“Contribution of Mining to the Economy – A South African Perspective”
Presentation by Roger Baxter Senior Executive, Strategy and Economics 4 February 2013
PRESENTATION OUTLINE The Strategic Context for the RSA Mining Sector Local context Why the Mining Sector is Important for the South African Economy
The Mining Sector’s economic performance has not matched its potential Unpacking the Growth Constraints Conclusion
Commodity outlook, short-term stress, longterm boom SHORT-TERM STRESS • Global economy is still recovering from the first global recession in 61 years. • Recovery is unevenly distributed, with advanced economies sluggish and developing countries growing strongly. • A mild “double dip” has taken place with global grow deaccelerating in late 2011 with the EU debt crisis and recession. LONG-TERM BOOM • The materials intensive nature of growth in emerging economies will escalate in next decade caused by continued urbanization and industrialization. • Supply will struggle to meet the growth in demand
The Structurally Driven Commodities Boom PWC ANNUAL MINING REPORT TITLES • 2007 “Riding the wave” • 2008 “as good as it gets”
• 2009 “When the going gets tough”
• 2010 “Back to the Boom”
• 2011 “The game has changed”
• 2012 “The Growing Disconnect”
World economy is currently weak, but is expected to recover
Source: IMF WEO October 2012
Risks remain…….
Source: IMF WEO Oct 2012
Despite the volatility in the short-term, the long-term fundamentals remain for in place for commodity demand • Long term drivers of the structurally driven commodities boom remain intact: » Trends in urbanization and industrialization appear to be entrenched for the next few decades in China, India and other EMs. » By 2050 another 3 billion people at the global level will urbanize. Most of this urbanization will take place in emerging market economies (UN population division). » The infrastructure expenditure to accommodate global urbanization is significant. » The quantity of minerals required to support this urbanization is significant.
Rising urbanisation, 3 billion people to urbanise by 2050 (most of the growth in Africa) World urban population growth (Billion people) 7.5 7.0
0.5
6.5 6.0
The world is set to urbanise close to another 3 billion people by the middle of the century
0.8
0.5
5.5 0.5
5.0 0.4 4.5 4.0 3.5 3.0 2010 Urban Pop.
Source: UN, McKinsey
China
India
Other Asia
Africa
RoW
2050 Urban Pop.
By 2025 China’s Urban population is likely to be close to one billion people China's urban population to reach nearly 1 billion by 2025 1000
926 million 900 120 Urbanized population (millions)
800 104 700 600
86 160
Small (0.5m1.5m)
300
100
6 mega
Midsized (1.5m5m)
34
200
Megacity (>10m) Big (5m-10m)
572 million
500 400
13 mega
316
233 149
143
153
2005
2025
0
Source: McKinsey Global Institute
Big town (<0.5 m)
Strength in the Eastâ&#x20AC;Śâ&#x20AC;Ś. Emerging & developing economies will comprise >50% of global GDP by 2013 (driven by China) 100% 90%
% of GDP (PPP basis)
80%
USA
70% 60%
Other advanced economies
50% 40%
China
30% Other emerging and developing economies
20% 10%
Source: IMF WEO April 2012
2016
2014
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
0%
Fixed investment will mostly be into infrastructure in emerging economies…….
