Bulk commodity and base metal prices in South Africa have shown an impressive recovery over the last two years from the long-term lows experienced in the beginning of 2016.
These price recoveries were driven by global economic growth and China’s focus on greener production. Unfortunately precious metals didn’t have the same recovery and platinum prices for example are trading at severe lows, PwC partner Andries Rossouw tells SASCHA SOLOMONS.
“On a global basis mining companies benefited from the improved prices and cost management strategies previously implemented which resulted in an impressive increase in profitability and cash generation,” says Rossouw.
The improved cash generation allowed most companies to improve their balance sheets. However, overhang in supply has meant that capital expenditure was still at 10-year lows.
Commodities in 2018
While bulk commodity producers have enjoyed a more profitable year, precious metal producers have not experienced the same fortunes due to pressure on prices and a significantly higher cost base. This meant significant impairment provisions by precious metal miners.
Whether the trend for bulk commodities will continue into 2019 will largely depend on ongoing economic growth. The impact of global trade wars could negatively impact on prices and eventual profitability.
On the other hand most of South Africa’s gold and PGM production still comes from deep level labour intensive conventional mines. These producers weren’t only impacted by stagnant or lower prices, but also by significant cost increases over the last number of years.
With labour often making up in excess of 50% of mining costs and electricity approximately 10%, the well above inflation cost increases eroded margins.
These mines are also more severely impacted by the essential additional direct cost in safety measures and indirect cost on productivity.
“Capital expenditure in South Africa has started to show signs of recovery as the historic lack of investment eventually catches up with mines leaving them with no choice but to start spending on sustaining capital expenditure.”
Precious metal companies will continue to battle in the low price versus high cost environment. The ongoing retrenchments and restructuring in this sector is testimony to the tough environment experienced by these companies.
Change in the mining industry is normally driven by long-term trends. However, Rossouw illustrates that the announced strategic review of Impala Platinum’s and Lonmin’s Western Limb mines is likely to have the biggest impact in next year.
The PGM basket price is reflecting an increase despite the woes of the platinum price on the back of increases in prices for the rest of the basket, notably palladium, rhodium and nickel that are doing well. Since 1970, the only time that it happened previously was in 2000-2002. This lead to good growth period for platinum prices.
The uncertainty with regards to platinum demand, which is really driven by the uncertainty around new technologies on the demand side is currently placing a damper on long-term investment positions and perceptions on long-term prices.
This position might change in the long run if for example hydrogen fuel cells were to emerge as a commercialised preference. The likes of Anglo American Platinum and Impala Platinum are investing in developing these downstream technologies which could eventually support demand.
PGM production in the long-term is likely to follow the same route of moving away from labour intensive mines to mechanised mines. Good examples are Anglo American Platinum’s Mogalakwena open cast mine and developments at Ivanplats’ Platreef mine and operators in Zimbabwe.
Similar restructuring announcements in the gold industry will continue to impact gold production and bulk commodities are currently impacted by freight rail constraints.
“In the absence of new technological solutions to mining gold at depth our gold industry is likely to struggle in the foreseeable future.”
Further, with regards to commodity prices he foresees bulk commodity and base metal prices impacted by global economic growth.
“Increases in real interest rates in the USA have traditionally put pressure on gold prices. It will be interesting to see whether the global uncertainty and risk would offset that.”
In addition, South Africa continues to see structural reform in the mining sector with a long-term move away from deep level conventional mines to mechanised mines.
At present it means an increased contribution from bulk commodities such as coal, manganese, chrome and iron ore to the total mining revenue basket.
The regulatory environment
Investors in new long-term projects need to price in long-term uncertainty.
“Although we’ve seen progress in South Africa with regards to certainty around the Mining Charter, other mining jurisdictions such as the DRC and Tanzania elected to raise taxes end regulatory requirements which could place a damper on investment,” states Rossouw.
“For South Africa, there are still a number of areas with uncertainty that should be clarified with the new regulations still to be issued; there was great progress from earlier versions of the charter. We applaud the consultative process that led to the revised charter and hope that the industry and government will continue to work towards a sustainable mining regulatory framework,” he concludes.