Trouble in the mining sector: finding a way out

It does not take an analyst to tell us that the South African mining sector is in deep trouble, from wildcat labour unrests to a general decline in production and contribution to the economy. Tendai Gwatidzo and Miracle Ntuli presented their thoughts on the origin of the sector’s maladies and proposed some remedies at a recent HSRC seminar.

The importance of salvaging the South African mining sector is borne out of its massive economic contribution. It is the top global producer of platinum metals and chrome ore, and ranks among the top three global producers of manganese ore and titanium. According to a Citigroup report, the sector’s reserves are estimated at approximately US$2.5 trillion, indicating that it still has a lot of potential. The sector’s economic contribution includes worker employment, export earnings and government revenue.
Its workforce comprises around half a million people. If we assume a modest dependence ratio of 1: 4, the number of direct beneficiaries climbs to about two million.

The sector generates vast amounts of government revenue through taxes and royalties. It raises around 30% of the country’s export earnings, and contributes 5% to GDP. This contribution is amplified if one considers
mining’s forward and backward linkages with the rest of the economy.

Why the decline in the mining sector?

The main causes of the sector’s decline are geological and external. Geological causes encompass poor ore grade and decreasing tonnage related to ageing mines – new mines are few. As deposits are gradually depleted, miners are forced to mine at deeper levels, resulting in high extractive costs. The external factors include changes in minerals markets and legislation issues related to compliance and a generally unpredictable policy environment.

Mining sector strikes are becoming more frequent and longer in duration.

Labour unrest

Mining sector strikes are becoming more frequent and longer in duration. The 2012 platinum strike, which disrupted production and saw the death of more than 40 people, was followed by the 2014 AMCU-led strike, which lasted more than five months. It is estimated that Anglo American Platinum, Lonmin and Impala Platinum incurred combined revenue losses of more than R20 billion and workers lost about 47% of their yearly wages.

These also affected the country’s GDP, contributing to a 0.6% GDP decline in the first quarter of 2014. The concomitant decline in mining’s export revenue saw the rand weaken significantly and the current account deficit balloon. Since there was no estimate of the indirect socioeconomic cost of the strike, its actual cost remains elusive, but even a back of an envelope calculation shows that it’s a huge amount.

In a recent study we found mining paid better than other sectors.

Wages and education

In a recent study we found mining paid better than other sectors. In 2012, mining’s median minimum wage was R4 743 compared to R4 000 for all sectors combined,

indicating a 19% wage benefit for those working in mining. However, the sector’s recent unrest points to an inadequacy of this compensating wage differential. This could be due to a concoction of current and historically-induced challenges facing these workers. Noteworthy are the dangerous and highly strenuous working conditions, and the legacy of the migrant labour system and its ensuing poverty and inequality.
Further study findings suggested mine workers were also pushed into demanding higher remuneration as their CEOs earned 300 times more than most workers. This differential was intricately linked to the sector’s stubborn black-white wage hierarchy.

This can be explained by the human capital theory juxtaposted with the country’s racial differential in educational attainment. As such, mining pays better qualified workers (mostly whites in white collar jobs) more than those with basic education (mostly blacks in blue collar jobs).

We need a system that creates incentives for workers, employers and government.

Finding solutions

The solution requires the efforts of all stakeholders – workers, employers and government. This entails conscientising all parties about the losses they accrue from instability in the sector. Despite the complexity of the problem, well-incentivised systems should be central to finding solutions. People respond to incentives, as former World Bank economist, William Easterly, would say. We need a system that creates incentives for workers, employers and government. This can help ameliorate the obvious principal-agent problem by ensuring that workers have a stake in these mines as shareholders.

If workers were core-owners of the mines, they could internalise ownership-related risks. Troubles that befell the mines would be felt in their pockets too. That way workers’ and employers’ interests would be synchronised. Thus workers would have a stake in enlarging the cake, rather than demanding a larger piece of an ever-dwindling one.

There is also a need for a platform that ensures a clear understanding of the challenges facing the mining sector, as they translate to the entire economy. Once such challenges are understood, there should be an all-embracing incomes policy.

Authors: Tendai Gwatidzo and Miracle Ntuli are associate professors at Wits’ School of Economic and Business Sciences.