Source: IMF WEO Oct 2012
The â&#x20AC;&#x153;big 5â&#x20AC;? of global mineral sales are Fe, Cu, Au, and al 120
Comparison of Revenue by commodity (top 40 mining companies - PWC)
100 80 $ billions
60 40 20 0
Source: PWC
2010 2011
Top 6 minerals, expected greenfield production growth for the period 2011-2020 Citibank - growth projects by commodity on a production volume basis, 2011-2020 Nickel, 11
Uranium, 1
Copper, 27 Coking coal, 11
Gold, 15
Iron ore, 21 Thermal coal, 16 Source: CitiBank
Mining Companies face greater complexity in their operating environments (PWC) 1. The cost of doing business is rising 2. Commodity price chaos (volatility) 3. The battle to keep profits 4. Restless stakeholders 5. Labour Pains! (finding willing workers and keeping them) 6. Capital project quandaries 7. Non-traditional sources of funding 8. The big companies get bigger! 9. Volatility is the new stability. 10. Legislative Olympics From Competition to Collaboration Source: Tracking the Trends PWC
Volatility is the “new stability”
Source: IMF WEO Oct 2012
PRESENTATION OUTLINE The Strategic Context for the RSA Mining Sector Local context Why the Mining Sector is Important for the South African Economy
The Mining Sectorâ&#x20AC;&#x2122;s economic performance has not matched its potential Unpacking the Growth Constraints Conclusion
Perceptions about Mining in general •Little link made between role of minerals and the functioning of a modern society. •Perhaps not enough credit given to the mining industry for playing a key role in South Africa’s economic development over past 130 years, which has transformed South Africa into the most industrialised country in Africa
Metals and minerals in a Smart Phone • • • • • •
Copper (16 grams) ¹ Silver (0.35 grams) ¹ Gold (0.034 grams) ¹ Palladium (0.015 grams) ¹ Platinum (0.00034 grams) ¹ Ceramic magnetic switches containing rare earths ² • Indium² • Titanium dioxide ² • Indium tin oxide ² • •
¹ source – USGS http://pubs.usgs.gov/fs/2006/3097/ ² source – NRC critical minerals report
Metals and Minerals in a car • 960kg iron &steel • 109kg Aluminum • 22.7kg Carbon • 19 kg Copper, 34kg for a hybrid • 19kg Silicon • 11 kg Lead • 10kg Zinc • 7.7kg manganese • 6.8kg Chromium •+Antimony, barium, beryllium, cobalt, gallium, gold, magn esium, molybdenum, neodymium, indium, palladium, Sulp hur, rhodium, silver, strontium, tin, titanium, tungsten, vana dium, zirconium.
• 4.1kg Nickel • 0.4 kg Platinum
Even a Wind Turbine uses a significant amount of metals and minerals • 335 tons of steel • 4.7 tons of copper • 13 tons of fiberglass • 3 tons of aluminum • 1,200 tons of reinforced concrete
Solar panels need many metals and minerals
•Lead (batteries) •Phosphate rock •Selenium (solar cells) •Silica (solar cells) •Tellurium (solar cells) •Titanium dioxide (solar panels)
• Arsenic (gallium-arsenide semiconductor chips) • Bauxite (aluminum) • Boron minerals (semiconductor chips) • Cadmium (thin film solar cells) • Coal (by-product coke is used to make steel) • Copper (wiring; thin film solar cells) • Gallium (solar cells) • Iron ore (steel) • Molybdenum (photovoltaic cells)
Even a bright smile, even comes from mining……. • • • • • • • •
Silica Limestone Aluminum Phosphate Fluoride Titanium Mica Petroleum
Perceptions and realities about mining PERCEPTION
REALITY
Is a “Dirt Digger”
Another R300 billion and 150 000 jobs created in downstream industries
Is uncaring about the lives of workers and does not pay well
67% improvement in LTFR, average wages per employee up 11% p.a.
Does not care about the environment, communities –Poverty at the doorstep of prosperous mines
Spent R1.4 billion on communities, R4 billion on skills and R25.8 billion in corporate taxes in 2011.
Profits and benefits exported to a small bunch of Capitalists
Shareholders balanced 50% local, 50% offshore, R12 billion in dividends
Resistant to Transformation
>R150 billion in BEE deals concluded, good progress on all pillars of Charter
Does not care about SA- Ingi SaldagoBusiness Report-”Eskom was right to switch off the Mines”
19% of GDP, 50% of exports, 1.3 million jobs, 94% of electricity, 17.2% of corporate tax
PRESENTATION OUTLINE The Strategic Context for the RSA Mining Sector Local context Why the Mining Sector is Important for the South African Economy
The Mining Sectorâ&#x20AC;&#x2122;s economic performance has not matched its potential Unpacking the Growth Constraints Conclusion
South Africa: Going for Sustainable, Balanced and Labour Absorptive Growth •Progress has been made to get the economy back on to a higher growth path (3.2% 1994 to 2011). •However, SA’s labour participation rate at 42% is low vs peers (~61%), its unemployment rate is too high (>20%), its levels of income inequality are very high (Gini coefficient 0.59). •Government has now placed the creation of meaningful employment as a central pillar of economic policy. •All parties recognise that higher levels of sustainable, balanced and labour absorbing economic growth is key to reducing unemployment •Government has developed the New Growth Path and the National Development Plan focusing on economic growth and employment creation.
