INDUSTRY:Even though precious metals are in hot demand, the south african mining industry - the world's largest - is facing an increasing number of problems
The equivalent of the weather forecast in Ireland, the gold price is reported at the end of bulletins on many South African radio stations. Although metal prices are riding high, the country's mining industry is dogged by some longstanding challenges, with power cuts the most recent.
The shiny commodities such as gold and platinum are enjoying their time in the sun with the downtrodden US economy, higher inflation, oil prices and rocky stock markets keeping investors' hunger on the boil.
Ongoing power outages in South Africa have triggered further speculative-related buying, with disrupted production boosting interest in platinum in particular, already in tight supply with car makers eating up 50 per cent of production.
Last month the country's largest gold, platinum, coal and diamond producers shut their underground mines for five days after uninterrupted power could not be guaranteed by the state-owned utility firm Eskom, which said electricity had to be rationed by 10 per cent for the foreseeable future.
South Africa is the world's second biggest producer of gold - China came in first place this year - and supplies 80 per cent of the global supply of platinum.
A London Bullion Market Association survey of 28 analysts forecast already high prices to reach $2,100 (€1,435) per ounce for platinum, $600 (€410) for palladium and $1,250 (€854) for gold this year. So has South Africa's mining industry been reaping the rewards?
Some industry sources say the higher metal prices should encourage more investment and will help offset higher costs (energy, raw materials, etc), though analysts also warn that these profits will be affected by the energy crisis.
Other challenges cited are safety problems that hit production last year, ageing infrastructure and mines, and a skills shortage. William Tankard, analyst with metal consultancy GFMS, says despite high inflation, current prices are helping maintain gold production.
"Gold producers' costs have seen widespread rises, although the gold price increase has maintained (and in many cases expanded) healthy levels."
"The majors have approved development expenditure for deep level expansions in order to extend the lives of present mines, but there are increasingly challenging logistical issues when trying to operate safely at depths of around 4,000m or more," says Roger Baxter, chief economist at the Chamber of Mines.
He says that after years of decline the industry is attracting more investment. "There was modest growth in the entire mining sector last year, and modest growth in platinum production."
In 2004 and 2005 there was a 20 per cent and 30 per cent decline in real fixed investment by the mining companies, but due to higher revenues there has been a rebound in 2006 and 2007 of 42 per cent and 12 per cent respectively, he said.This will take a while to trickle down to higher production, he says, but it will hopefully lessen the impact of the electricity situation this year.
However, gold mining has been in decline since 1970 when it produced a record 1,000 tonnes, compared to the estimated 250 tonnes in 2006 and the electricity situation does not provide an environment for expansion.
"There has been declining gold production in the last couple of years in South Africa. This has been a result of shafts closing and generally lower grades across the industry," says Shane Hunter, mining analyst for stockbrokers BJM securities.
"The electricity crisis is causing production losses and causing great uncertainty in the industry. For example, Gold Fields, one of the top three companies in the sector, has predicted around 20 per cent less production for the March quarter from their South African operations which is substantial and gives some idea of the potential impacts," he says.
"Harmony has stated that even at the 90 per cent average power planned to be supplied currently, some shafts may have to be closed." He says that for the first time ever, Gold Fields will not be paying an interim dividend for the first half of 2008 due to the risks around the power crisis.
Another South African mining analyst said the price of gold has not gone up nearly enough to keep margins stable over the next 10 years and the request to cut consumption of power by 10 per cent will lead to the closure of marginal mines, retrenchment and job losses and will put big investments on hold.
Alan Fine, public affairs manager with Anglo Gold Ashanti, said that various government people have said it will take a "long time" to sort supply.
Electricity is stealing the headlines from the previous big mining issue - safety problems. As mines get older they produce gold with lower grades so there is a need to delve deeper, but this also increases danger for miners.
In the last three months of 2007 safety-related mine closures were a feature and provisional government figures show that 221 mineworkers were killed last year, compared with 199 in 2006. Another problem for the sector is the skills shortage. John Reade, head of metals strategy at UBS, said that after 20 years of decline until 2001, the industry is now facing a shortage of skills.
"There are three factors involved: metal prices are very strong, so internationally there is great demand for mining skills; the current high level of construction in South Africa due to the World Cup and the building of power stations; and there is a skills emigration issue."
Some say the skills shortage has been exacerbated by affirmative action whereby lots of engineers and other skilled workeres can't be employed because of their gender or because they are caucasian.
Prof Kevin Bennett, director of the Energy Research Centre, says this is having a poor effect on the stock of mining and engineering graduates with some of the "top people" seeing no future in the country.
"While all attention is currently on the electricity shortage, there is another policy that is doing more harm than good in the engineering, mining and other sectors. That is the equity policy which is quite rightly attempting to redress imbalances of the past," he said.
"In the process of doing that though, it is forcing skilled white males to seek employment overseas. With our limited skills base, surely we should be making every effort to retain the skills that we have, especially since it is the South African taxpayer who has largely contributed to the cost of their education," he said.
Another problem for the mining industry in South Africa is the high proportion of the mining workforce that are infected with HIV. However, Prof Bennet says that the mining companies have been "pretty proactive" and he believes the industry is over the "hump" of the problem.
"Although an accurate survey of prevalence levels cannot be conducted, it is estimated that prevalence levels of HIV/AIDS have remained stable at around 30 per cent of the workforce in recent years at the South African operations," the most recent report from AngloGold Ashanti said.
Another issue that gets mentioned is the government's Black Economic Empowerment strategy (BEE), which aims to address the inequities of apartheid. Progress in this industry is steady since the mining charter of 2004, but it can be controversial.
One analyst, who did not want to be named, said BEE's drawback is in dilution of shareholding and costs to companies whereby firms need to give shares to BEE partners. He said that the requirement to comply with lots of legislation was cumbersome and costly, and it was difficult for local companies and foreign investors to undertake further investments with confidence they were in compliance.
Despite all the gripes, the gold and mining industry is vital to the South African economy and accounts for 50 per cent of its total merchandise, or goods, exports.
It reduces the current account deficit, which stands at 8 per cent, and is an important generator of foreign currency. The direct share of mining and quarrying stands at 7 per cent of GDP, but is significantly more if all the indirect links to growth are taken into account.
"Direct contribution to GDP is around 7 per cent, but taking into account indirect contribution you can add 50 per cent to that," Simon Kendall, analyst with UBS South Africa said.
Primary minerals took in 150 billion Zar (€13.5 billion) of export earnings in 2006, with semi-fabricated minerals accounting for 220 billion Zar (€19.9 billion).
In 2006, platinum sales reached 65 billion Zar (€5.8 billion), coal came in at 38 billion Zar (€3.4 billion) and gold sales were 37 billion Zar (€3.3 billion), said Baxter.
"The mining industry still directly employs just fewer than 470,000 people, with around one million jobs linked to the sector," he said.
So with South Africa sitting on 87 per cent of known reserves of platinum, and with growth in mining of other non-gold metals such as iron ore and manganese, the future looks bright.
As one analyst puts it, all that glisters is not gold and with a wealth of different resources the mining industry will remain the "lifeblood" of South Africa's economy for a long time.
