At the start of the Great Depression in 1929, SA prime minister Barry Hertzog insisted: "There is no reason to anticipate a slump." He got it horribly wrong. Annual diamond export revenues dropped from £16,5m to £1,4m from 1928 to 1934, and widespread unemployment racked the country, forcing people to beg on the streets.
SA's mining sector faces this scenario today as the global credit crisis hits hard and the world's economic powerhouses are plunged into recession. The cancerous global credit dearth is starting to eat into capital expenditure plans of miners worldwide. About US$50bn earmarked for new mines and expansion projects in 2009 will now be delayed, according to Credit Suisse this week. And a further $150bn scheduled for between 2010 and 2012 could be put on ice. This is an ominous sign for the local mining sector, as companies will struggle to fund any growth ambitions.
Though government says exchange controls and the National Credit Act have largely insulated SA's financial institutions from the global market fallout, minerals & energy minister Buyelwa Sonjica has warned that the local mining sector could be facing a great depression of its own. "Until the global economic crisis has passed, we will take a knock one way or another... mining is probably the most vulnerable [sector] in SA."
Sonjica says foreign direct investment in SA's mining sector will wane, but she doesn't know to what extent. "The effects on the platinum and gold industry are very concerning for SA."
Apart from the global economic uncertainties and the fact that it is mostly cheaper and easier to mine elsewhere, the SA mining sector has its own set of entrapments. Factors threatening the future of the sector - which directly contributes 6,8% to GDP and 17,5% in total - are poor safety records, power shortages, skills, bureaucratic red tape, increased costs, logistics constraints, depleted reserves and rand volatility.
Given that the mining sector employs 500 000 people and brought in roughly 50% of SA's total merchandise exports last year, these factors, together with collapsing commodity prices, could have a profound effect on economic growth. Finance minister Trevor Manuel has already downgraded his growth expectations for SA from 4% to 3,7% for 2008.
The Chamber of Mines estimates that about 10m people would lose their daily subsistence without mining. Migrant labourers from Mozambique, Lesotho and Swaziland, who make up almost a third of SA's mining workforce, will be most affected. And the country's cavernous current account deficit (when we import more than we export) is likely to swell beyond its 7,6% of GDP this year as a result of falling commodity prices.
Lower prices for products mean mining firms get less money and pay government less in tax. Export revenue will also take a knock. The mining sector raked in R310bn in revenue last year. Of that it spent R50bn on wages, R37bn was reinvested as capital expenditure and R22bn went to taxes, with an equal amount paid as dividends. "Most of the benefits were reinvested locally; it's important that people realise that," says Chamber of Mines chief economist Roger Baxter. "The mining sector's economic footprint in SA is very significant."
But market conditions have changed globally and some future projects in SA could be canned or put on hold. Diamond and platinum miners that produce at the upper end of the cost curve could feel the greatest pressure.
Two of the world's biggest resource firms, Rio Tinto and Anglo American, say they are reviewing their expansion plans, with BHP Billiton forecasting volatility and uncertainty to persist in the near term.
Already, several mines have been forced to close as profits of base metal producers get squeezed on the back of crumbling commodity prices. Last Wednesday Toronto- and Johannesburg-listed Uranium One halted production at its Dominion mine near Klerksdorp after the uranium price dropped from last year's high of $135/lb to $45/lb. Two days later, Patrice Motsepe's African Rainbow Minerals (ARM) shut down temporarily two of its ferrochrome smelters it owns jointly with Assore, because of a sudden decline in market demand.
Marsh Risk Consulting Africa mining practice leader Jane March does not rule out further SA mine closures, but it's too early to say to what extent.
Commodities that have been hammered in SA are platinum and base metals. Platinum has dropped from its record high of $2 300/oz in March to $720/oz earlier this week. At this price, many existing and new mines are uneconomic because of surging costs.
North American Palladium announced last week the closure of its Lac des Iles mine in Ontario because of low platinum-group metal prices. Blue Note Caribou Mines in Canada will shut down two zinc and lead mines in November because of low metal prices.
