Eunomix calls for rigour on benefication policy in South Africa

2 March 2015

Eunomix calls for rigour on benefication policy in South Africa: the opportunity cost is an unsustainable mining industry and a fractured industrial blueprint for Africa's second largest economy

JOHANNESBURG: Policy uncertainty in South Africa's resouces sector has become a defining feature of the investment regime and is now a liability, says Claude Baissac, Group Chief Executive of Eunomix.

"The time for extracting further concessions out of a battered mining industry is not now. The commodity landscape has changed profoundly, with across the board decreases that are forcing the industry to massively curtail investment and control losses. If policy uncertainty could in the past be made navigable by rising prices it is now a serious liability. This needs urgent resolutuion, and in the right direction," Baissac notes.

Eunomix Research, a specialised division of Eunomix with a focus on public policy in resource rich countries, today (Wednesday) issued a report that assesses the possible economic effects of the possible reintroduction of developmental prices in the Mineral and Petroleum Resources Development Amendment Bill, which has returned to Parliament.

The report cautions that the continued focus on beneficiation flies directly in the face of advice given to government by the International Panel of Advisors on Growth in terms of the AsgiSA process. There was no support for the belief that cheaper mineral products would drive faster industrial growth.

The authors, who have investigated policy options for South Africa, said: "There is no reason for countries like South Africa to focus attention on beneficiation at the expense of policies that would allow other export sectors to emerge. This makes no sense conceptually. It is completely inconsistent with international experience. Quite simply, beneficiation is a bad policy paradigm."

To illustrate, Arcelor Mittal recently said that for 85% of their customers steel represented 5-25% of their costs. Reducing the price of steel by 10% would therefore reduce costs for these customers by between 0.5% and 2.5% which was unlikely to significantly change their global competitiveness. In addition, a 2011 study of South African steel imports by Kumba Iron Ore found thtat iron ore typically makes up only 6-13% of the country's steel making costs. But steel exports in 2010 were 30-35% more expensive than international competitors from Ukraine and Brazil. Consequently, the Report notes thta even if SA iron ore was free, the competitiveness gap would not be closed. Reducing the local costs of iron ore by 10% as a resultof a 10% tax on iron ore exports would reduce the price of SA steel by 0.6-1.3% and so would have minimal impact on the competitiveness of SA steel.

Eunomix Research also considered the likely impact on the mining industry of a 10% tax on mineral exports, particularly platinum group metals (PGMs) and iron ore, both believed to be prime targets of the South African government's benefication drive.

A numerical assesssment among PGMs found that in order to remain profitable in the event of a tax on revenue being imposed, each shaft would need to be analysed separetely by its owner. It stands to reason that Unprofitable shafts would be closed and only those that are still profitable after tax would continue to operate as ounces produced would fall, along with export revenues and jobs.

Iron ore production is different to PGMs as it is focused around a smaller number of very large open-pit mines. Eunomix Research's review found that the ability of an iron ore producer to adjust production to protect margins after the imposition of a 10% export tax is therefore more limited than that of PGM producers. This does not mean there will not be a longer-term impact as shareholders seek higher profit margins in other countries and/or other metals, the findings noted.

"Eunomix Research suggests that much more analytic work is needed to model what each of the measures proposed would result in, individually and in solido. Eunomix Research's analysis needs to be supplemented urgently to jump-start a true conversation of shared values. Declining commodity prices need not lead to a secular decline of an industry that is now too many things to too many interests."

The report is available on http://www.eunomix.com/research.php