prices for our exports -- largely due to higher minerals prices.
Mining has been a lodestone for foreign equity investment too, so its difficulties affect capital inflows. Combined with international economic uncertainty, the result has been an outflow from the JSE for the first time since 2003. Portfolio investment in the private nonbanking sector averaged R26bn a quarter in the past three years. The first quarter of this year , in contrast, saw an outflow of almost R20bn.
While mining contributes only 10% of the GDP directly, it has largely underpinned the economy's robust growth since 2002. Soaring prices for metals directly supported exports and attracted portfolio investments to mining stock. That boosted the rand and moderated inflation and interest rates, fuelling the much-hyped consumer boom.
The paradox was that the high rand that bolstered these positive trends also undermined exports from other sectors and even reduced the profits to the mines themselves.
Still, economic growth permitted unheard of levels of consumption by the rich, reflected in booms in housing and imported car sales. It also funded an expansion in employment and social grants that saw a real reduction in absolute poverty.
Unemployment dropped from almost 30% in 2000 to 23% last year. Significantly, however, well over three quarters of new jobs since 2002 emerged in the tertiary sector, mostly retail, construction and private security services. Although child grants remain at less than R300 a month and old-age pensions below R1000, they provide the main source of income for almost 3- million households.
The electricity shortfall threatens these gains. For most of its history, SA has benefited from the tendency of precious metals prices to rise when the world economy faces a crisis. Today, too, high commodity prices should have cushioned our economy from the slowdown in the north. Instead, we now face soaring costs for food and fuel, without being able to take full advantage of equally buoyant metals prices.
SA can't solve the international monetary crisis but we could collectively make greater efforts to lower electricity usage to provide the margin needed to increase power to the mines, restoring hopes for renewed growth. Households and public buildings could save 20% or more on electricity bills just by turning off unused appliances and lights, switching to more energy efficient bulbs, and being more careful about heating and cooling.
Ultimately, the casual neglect that lets us push the burden of the electricity emergency on to the mines reflects a deeper problem. We need to come up with an explicit strategy to use mining's strengths as the basis for stronger, more diversified and inclusive development.
Makgetla is sector strategies co-ordinator in the Presidency.
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