Mining’s old guard needs strong medicine
A new report details subpar investor returns in the mining industry over the last decade, particularly big cap diversified companies which have not adapted to new realities.
South Africa continues to dominate the supply chain for capital equipment to the mining sector of several countries in the immediate neighbourhood of the sub-region, according to available statistics and data.
Although information so far gathered may not be all that exact South Africa’s mining capital equipment supply to the mineral producing states of the Southern Africa sub-region in monetary terms is in the range of US$6 billion and $11 billion annually as from 2005.
Whatever it is South African companies in the period 2005-2014 supplied 50-60 percent of various capital equipment, goods and services to neighbouring countries up north. However there has been a sudden and marked decrease by almost 70% in the supply of the same in the past two years partly because of that country’s worsening economic situation.
Even then the golden country with the most developed mining and manufacturing sector on the continent has continued to place itself at the head of the supply chain for mining equipment and machinery in the sub-region and more especially for key mining countries like Zambia and the Democratic Republic of Congo (DRC).
For example taking advantage of the two countries huge foreign direct investment to their mining sectors estimated at $5 billion to $17 billion as from 2014, South Africa has enshrined itself as the major source for those countries capital mining imports. Other countries like Namibia, Mozambique, Zimbabwe and Botswana also depend for some of their mining imports on South Africa.
Now with the emergence of Original Equipment Manufacturers (OEMs) through the various mining companies operating there South Africa’s grip on the supply chain for capital equipment is slowly slipping. The only advantage it possesses in the long term is its geographical proximity to the market while its weakening rand may temporarily make its exports cheaper.
But as things stand now the OEMs from Europe, America and Asia are also offering competitive prices and exclusive after-sale service incentives to lure business to themselves. This is likely to undercut South Africa’s dominance of the supply chain in the sub-region.
In fact there are predictions that in the next three years from now South Africa’s supply of capital equipment to the mining sector of mineral producing countries in the sub-region may dwindle to less than 10% or even less depending on the political situation there.
Financial constraints, falling revenues of recipient countries, diminishing manufacturing sector, stiff competition from foreign OEMs and other economic problems will adversely affect South Africa’s competitive edge in the supply chain of capital goods to the mining industry.
Not only that importing countries may not want to perpetually depend on South Africa for their procurement of capital equipment and machinery as they try to reassert their position in terms of trade equity.
In any case it will take some time for the OEMs of foreign countries to upset South Africa’s command of the supply chain to the mining sector of the sub-region where it belongs. For example political instability in some of the countries makes them credit risks and foreign suppliers may not be willing to do business with them. For instance DRC is considered a high risk country by many of the OEMs.
Therefore for this reason and much more South Africa will continue to play a pivotal role to the supply chain of capital equipment to the mining sector of Southern African countries which it has dominated for the past century through its colonial appendage to such mining conglomerates like the Anglo-American Corporation, De Beers, Lonrho and many others.
After attaining independence in 1994 South Africa further increased its supply of mining goods through the facilitation of regional trade groupings such as the Southern Africa Community Development, Common Market for Eastern ans Southern Africa and others where it has its membership. The South Africa Capital Equipment Exports Council testifies to the fact that from 2005 to 2014 the country’s exports of capital mining equipment increased from ten billion rands to R46.2 billion.
Other than its strong manufacturing sector and experience in mining South Africa is strategically well-placed in the sub-region and is able to supply capital mining equipment to its customers according to their specifications and preference. This is even more so considering that being part of the sub-region it understands the mining terrain of the countries it is dealing with more than anyone else from the outside.
But then on the negative side too much dependence on South Africa for their mining capital goods has resulted in some of the countries diminishing their own manufacturing sectors and becoming more of consumers and distributors than producers. Take for example Zambia, it has since lost its manufacturing base for mining equipment and exited the mining value chain to become just a conduit for South African goods to neighbouring DRC.
On the positive side and in the long run technology transfer, training of locals using local goods and services may help to revive the manufacturing sectors for those countries. But then this may not come that easily and within a short time for the countries to compete on par with South Africa in the area of manufacturing capital goods. All what will happen is there will be an increase in value addition and the building of a regional market through existing mining inputs clusters.
Over all it is difficult to predict with any degree of certainty how long South Africa will continue to commandeer the capital equipment supply chain with its neighbours given the prevailing economic situation which threatens to undermine its manufacturing industry. Already as from July, this year the manufacturing sector of that country has shrank by about 1.5%. For a country whose manufacturing sector is the fourth largest to the economy and has an eighth position on the GDP any drop can be worrisome.
Available statistics show that as from July this year South Africa has recorded a decline in the manufacture of metal products, machinery, transport equipment, electrical machinery, motor vehicle spare parts and accessories, crucial to its export base for capital goods.
Reeling against the strength of the dollar which has in recent time resulted in the sharp drop in the value of its rand South Africa faces a precarious situation as the ruling African National Congress (ANC) loses popularity in the country because of high profile corruption cases involving top leaders, including that country’s president Jacob Zuma.
The weakening and volatile nature of the rand may not augur well for South Africa’s trade with its neighbours. In fact it is being feared that should the rand continue with its downward trend it will put pressure on the manufacturing sector and hurt its production of capital equipment exports.