While South Africaâ&#x20AC;&#x2122;s growth rate has risen to 3.2% p.a. 1994-2012, it is just too slow to meaningfully tackle unemployment & poverty
South Africa
South Africa’s economic growth profile is imbalanced and constrained by the poor performance of the export sector •RSA cannot solve its unemployment and poverty challenges on the basis of an advanced economy “growth model” (credit fueled, consumer driven, import intensive and imbalance creating growth in the non-tradable sectors). • All parties recognise that higher levels of sustainable, balanced and labour absorbing economic growth is key to reducing unemployment (i.e. get tradable export sectors to boom). •Government has developed the New Growth Path focusing on economic growth and employment creation.
Too much of the economyâ&#x20AC;&#x2122;s recent growth has been driven by credit fuelled non-tradable demand side, & tradable export sectors have languishedâ&#x20AC;Ś.. South Africa: Contribution to GDP in real terms, nontradable vs tradable sectors of economy (real terms) 2 000 000 1 800 000 1 600 000
R'millions
1 400 000 1 200 000
Nontradable
1 000 000 800 000
Non-tradable sectors
600 000 400 000 200 000 0
Source: StatsSA
Tradable
To ensure more balanced and higher levels of growth the country needs its tradable export sectors to grow at a much faster pace â&#x20AC;˘THIS IS WHERE MINING FITS IN. â&#x20AC;˘Mining has a very large foreign exchange earning, GDP multiplier and employment creation foot print.
Work done through various processes does recognise the Mining Industry’s potential • Mining Industry Growth Development and Employment Task Team (MIGDETT) – Recognising the country’s mineral and mining potential. – Identifying the key constraints and challenges. – Working in a collaborative approach to resolve challenges
• New Growth Path – Mining recognised as a top 5 key priority sector that can generate growth and employment.
• The National Development Plan – Recognises the importance of mining to the economy of South Africa
Role of Mining Often Underestimated • Key foundation industry (enabled SA to become the most industrialised country in Africa) • Large employer of semi-skilled and skilled workers • Critically important NET generator of FOREX • Significant multipliers into the rest of the economy (large procurement, investment and wage spender) • Equally important, very large magnet for foreign investment inflows (which help fund current account) • Significant contributor to transformation in the economy
Mining - The “Flywheel” of the RSA Economy • Creates 1.3 million jobs (500 000 direct & 800 000 indirect). • Accounts for about 19% of GDP (9% direct, 10% indirect & induced). • Critical earner of foreign exchange >50%. • Accounts for 20% of investment (12% direct). • Attracts significant foreign savings (R1.4 trillion/ 29% of value of JSE). • 17.7% of corporate tax receipts, 2011 R26bn & R5.5 billion in royalties. • R437 billion in expenditures, +/- R389 billion spent locally. • R89 billion spent in wages and salaries • 50% of volume of Transnet’s rail and ports • 94% of electricity generation via coal power plants • 15% of electricity demand • About 37% of country’s of liquid fuels via coal • R4 billion spent on skills development • R1.4 billion spent on community investment
The linkages of mining to the economy First round impact: •GDP R59 billion or 2.3% of GDP •Jobs 207 949
Mining’s direct contribution: •GDP R230 Billion or 9% of GDP •Jobs 499 217
Indirect impact •GDP R42.7 billion or 1.7% of GDP •Jobs 149,898
The Induced Impact: •GDP R136,1 billion or 6% of GDP •Jobs 496,319
The Total Contribution of Mining to the Economy •GDP R468 billion or 18.7% of GDP •Jobs 1,353,383 (16.6% of total employment) Source: Quantec & IDC, 2010 data
