Marikana’s shadow will engulf whole economy

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The wildcat strikes on SA’s mines that inevitably followed the wage settlement at Marikana have important implications for the economy and for the future of mining. Lost mining production from strikes comes as the economy is already running a very large deficit on the current account of the balance of payments. We rely on inflows of "hot money" — foreign portfolio purchases of bonds and equities — to fund this deficit. Foreign investors are large owners of South African mining shares. The risk is growing that they will take fright and sell their shares just as our exports shrink. The combination of a high current account deficit and sudden capital outflows would be devastating for the rand and local asset prices. This could push SA’s feeble economy back into recession.

The illegal strikes and high wage demands come as many mines are already under pressure from falling commodity prices and rapidly rising production costs. Unscheduled wage increases will push these mines further into the red.

It is unlikely commodity prices will come to the rescue. Given the weak global economy and slowing growth in China, it is more likely commodity prices will fall further. In the face of escalating losses, mining companies may be forced to cut production and retrench workers. Shafts and even whole mines may close. Tens of thousands of jobs are at risk.

Twenty years ago, the mines agreed to phase out the hostel system. So why are mine workers still living in squatter camps? The blame for the lack of decent housing lies with the government, the mining companies, the unions and the dysfunctional local authorities in the mining areas.

The government owns the mineral resources the mines extract. It gave — against the advice of many — excessive weight in the licensing requirements to the achievement of black equity ownership, rather than improved workforce and community development. Mining licences were granted immediately on the achievement of targets for black economic empowerment shareholders as stipulated by the Mining Charter, with attainment of the charter’s goals for transformation via workforce and community development left behind.

This does not mean mines did not spend what was required of them. Indeed, mining invests considerably more in community development than other sectors. According to the 2010 Trialogue review of corporate social investment, the mining industry spent R1.1bn on community development in 2009-10 — double that of any other sector. Yet mining contributes less than 10% to our economy. However, the obligation to align charter social and labour plans with local economic development programmes has meant that 40% of miners’ social spending was on public infrastructure, including roads. Thus mines have funded basic services that local governments should have provided. This has diverted resources from uplifting neighbouring communities.

When it comes to housing, mining companies, encouraged by the unions, took the easy option when converting hostels into family units. They offered living-out allowances and left workers to find their own accommodation. In situations where local government is not building houses, workers have few alternatives. As a result, many now live in squatter camps.

The events at Marikana have rightly renewed the focus on workers’ living conditions and wages. There is increased pressure for mines to provide housing. Will the mines be able to convert the living-out allowance into spending on the construction of new homes? This is almost unthinkable because of the dependence many workers now have on those allowances to fund their own living expenses and those of distant family members. So, in addition to higher wages, mines probably now face the additional burden of providing housing plus living-out allowances, which will raise their costs even further.

Rising production costs will limit the extent to which SA’s underground mineral wealth will ever be developed. Mines can sustainably extract only those deposits whose production costs are below their sales price. What cannot be profitably extracted is left unmined — in most cases forever.

SA’s mining industry has already been shrinking for much of the past decade, even when commodity prices were very high. Falling prices and increased costs will accelerate this decline. A smaller mining industry means lower employment and falling exports. This will worsen already high unemployment and pressures on the current account of the balance of payments.

The shadow of the Marikana tragedy looks set to fall across large parts of the economy. Mines are in the spotlight and are desperate to resume production. The unions are struggling to restore their credibility among workers and the government seems determined to increase its operational role in an industry under severe pressure. The stage is set for seldom acknowledged trade-offs whose hidden costs will be borne by all of us.

• Professor Gavin Keeton is with the economics department at Rhodes University. This article was published on Business Day.