ANC's mining report makes a foolish assumption

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A central theme of discussions at this week's African National Congress (ANC) policy conference will be state's role in the economy. Mining will enjoy particular attention when the report, State Intervention in the Minerals Sector ( SIMS ) is discussed.

The SIMS report rejects the nationalisation of mining in SA as unaffordable - a conclusion that continues to be disputed by elements in the tripartite alliance. It proposes instead a system of state ownership and widespread intervention and regulation. If accepted, these recommendations will have profound implications for the profitability of existing mining companies.

Central to the report's recommendations is its belief that mineral resources are the only real competitive advantage SA has. It believes development of these resources must underpin future economic growth. Specifically, private or state-controlled mining companies should be forced to sell locally and to do so at, or below, international prices to encourage local value addition to minerals.

The report recommends that a special r esource r ent t ax should be imposed on mining profits above a certain level. The proceeds of this new tax should be ring-fenced. Two-thirds of the proceeds should be used for an extensive system of minerals regulation and development. A third should be used to establish sovereign wealth and fiscal stabilisation funds. These will shield SA from periods of exchange rate overvaluation when commodity prices are high and fund fiscal shortfalls when commodity prices are low. It is questionable whether a resource rent tax would ever yield for SA the report's projected R40bn in additional tax revenue. If revenues prove less than projected, the government will have to fund from existing revenues the substantial fiscal obligations that the report's mineral value-addition agenda requires.

Tax and other projections made in the report are based on the belief that the boom in commodity prices from 2003-2010 will continue indefinitely. Recent developments challenge the wisdom of this assumption. While still very high by historical standards, commodity prices have been falling since the beginning of last year. Reasons for this include stagnation of the developed economies and slowing growth in China. High prices have led to inevitable substitution and reduced usage of expensive commodities. At the same time, output has risen as a result of investment in new capacity.

There is now a surplus of commodities previously in short supply. Hopes for future revival in demand growth appear increasingly shaky. As a consequence, influential commentators are questioning the sustainability of the commodity price "super-cycle" that is the key underlay of the SIMS report's recommendations.

Ruchir Sharma, h ead of e merging m arkets at Morgan Stanley, suggests that "the era of easy growth in emerging markets and high commodity prices is ending". Echoing this sentiment, major mining companies have revised downward their commodity price forecasts, shelved some planned projects and delayed others already under construction.

There are benefits from weaker commodity prices, a fact reflected locally in recent falls in the petrol price. Lower global oil prices have more than offset the weaker rand. The negative consequences for SA of lower prices are demonstrated by the closure of a number of platinum mines and announcements that operations at other mines are under review.

The problems confronting the platinum industry are evidence of the effects of lower global prices even on the production of a commodity of which SA is the world leader. Rising production costs have destroyed our competitive advantage, something the SIMS report ignores with its naive belief that advantage is automatically conferred by resource endowment alone. SA enjoys a competitive advantage in commodity production only if the costs of extraction are less than the price at which the commodity can be sold. If costs exceed the price, then the "advantage" is meaningless.

The rand costs of producing gold and platinum have trebled in the past decade. This is double the domestic inflation rate. Sharp hikes in electricity costs, substantially above-inflation wage settlements and safety-related shaft closures have all played a role in rapidly escalating costs. In the case of platinum, unrealistic expectations of future metals prices le d to the mining of increasingly marginal and costly ore bodies. As a result, the mining industry is now vulnerable if prices fall further.

Against this backdrop, it would be foolish to embark upon a policy direction that further ratchets up costs and commits the government to spending premised on a shaky belief that profits and taxes from mining will remain exceptionally high forever.

Instead, it is time to take stock of the current benefits derived from mining in SA and how best to grow and share these. This requires sober assessments of future prices and a comparison of SA's production costs with those of our global competitors. Decisions can then be taken on what can be done to balance costs and prices to maximise production, job creation, exports and tax revenue over the long term.

  • Professor Gavin Keeton is with the economics department at Rhodes University.

This article was published on the Business Day website.