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South African gold mining’s fall from grace

The ever-continuing gold output decline could be exacerbated by new wage negotiations.

South Africa may have regained its position as the world’s fifth largest gold producer in 2014 when all the figures have been tallied. One estimate of global gold output in 2014 records that the country produced 168 tonnes, a small increase on 2013’s 164.5 tonnes. Not so many years ago, South Africa had totally dominated world gold production producing 1 000 tonnes a year. But latest output figures from Statistics South Africa show a serious continuing decline in monthly gold production. With new across-the-board wage negotiations coming up over the next couple of months, some suggest that this year could, as a result, see a further sharp slump in output. Initial indications suggest that the wage talks may be extremely difficult. And difficult wage negotiations in the South African context can get out of hand as witness the virtual four month shutdown of much of the country’s platinum sector in 2012. This was coupled with some horrendously violent events (including the Marikana massacre when police opened fire on striking miners killing 44) and continued reports of other violence and intimidation throughout.

It’s not that we necessarily expect this to be replicated in the gold mining sector negotiations, but inter-union rivalries between the NUM, which represents around 57% of gold sector workers, and AMCU, which tends to be more militant in its approach, which currently looks after the interests of around 25% and is seeking to replace the NUM as the industry’s main union, could add another dimension – and probably not a positive one.

Thus the NUM will be looking to protect its currently dominant position in the gold sector by playing hardball, while AMCU will be looking to gain ground as it did in the platinum mines where it managed to supersede the NUM as the dominant union. Thus initial reports suggest the NUM is, as a preliminary negotiating ploy, looking for wage increases of 100% for the lower paid section of the gold mines workforce.

But this comes at a time when a number of existing mines are operating at a loss even on a cash costs basis, and perhaps half the sector is loss-making on an All in Sustaining Costs metric, and there’s little sign of any improvement in the gold price – indeed it has fallen to four to five month lows this week.

Thus the mining companies cannot concede major wage increases without having to shut down mines (which will generate government opposition given the huge numbers employed in the sector) and the implication is that the wage talks could thus become a very hard fought battle for the hearts and minds of the workforce which could easily turn nasty, as in the platinum mines.

And as to South Africa’s continuing gold production decline, regardless of the outcome of the labour negotiations, Statistics South Africa – the state’s statistical body – a week ago published an appraisal of how it views the situation and this makes for interesting reading for followers of the sector. A very much shortened version of Stats SA’s analysis is set out below – the full statement and some more associated comment may be viewed on the website – click here to view:

[South Africa’s] gold production reached a new monthly low in January, according to data released by Stats SA. Although a number of temporary factors might have contributed to the unusually low level, general historical trends show that gold has lost the prominent place it once had in the South African economy.

Stats SA has published comparable mining production indices that go back as far as January 1980, for the industry as a whole as well as for various minerals, including gold, iron, platinum and coal. The indices provide an indication of the level of production, set against a particular base period. Currently, the index has been set to 100 for the base period of 2010.

Historical values of the gold index show the extent of how production has fallen. In January 1980, the index was 359.0, while the volume of gold produced was far lower in January 2015, resulting in the low index of 48.4. What is not shown in the graph, however, is that production started on its downward trend well before January 1980.

Fig. 1. Monthly gold production index, 1980-2015 (Base: 2010=100)

gold pic 1

The fall in production has reduced gold’s contribution to the South African economy. The metal contributed 3.8% to gross domestic product in 1993, falling to 1.7% in 2013. In terms of sales, gold made up 67.0% of all mineral sales in 1980, falling to 12.5% in 2014.

So with the waning importance of gold to South Africa, does the future hold any promise for the industry? One estimate suggests that the country will soon need to look beyond the precious metal as a major resource, and if this estimate holds true, many South Africans alive today will see the country taking on a much reduced role on the global gold mining stage.

Fig 2. South African gold mining production from its 1970 peak of around 1,000 tonnes as a percentage of global gold output

gold pic 2

Chart published on Zero Hedge in 2012. To view article click here 

That assessment makes for depressing reading for the South African gold mining sector and indeed for the South African economy as a whole. There has been some respite within the gold sector itself due to the declining value of South Africa’s rand against the US dollar, but this also ultimately leads to increasing inflation which in turn tends to cancel out the advantages – and leads to ever more problematical wage demands in percentage terms as miners seek to at the very least maintain their standards of living.

Truly the South African gold sector is increasingly finding itself between a rock and a hard place. In this writer’s view the country’s gold sector is well set to continue on its downward path and is unlikely to make any recovery as the mines get ever deeper making the gold they produce more costly, and more dangerous to mine. Already some mines are producing the majority of their output from more than 2 miles vertically below the surface. Improvements in technology may enable them to continue to do so, and move even deeper – but at what cost? The only salvation could be a huge gold price increase, but it is not certain that even that could do more than temporarily arrest the continuing decline.


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