South Africa: More Upstream, Less Downstream Beneficiation – by Ross Harvey (All – December 21, 2015)

South African mining data released recently reveals a 4.6% year-on-year production contraction to October. Coal, iron ore and gold were most heavily afflicted, while platinum group metals recovered from their 2014 slump with growth of 26.5%.

The rand continues to take a beating on global markets, presumably ahead of an expected credit rating downgrade by Fitch of South Africa’s sovereign debt. While this should make global exports of raw materials more attractive to consumer markets, the mining sector is hamstrung by rising domestic costs and global secular stagnation. Is the industry likely to recover?

As a mining jurisdiction, South Africa’s score (relative global rank indexed out of a maximum of 100) has fallen from 56.1 in 2011/12 to 52.6 in 2014 on the Fraser Institute’s Investment Attractiveness Index. The country ranked 64th out of 122 competitors in 2014, being eclipsed by Tanzania, Namibia, Botswana, Burkina Faso, Ghana, Madagascar and the Ivory Coast.

Ireland came first. The Index is constructed by combining the Best Practices Mineral Potential Index, which rates regions based on their geological attractiveness, and the Policy Perception Index, a composite index that measures the effects of government policy on attitudes toward exploration investment.

An important caveat, however, is that respondents consistently indicate that policy factors account for only 40% of their investment decision.

This is often overlooked, especially as South Africa’s policy regime is regularly cited, domestically, as an explanation for declining exploration investment expenditure. However, in a commodity price downturn and global secular stagnation (a massive slump in total factor productivity growth in the world’s major consumer markets), it is this 40% that can make all the difference between attracting investment or not.

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