And AngloPlat, the world's biggest platinum producer, says given current metal price levels and uncertainty in global markets, "the costing and scheduling of all capital projects are under review".
The credit crisis has also forced diversified miner Xstrata to temporarily shelve its plans to buy SA's third-biggest platinum miner, Lonmin, for $10bn.
Baxter would not speculate on the extent of the commodities bust on SA, saying mining companies would turn to closures as a last resort. "Mining is a long-term game where one doesn't simply stop activities for a year and come back."
Miners of base metals like copper and nickel are also reeling from price collapse pressures and mine closures. But some SA operations might be in a better position to survive. This is because the country's biggest copper mine, Palabora Mining, is owned by Rio Tinto, which has enough money to keep the mine afloat until prices stabilise. Russian giant Norilsk Nickel, which jointly owns the Nkomati nickel mine in Mpumalanga with ARM, should also ride out the crisis thanks to its strong cash positions.
Though mining might be in trouble now because of the global slump, it has never been a walk in the park. In a review of the top-40 global mining companies for 2008, PricewaterhouseCoopers shows that though revenues grew by 32% in 2007, costs increased by 38%. The review also identifies the shortage of new resources and skills, such as metallurgists and mining engineers, as pressing issues for the industry. Power shortages present further challenges to mining outfits.
Added to this is the increasing difficulty companies are having in procuring the equipment they need to mine.
While these are global problems, SA has to contend with other concerns, too. "We've had a commodities boom for the past seven years but SA has not been able to take full advantage of it, particularly in the past three years," says Baxter. "Why has SA's mineral production been falling while countries like Australia have been rising? That's a question we've got to ask ourselves."
SA's mining production has shrunk over the past three years. From 1994-2003 real fixed investment in the mining sector grew by 7,8%/year. Then in 2004, it plunged 20%, and in 2005, 13%. It bounced back "quite nicely" in 2006 by 40%, gaining a further 20% in 2007. "The problem is that this hasn't yet fed through to increased production," says Baxter. Gold, however, has been in terminal decline since 1972, when SA produced 79,1% of world output. It now manages only about 11%. So what has been holding back the country's resources sector?
When Eskom cut off the country's power supply in January, all mines had to operate at 90% of their normal power requirements and most are still producing at that level. AngloPlat lost 150 000 oz of platinum in the first two months of this year because of the power crisis. That's worth $260m at this year's average platinum price. The gold sector lost 30 t of production (R7,8bn at current prices) because of the power shortage.
Baxter says it is "nonsensical" that government is cutting off power to an industry that is the biggest exporter.
"The fortunes of the SA mining sector hinge on the criticality of improving exports [which is important to reduce the current account deficit]," says Baxter.
But exports were already impeded. The World Bank ranks SA 147 out of 181 countries for trading across borders.
The shortage of rail infrastructure, particularly for coal and iron ore miners eyeing lucrative export markets, is also constraining the industry. A good example is Richards Bay Coal Terminal, the world's biggest single coal export terminal. Its stakeholders are lifting its capacity from 72 Mt to 91 Mt by next year in a R1,1bn expansion project. Transnet Freight Rail, on the other hand, plans to expand the capacity of its coal line from Mpumalanga to the port to 82 Mt over the next five years.
Red tape is also a hindrance. Mining companies have to deal with three different government departments - land affairs, water affairs & forestry, and minerals & energy - to get approval for environmental management plans.
Potential investors don't want red tape but rather "smart tape" and a "one-stop shop", says Baxter. Sonjica is aware of these problems and concedes "this is a risk we can't take lightly".
The safety record is another big risk to the industry's future. Ousted president Thabo Mbeki commissioned an audit into the safety standards of 355 mines. The findings of the probe are expected to be released soon.
SA's black ownership requirements are also a stumbling block. By law, blacks must own 15% of every mining project in the country by 2009, and 26% by 2014. Shareholders in international mining companies struggle to understand why their shareholding in a project has to be diluted in a practice that's uncommon in the rest of the world.
