South Africa at policy crossroads as it misses second boom

GROWING mine closures are indicative of the threat to an industry confronted with a global economic downturn, rising production costs and unceasing policy uncertainty.

A new mining deal focused on productivity and investment is an imperative for the industry, for tens of thousands of jobs, for entire communities, and for the country.

Aquarius' suspension of its Marikana operation and Eastplats' termination of two projects should be a "penny dropped" moment for the country's leadership.

It should make obvious the fact that mining is facing a crisis that does more than merely threaten the profits of an industry thought to be poorly transformed.

The cancellation of projects and and the continuing serious declines in production have severe economic implications, for now and the future. They negatively affect communities. They lead to tax revenue losses.

Mining accounts for about half of South Africa's export earnings. Decreases in exports damage the country's macroeconomic standing and the currency.

Attributing these closures and the industry's recession only to the persistent global economic crisis would be an easy mistake to make. It is a tempting excuse.

But the mining recession overwhelmingly points to domestic factors. Inflation-beating factor costs and infrastructure bottlenecks: power, transport, water. It also points to fractious labour relations, administered mine closures for safety and administrative inefficiency in the Department of Mineral Resources.

With the possibility of significant changes being approved by the ANC, policy uncertainties and growing concerns over corruption are among the negative factors.

The reality is that these factors have cost the country the second commodity boom, after having cost it the first.

Over the course of the past decade, high commodity prices merely allowed the industry to partially offset the relentless onslaught of rising costs, infrastructure bottlenecks, and continuous administrative pressures to transform and be safer (legitimate demands, no doubt).

The mining industry is no longer globally competitive. This reality is reflected by facts and by opinion. This loss of competitiveness has been known to analysts, investors and providers of capital for some time.

Be it the Frasier Institute global ranking, the Behre DolbearGroup survey, moods at mining conferences, Anglo-American's Cynthia Carroll's speech at last week's Mining Lekgotla, or the growing body of professional opinions.

The message to the government and the ANC should be clear: the South African mining industry is a sunset proposition, in part because of geology, but in a larger part because of policy.

Byletting costs grow uncontrolled and by not creating a stable and good practice investment climate, government has neutralised a growing share of the country's mineral bonanza.

As a result investors have been looking away from South Africa. In the globalised economy perception is reality. The Aquarius and Eastplats decisions to close down mines are a manifestation of this powerful trend. These are not the first ones, and others will join.

The platinum sector - the country's largest contributor to its mineral wealth - is in a particularly bad shape when the opposite should be the case. Anglo Platinum is conducting a comprehensive review of its business.

The signs are that these developments are more than a mere response to the international economic downturn. There is every chance that the industry is shutting down capacity for good. A growing portion of the country's mineral endowment is being neutralised, rendered uneconomic to mine, refine and export - let alone be locally beneficiated.

As the ANC policy conference approaches there is a narrow chance that the spate of mine closures and evident sectoral crisis will move the party to a policy turnaround - to adopt a more business-friendly stance.

But there is also the chance that, on the contrary, the frustration regularly expressed at the lack of cooperation from industry with "national goals" increases.

Illustrative of this frustration is Minister Susan Shabangu's statement in February that: "Continued reliance of the sector on the previously advantaged 20% of the population, obsessed with a bottom-line approach at the expense of national objectives, has undermined the objectives of this sector."

The government and ANC want to ensure that the industry becomes deputy to the state's sheriff. This is the developmental state concept, South Africa redux, and applied to the so-called mineral-energy complex.

There is broad consensus in the government and party that the state must take a greater interest in mining. The policies that emerge from the ANC policy and leadership are unlikely to provide relief to the industry.

The rift between the two parties - industry on one hand, and the government and ruling party on the other - may grow wider. The first is calling for measures to help it survive the economic downturn. The second is proposing to take matters into its own hand to implement its national objectives.

The industry would see any state-centric policy - with the introduction of a resource-rent tax, a strategic minerals policy, export taxes, sunset clauses on licences, and so on - as confirmation that conditions are likely to worsen. In the short term, this would translate into more mine closures.

In the medium term it would chase away investment, and reliance on the developmental state to compensate for the decline in private investment and production would be insufficient to compensate for this "investment gap".

The state, itself dysfunctional in a widening spectrum of critical areas, is already stretching its fiscal and administrative capacity to deliver its infrastructure strategy.South Africa's economy is hollowing out.

The trajectory experienced by the mining industry in the past decade is spectacularly illustrative of this grave phenomenon.

As the ANC considers the future of mining ahead of its policy conference, it faces a stark choice.

It either will continue with the "recessive bias" that is inherent to the policy choices that have been made or opt for "growth bias" by focusing on the true causes of decline while finding a transformation model that is not growth-reducing.

A"transformationin growth" model should not seek to displace the private sector. The South African state simply does not have the resources required - in capital, in manpower, in know-how or in credibility.

For international observers South Africa is clearly at an economic crossroads. It cannot for long continue to lose its core industries, add to its mass of jobless people, and weaken its fiscal stance in pursuit of a developmental state project that is politically convenient but economically risky.

The recent closures are a clarion call to action.

• Baissac is directorof Eunomix, a London-based risk-investment climate consultancy