The benefits of mining are mostly captured locally • In 2011, RSA mining’s total expenditure excluding depreciation and impairments was R437 billion • R251 billion was spent on purchases & operating costs (timber, steel, explosives, electricity, transport, uniforms, etc.) • R88.7 billion went on salaries & wages for mine employees • R47 billion on capex (the lifeblood of mining) • R25.8 billion in corporate tax (17.2% of corporate taxes + STC) • R12.7 billion in dividends (only 2.6% of total) • R17.2 billion on interest to the banks Of this about R389 billion (89%) was spent locally, and the spending multipliers created as much economic value & jobs as the direct mining sector contributed Source: StatsSA Quarterly Financial Statistics, Dec 2011
The Industry is playing a substantial role in transformation and community development •The industry is playing an important role in transformation in the country: • The industry spent R4 billion on skills development (over and above the statutory levy). 10 228 students were fully supported at tertiary institutions. • The industry is fully supportive of transformation in the procurement chain, is on target in terms of the Charter and is partnering with government to encourage greater localisation of procurement. • In 2011, all the Chamber’s members were on track to achieve the 26% ownership target. • In 2011, the industry was making good progress on employment equity.
•In 2011, the industry spent R1.4 billion on community investment: • However, the industry is looking at improving the effectiveness of this expenditure.
Downstream beneficiation is far bigger than people think! • About 99% of RSA's cement is made locally from locally mined products • 80% of RSA's steel is made locally from locally mined iron ore, chrome, manganese, coking coal • 30% of RSA’s liquid fuels are produced from locally mined coal • 94% of RSA's electricity is produced from locally mined coal • Most of our domestic chemicals, fertilisers, waxes, polymers, plastics, etc., are fabricated using locally mined minerals & coal • 13% of the world's platinum catalytic converters are made in RSA, and so on Overall another R300 billion in sales value and >150 000 jobs are created in the downstream beneficiation industries. Extra value is being created where the commercial opportunities exist
Side-stream beneficiation is a significant industry in its own right • Significant industries have developed to provide goods and services to the mining sector: • The Johannesburg Securities Exchange was established in 1887 and is the world’s 22nd largest exchange. • Financial and legal services were started to support mining and now accounts for 20% of GDP. • Significant education, skills development and knowledge cluster has evolved and developed around mining. • The development of infrastructure (rail, ports, electricity, etc.) is still dominated by demand from mining. • A significant manufacturing sector still supplied goods into mining, steel, mining equipment, explosives, etc. Overall, this industry is significant (2.3% of GDP and >200 000 jobs) and has become a big exporter into the rest of Africa.
Minerals & Metals In South Africa: A Significant Value Added Cluster Mining is one of the most extensive and Science Technology best developed South African industrial clusters Exploration Professional Extensive sciences & technology Geoscience schools network/research Broad expertise in geoscience Large exploration expertise Mining Equity Large number suppliers of equipment Suppliers financing and services World class educational and skills development systems and institutions Smelters Governance Sophisticated financial institutions Refineries Policy (JSE, banks, legal) Large scale smelting and refining.