More recently, government's plan to resurrect the state-owned mining company, African Exploration Mining & Finance Corp, has caused jitters in the private sector. "I cannot see the economic sense of doing so," says Baxter.
It's too early to predict whether the new state company will deter investment in the private sector. But Baxter says it is important that government sets a clear and competitive framework.
Sonjica says no firm decisions have been made on the role of the new mining parastatal, but it "won't seek to nationalise mines". Rather, government will use it to accelerate black participation in the economy, and secure coal supplies for Eskom.
While the future of mining seems bleak in the short term, coal and gold could be a saving grace for the industry. Gold mining seems to be in better shape than most base metal and platinum producers to "weather the storm", says Marsh's March.
Though the gold price has not been immune to the global rush to cash - the dollar in particular - it has held up against platinum, copper, nickel and uranium. The dramatic depreciation of the rand to almost R12/$ over the past two weeks has also lifted the price that SA's gold miners receive. The gold price in mid-September scraped R270 000/kg, settling to around R260 000/kg. SA's big three gold miners - AngloGold Ashanti, Gold Fields and Harmony - produce at total costs of around R180 000/kg, leaving plenty of room for profit.
March, however, points out that a weaker rand means mining houses pay more for imported consumables and equipment. Even so, this doesn't completely erode the benefits of a higher rand-gold price, she says.
The gold sector alone accounts for just under 8% of SA's merchandise exports. It employed 168 000 people last year. Including the multiplier effects, it accounted for 3% of the country's GDP and made R40bn in sales. Though SA lost its century-old position as the world's biggest gold producer to China in 2007, and is expected to slide to third or fourth place behind the US and Australia this year, gold still plays a key role in the economy. After all, the gold under the ground is the reason why Gauteng is Africa's economic powerhouse. But what does the future hold for SA's gold giants?
The two biggest of these say they will continue to turn profits for decades to come.
Gold Fields' Holland says his company will be able to at least maintain and grow production levels when its R6bn South Deep mine reaches full production in 2014.
AngloGold Ashanti Africa executive vice-president Richard Duffy adds: "It's still a robust industry and will continue to be for many years." AngloGold's SA operations are "more than competitive" with its global mines and wider mining sector. For example, AngloGold's two core operations - Mponeng and Moab Khotsong west of Johannesburg - will continue producing the precious metal "beyond 2030" at current prices.
SA coal mining will also be resilient to the global commodity slowdown. While coal prices have softened from their highs of around $160/t in June to $120/t this week, this still provides attractive margins for mines. Demand from Eskom for coal will also drive up domestic prices. Eskom bought 110 Mt of coal last year and this is set to rise as its new power stations come on stream over the next few years.
Says Baxter: "I'm still a believer in the fundamental drivers of the commodities boom and the underlying structural drivers of it." The long-term prospects of the mining industry remain buoyant for companies that can ride out the storm. BHP Billiton, Rio Tinto and Anglo American all make that point clear in their recent production reports for the quarter ended September 30. They say despite the short-term precariousness of global markets, countries like China will drive strong demand for their products further down the line.
Rio Tinto says the Asian powerhouse is "pausing for breath". This comes after China's double-digit economic growth of the past decade pushed commodity prices to record levels.
Says Anglo American: "Our strong strategic position and the market fundamentals of our core commodities will continue to drive growth over the medium and long term, with constrained supply and demand led by China."
After the dust settles on the global doom, March predicts: "There might be some recovery in the next couple of years."
Investors should note that the Chinese dragon and other emerging economies might be taking a bit of a nap, but are not in an eternal slumber. When they begin to rise again, demand for commodities will pick up, as will share prices in the sector.
In fact, SA managed a "remarkable" recovery after the Great Depression of the 1930s. Says John Cameron-Dow in his book Newspaper History of SA
: "Almost overnight, unemployment shrank, wages rose, foreign debt was repaid and the gold price soared."