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South Africa’s Mining Sector Needs Urgent Reforms Amid Economic Decline

Minerals Council Urges Swift Action to Halt Mining GDP Fall

by Adenike Adeodun

South Africa’s mining sector is grappling with significant economic challenges, necessitating immediate and decisive action from the seventh administration. The Minerals Council South Africa has called for the government to fast-track structural reforms initiated by the sixth administration to halt the economic decline. On June 5, the council emphasized the critical nature of these reforms for the industry’s survival and growth.

Statistics South Africa reported on June 4 that the mining sector’s GDP, measured in real terms, contracted in the first quarter of the year. This contraction reflects the broader economic difficulties faced by the sector. The value added by mining declined by 2.3% quarter-on-quarter, almost entirely reversing the 2.6% growth recorded in the previous quarter. This decline in the mining sector has significant implications for the overall economy, reducing the GDP by 0.1 percentage points.

The contraction in the mining sector was driven by lower activity in several key areas, including platinum group metals (PGM), coal, gold, and manganese. This decline is particularly concerning given the sector’s importance to South Africa’s economy. Compared to the first quarter of 2023, the mining value added fell by 0.3% year-on-year, highlighting a persistent downturn.

Despite the challenges in mining, the non-mining GDP managed to post a modest gain of 0.1% quarter-on-quarter, thanks to a significant rebound in the agricultural sector. Agriculture grew by 13.5% quarter-on-quarter, recovering from weakness in the second half of 2023. However, value-added in five other major sectors declined in the first quarter, underscoring the widespread economic weakness at the start of the year.

Mining’s underperformance began in 2022, a year marked by record power cuts and worsening logistics. These constraints have continued to hamper the sector’s growth. The mining GDP is now 9.5% below its pre-pandemic level, in stark contrast to the non-mining GDP, which is 1.7% above its pre-pandemic level. This disparity underscores the unique challenges faced by the mining sector.

The tough operating environment for mining is also reflected in profitability figures. The gross operating surplus for mining declined by 12.8% year-on-year in the first quarter. In contrast, the non-mining economy saw a 6.7% increase in the gross operating surplus, revealing a stark divergence between the two sectors.

Despite these challenges, one area where mining outperformed was in employee compensation. The compensation of employees in the mining sector increased by 8.6% year-on-year in the first quarter. By comparison, the average increase in compensation for non-mining sectors was much lower, at 3.4% year-on-year. This rise in employee compensation highlights the sector’s commitment to its workforce despite economic difficulties.

The Minerals Council noted that the absence of load curtailment in the second quarter could bode well for improved GDP performance from April to June. Load curtailment has been a significant issue for the mining sector, and its absence could provide much-needed relief. However, production cutbacks in key sectors like PGMs, due to factors unrelated to energy security, suggest that mining output may not fully benefit from this reprieve, at least not immediately.

The overall economic outlook remains cautious. The moderate contraction in GDP in the first quarter indicates potential downside risks to the already subdued real GDP growth forecast of 1% for this year. The need for structural reforms is more urgent than ever. These reforms are crucial not only for stabilizing the mining sector but also for ensuring the broader economic health of South Africa.

The South African mining sector’s economic challenges are a pressing concern that requires immediate and decisive action. The Minerals Council of South Africa has called for the seventh administration to accelerate structural reforms to address these issues. With the sector’s GDP contracting and profitability declining, the need for reform is clear. While some positive signs exist, such as the absence of load curtailment in the second quarter, significant risks remain. The future of South Africa’s mining sector depends on the swift implementation of these necessary reforms.

Source: Mining Weekly

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