NEWS24 / 07 MARCH 2019 - 05.00 / TERENCE CORRIGAN
If South Africa's minerals production – which is lower now than it was in 2013 – were to improve, all sorts of further opportunities would open up in the upstream supplier space, writes Terence Corrigan.
A thriving mining industry that generates demand for goods and services running to billions of rands would deliver much greater economic gains than minerals beneficiation.
Yet, beneficiation is the official policy of the Ramaphosa government, despite expert advice that it is a costly mistake which cannot work. Beneficiation, in the South African debate, means downstream industrial development – taking mined minerals and transforming them into industrial products like machine tools, cellphones and motor vehicles.
This is a response to the "man in the pub" level of complaint that South Africa mines all these wonderful minerals yet "doesn't do anything with them". The problem is that this misunderstands how developed economies have achieved success.
Examining the costly misunderstanding is the thrust of the latest report from the Institute of Race Relations, "Multipliers from Mining", which makes the case for focusing on the industries which supply mines – the so-called backward linkages.
Comparative experience shows that having minerals doesn't simply translate into producing finished goods anywhere. South Korea is the world's biggest exporter of steel products despite having negligible iron ore reserves (less in fact that North Korea). Switzerland farms no cocoa yet is a famous chocolate producer.
Renowned development economist Paul Collier of Oxford University argues that, "governments become wrongly fixated about value added downstream. For most minerals, beneficiation does not make sense".
The South African government should know this. The 2008 international panel on the Accelerated and Shared Growth Initiative (ASGISA) says exactly the same thing and concludes that, "privileging beneficiation is unwarranted and it takes government's attention away from other opportunities that may have more potential to create export jobs in South Africa".This is not arcane or secret knowledge.
The paper which makes the point, by Harvard economists Ricardo Hausman, Baily Klinger and Robert Lawrence, was commissioned by the South African government and is available on the National Treasury website.
Even more obvious is the chapter in National Development Plan – supposedly official government policy – which argues that "beneficiating all of the country's minerals is neither feasible nor is it essential for developing a larger manufacturing sector" and "there are important trade-offs to be considered in mineral beneficiation". But South Africa insists on swimming against the tide.
President Ramaphosa has repeatedly affirmed beneficiation as official policy. In his 2018 State of the Nation Address, he stated that "we will reindustrialise on a scale and at a pace that draws millions of job seekers into the economy". Noble words – but the policy instruments the government has designed point in a different direction. And not only is beneficiation policy destined to fail to meet this ambition on any sort of scale, it also does actual harm to the basis of it all: mining itself.
The 2018 BEE Charter for the mining industry is the latest in a series of regulations which inhibit mining investment in South Africa. It allows mining companies to claim "offsets" or exemptions from its black ownership provisions, in proportion to their "beneficiation activities". In other words, if they engage in manufacturing, they do not have to find as many black co-owners. This ignores the fact that there is not a mining company in the world which has manufacturing ambitions.
The charter adds rigid requirements for local procurement and supplier development. It requires that 70% of capital goods are sourced from South African companies and specifies, in a complex matrix, how many of these must be black-owned, how many BEE compliant, how many owned by women and how many youth-owned.
Policy makers need to ask themselves which the more likely outcome is: That there will be a surge in the number of black-owned mining equipment manufacturing companies in South Africa; or will international mining companies with alternatives elsewhere shift their focus to operations outside South Africa? The second is far more likely.
But mining can assuredly be the basis of future industrial development. Ricardo Hausman argues that the formula for development is not "adding value to (a country's) raw materials" but rather "adding capabilities to (a country's) existing capabilities". In other words, the way ahead is to mix new capabilities (say automation) with capabilities a country already has (like getting minerals out of the ground). Thus the basis of development is a thriving mining industry.
If South Africa's minerals production – which is lower now than it was in 2013 – were to improve, all sorts of further opportunities would open up in the upstream supplier space. That means abandoning the present beneficiation strategy together with its misguided premises and false hopes.
- Terence Corrigan is a project manager at the Institute of Race Relations. Readers are invited to take a stand with the IRR by sending an SMS to 32823 (SMSes cost R1, Ts and Cs apply).
Disclaimer - The views expressed here are not necessarily those of the BEE CHAMBER