Citibank research note rates South Africa as the richest â&#x20AC;&#x153;in situâ&#x20AC;? mineral resource holder in the world:
Source: Citibank
The South African mining industry is the world’s fifth largest by GDP value… South Africa has the world’s fifth largest mining sector measured by real GDP The global top ten mining countries as measured by Mining GDP (2008, US$ billions) Rank
0
20
40
1
China
2
USA
3
Australia
4
Brazil
5
South Africa
21
6
Canada
21
7
Russia
20
8
India
19
9
Chile
18
10
Colombia
Source: McKinsey
60
80
100
120
140
160
180
200 182
129
64
26
3
RSA
A “high road” is very possible for South Africa’s mining industry Two scenarios were developed for the forward looking scenarios
Production growth
‘High road’ Current constraints are relieved
B
C
A
D
Constrained by current bottlenecks ‘Low road’
Costs grow at historic rates
Source: McKinsey
Cost increases are reduced to half of historic rates
Cost Management
PRESENTATION OUTLINE The Strategic Context for the RSA Mining Sector Local context Why the Mining Sector is Important for the South African Economy
The Mining Sectorâ&#x20AC;&#x2122;s economic performance has not matched its potential Unpacking the Growth Constraints Conclusion
South African mining has performed poorly versus its global peers South Africaâ&#x20AC;&#x2122;s mining sector has underperformed in terms of economic growth relative to peers The global top ten mining countries as measured by growth in mining value added (2001-2008 real US$ terms) Rank
-5
0
5
10
1
China
2
Chile
3
Russia
4
Indonesia
5
India
7
6
Colombia
7
7
Australia
7
8
Brazil
7
9
Peru
10
Venezuela
13
South Africa Source: Global insight
15
20 19
12 10 8
6 4 -1
RSA
Despite having the worldâ&#x20AC;&#x2122;s largest in situ value of mineral resources, South Africa only accounts for 3% of Greenfieldâ&#x20AC;&#x2122;s growth projects in the next decade Citibank - Greenfields mining project volume addition by country (% of total), 2011-2020 Argentina, 1 Other, 17
USA, 2
South Africa, 3
Australia , 38
Russia, 3 Philipines, 3
Peru, 9 PNG, 2 Mozambique, 5 Mongolia, 2 Mexico, 1
Brazil, 3 Indonesia, 1 Kazakhstan, 1
Canada, 5 Chile, 4
PRESENTATION OUTLINE The Strategic Context for the RSA Mining Sector Local context Why the Mining Sector is Important for the South African Economy
The Mining Sectorâ&#x20AC;&#x2122;s economic performance has not matched its potential Unpacking the Growth Constraints Conclusion
South Africa: Stakeholder model to solving challenges: The Mining Industry Growth, Development And Employment Task-team (MIGDETT) Tripartite, leadership driven. Setup in December 2008.
â&#x20AC;˘ Short-term mandate (2008/2009): focus on limiting negative impact of global financial crisis on RSA mining sector.
â&#x20AC;˘ Long term mandate (2010-): to reposition the industry for sustainable growth and meaningful transformation.
Agreement by tripartite MIGDETT leadership to develop “Strategy For Sustainable Growth And Meaningful Transformation Of The South African Mining Sector” –To better understand the real potential of the RSA mining sector –Unpack the competitiveness & transformation constraints –Agree on a set of key priorities that need to be addressed –Move to “SA Inc” approach –Implement the agreed solutions
Assessing the competitiveness of the RSA mining sector •There are both •Controllable factors -infrastructure, regulatory environment, management efficiencies, etc.) and •uncontrollable factors (geology, grade, location, etc),
•that affect the competitiveness of the RSA mining sector. •The competitiveness assessment looked at six key areas: •General competitiveness •Inherent potential •Market context •Product demand •Regulatory environment •Enabling factors
South Africa ranked 52nd most competitive economy in WEF 2012-2013 report out of 144 countries
Competitiveness drivers of mining Competitiveness threat
Competitiveness drivers
Mixed picture Competitive advantage
Market context Factor market efficiency
The key threats to competitiveness of SA mining are
Industry structure Inherent potential Natural resource endowment Human capital/ skills Geographical factors
Enabling factors Infrastructure Ease of doing business ▪ Social licence ▪ Security of tenure ▪ Rule of law ▪ Macroeconomic stability
Product demand Accessibility of markets Domestic demand
(electricity, rail)
▪ Regulatory framework ▪ Social licence to
International demand
Regulatory environment Regulatory and legal requirements Institutional capacity
1 Dealt primarily in sustainability and transformation workstreams SOURCE: McKinsey & Company
▪ Infrastructure
operate1
▪ Human capital/ skills ▪ Institutional capacity ▪ Rapidly escalating costs
Enabling factors: •Ease of doing business – SA favourably ranked in top quartile. •Infrastructure – at a general level SA’s infrastructure is ranked as reasonable, but specific constraints have emerged (rail & electricity) •Social license to operate (safety, health, environment, etc.,) important component of the industry’s long term license to operate. •Macroeconomic stability – the country has adopted prudent macroeconomic policies, but volatile exchange rate is a challenge. •Political stability – SA is a stable constitutional democracy. •Technological readiness – SA ranks in 3rd quartile, but firm level technology absorption is in top quartile. •Business sophistication – SA ranked favourably in 2nd quartile. •Innovation capability – SA ranked favourably in 2nd quartile, with quality of R&D & scientific research organisations in top quartile.
