Commodities | Sep 06 2006
By Greg Peel
Surbiton Associates reported earlier in the week that gold production for the year to June 2006 fell 5% in Australia. Production decline in was 6% in South Africa for the three months to July, year-on-year. Production globally has been in a declining trend for the last decade, and has failed to keep up with demand.
As with most commodities, a lack of investment due to indifferent prices in past years has meant recent price rallies have sparked a scramble to catch up with mine expansions, developments and exploration. AllAfrica.com reports South Africa’s general mining sector expanded in the second quarter of 2006 having contracted in the previous three quarters. Yet still the mining sector has grown at a rate less than the overall economy. South Africa has failed to take full advantage of higher commodity prices.
The biggest contributor to the sector’s decline has been the gold industry. With annual output now below 300 tons South Africa is at risk of conceding its number one global gold miner status to the US. While employment in mining has risen 3%, employment in gold mining has fallen 9%. Some mines have deliberately cut production in order to extend mine lives while still collecting high prices.
The biggest problem in the industry, reports AllAfrica.com, is simply lack of investment. While private sector fixed investment in South Africa increased by more than 20% in 2003-05, fixed investment in mining fell 32%. This is in contrast to the situation in Australia, where mining investment has doubled over the past year. After a slow reaction to rising prices, analysts are expecting mining export volumes to enjoy strong growth in 2007.
Apathetic mining companies are not the reason, but more so South Africa’s bureaucratic system. Legislation was introduced in 2004 requiring miners to convert to or apply for new licences. The government has a policy of “beneficiation”, part of which is to reduce the country’s dependence on mining exports.
Probably not great timing. While commodity prices continue to surge there is a backlog of licence renewals waiting for process. In a world where demand for gold is increasing, a lag in South African mining will only serve to exacerbate the growing demand/supply gap.