The economic tide appears to be turning and just over a month ago TradeInvestSA looked at how the South African economy was beginning to mend. One industry that is crucial to monitor during this period is the mining sector. In our second issue in 2010, TradeInvestSA examines the state of the mining industry in South Africa and we look ahead to the prospects of the coming year.

Long recognised as the most prominent sector in South Africa and despite that fact that the industry is only the fifth or sixth largest contributor to total GDP at present, the mining industry is still regarded as a cornerstone of the economy. Not only is it the biggest employer, but the demand for the many commodities that South Africa possesses has played a major role in helping the economic recovery of the country. South African mining companies are of the most successful in the world and South African expertise in this sector is globally recognised.

The recession's effect on the industry

The global recession hit the mining sector very hard and the fall in export sales and commodity prices in late 2008 and early 2009 led to massive job losses, estimated to be in region of 50000. This number could have been even bigger with analysts putting estimated losses at between 100000 and 150000 had the government, labour unions and mining companies not implemented the Mining Industry Growth, Development and Employment Task Team (MIGDETT), which helped mitigate against those larger potential losses.

The mining industry experienced a series of disastrous events, where commodity prices fell at the same time as demand fell. This forced most mining companies to cut production and either reduce or cancel any major expenditures on capital-intensive projects. These major cutbacks led to the major job losses and by March 2009 things did not look good.

The levels of mining production continued to drop significantly during this period, off the high volumes in January 2005. There was a steady decrease with the lowest production levels experienced in January 2009. Production increased from there but then fell again between June and September 2009. Much of the same misery has befallen the mineral sales figures, with them having dropped 30% overall between October 2008 and October 2009.

The increased levels of production, however, between October 2009 and November 2009 are hopefully a sign of things to come.

The turnaround

The mining sector's turnaround began in about May 2009. As Nicky Weimar, Senior Economist at Nedbank, notes, there were several factors which contributed to this. 'Firstly, the US dollar weakness played a critical role as most commodities are denoted in that currency. The prices of commodities needed to rise as the US dollar fell to maintain the real or inflation-adjusted value of the commodity at the same levels. Added to this, the weak US dollar convinced many central banks across the world to diversify their foreign assets out of US dollar and into commodities.  This led to both a price and volume effect emanating from the weaker US dollar.'

Secondly, the slow nature of the global recovery began in earnest around that time and the stimulus was mainly led by China. As China started to reinvest in major projects again so the demand for commodities increased again.

Lastly, these two factors combined to provide positive prospects for commodity investors. The frailty of the US and European economies, together with the strength of the Chinese and other major emerging economies made investors seek opportunities in these markets, many of which were 'commodity-intensive'.

These commodity prices are on the rebound but there is still a way to go. The platinum price, for example, lost about 60% of its value in 2008 and is still now recovering. Gold production is still declining, despite its higher price.

Outlook for 2010

The outlook for 2010 does however look brighter, although a cautionary note must be added. As Nicky Weimar notes, 'While a global recovery appears to be on track in early 2010, the rate of growth is likely to remain subdued and fragile and the risks of new setbacks in the global landscape remain exceptionally high...' The growth in the sector will hinge on continued growth in global demand and particularly the demand in China and the other major emerging markets. It will also depend on the slow recovery of the US and European economies as their appetite for South African commodities will always remain relevant and important. Weimar finally notes that, 'the South African mining industry should experience higher export volumes and achieve better prices, especially in relation to the Chinese and other emerging markets in 2010. Some of these gains will however be offset by a stronger rand, especially in the first half of 2010.' 

According to Frost and Sullivan’s mining industry outlook for 2010, the challenges that face the sector in the year ahead include electricity supply shortages, skills and safety concerns, that adversely impacted on production in 2009 and are likely to continue to affect the performance of the mining industry in the year to come. The recovery of commodity prices, particularly in the gold, platinum and coal sectors, is also likely to lead to increased wage demands from the labour unions.

Despite these challenges Frost and Sullivan is still positive about the mining sector’s prospects in 2010: 'Although the speed and extent of global economic recovery is still subject to debate, commodity prices are likely to put up a strong performance in 2010. Secondly, the global mining industry is likely to be buoyed by growing physical demand for commodities, the strong possibility of speculative behaviour/buying from many stakeholders in the industry and rising prices to expand production capacity.'

If the challenges can be overcome and the damage of price volatility reduced, then the mining sector will continue a steady rise out of the recession.