More recently the nationalisation debate created some uncertainty – but this has been laid to rest SIMs doc produced for ANC • Wholesale nationalisation ruled out as an option • However, recommendations include greater state involvement, a resource rents tax, a sovereign wealth fund and constitutional changes. ANC June Policy conference • Wholesale nationalisation not an option. • Strategic nationalisation on a case by case basis and on the balance of evidence (same as 1992 Ready to Govern Document). • More balanced approach to mining. ANC December Mangaung Conference • Wholesale nationalisation ruled out • State to play a more interventionist role in mining
South Africa is ranked 39th easiest place to do business (out of 185 economies)
Good
Bad
Rough growth potential of some of the bulks: • Iron ore could double production within 5 to 10 years to >100 million tons (MT) per year by 2020. Employment could rise from 18 000 to 30 000 people. Biggest constraints: rail. • Coal production has to rise from current 254 MT p.a. to 355 MT by 2020 to satisfy Eskom, Sasol & exports. Jobs could increase from current 73 000 to 100 000 by 2020. Biggest constraints: rail, regulatory issues. • Manganese could double/treble production from the current 7.2 MT to 15MT/20MT by 2020. Employment could rise from current 5879 to >10 000 in this period. Biggest constraint: lack of access to efficient heavy haul rail These three bulks could significantly increase their export earnings and GDP contribution and add about 50 000 jobs, if the constraints are resolved.
South Africa has adopted a partnership approach to resolving the constraints (through MIGDETT) • The MIGDETT stakeholders recognise the challenges. • Assessment of the constraints has been completed. • Work is underway to resolve the constraints. • By 2014, MIGDETT focus is on getting South Africa back into top half of the rankings.
MIGDETT Milestones, so far.. • Documents on Competitiveness and Transformation completed. • These document were debated at a comprehensive Mining Summit held in late March 2010. • Final declaration signed 30 June 2010. • Revised Mining Charter finalised in September 2010. • Sectoral growth strategy completed and submitted to Cabinet in Dec 2010. • New web-based application system launched early 2011. • Mining back on top 5 sector priority list of government. • Platinum Task Team established in June 2012. • Further work being done to strengthen MIGDETT
Work is being done on solutions • The DMR has released a MPRDA Amendment Bill (industry is engaging through the Chamber). • The infrastructure task team is working on a matrix of infrastructure constraints per commodity (input to the PICC). • There is an investigation into issues holding back exploration & R&D. • A state owned mining company has been launched to compete on a level playing field with the private sector. • The stakeholders are engaging on wide range of areas to promote competitiveness and growth. • The stakeholders are engaging on the challenges facing the PGM mining sector.
PRESENTATION OUTLINE The Strategic Context for the RSA Mining Sector Local context Why the Mining Sector is Important for the South African Economy
The Mining Sectorâ&#x20AC;&#x2122;s economic performance has not matched its potential Unpacking the Growth Constraints Conclusion
South African Mining Industry of the Future? Government and trade unions: proud of and fully supportive of the mining industry and acknowledge industry as important for the country
Investors regard industry as a good investment destination
Constructive
Skilled workforce, transformed, productive, decent wages and non-discriminatory, safe & healthy workplaces
Key exporter Key earner of foreign exchange Key taxpayer Creator of decent jobs Developer of skills Key contributor to economy
Partnerships built on TRUST
Management not only focus on profits, but provide decent jobs, play positive role in mining communities and sensitive to environment
Conclusion
Mining and minerals matter for the growth, development and transformation of SOUTH AFRICA and AFRICA
Conclusion
South African Mining: “Putting South Africa First”