The South African mining industry is undergoing a period of transition as it continues to expand its capacity within a changing legislative enviroment. The demand for coal is set to increase due to the construction of a number of new power plants and increased demand from rapidly industrialising countries such as India and China.
However, according to the latest study conducted by ICD Research, new government legislation will reduce the profits of mining operators by adding offsets to non-renewable mineral resources. Furthermore, diamond production will continue to fall due to subdued demand in the luxury product markets, especially in the US.
The negative effects of the global economic crisis and subsequent decline in both the demand for and price of metal caused the total value of South African mineral production to decrease by 24.3% to just less than US$30 billion in 2009. However, due to the gradual recovery of the world economy and the revival of industrial production, consumer demand and commodity prices, the South African mining industry is expected to expand at a compound annual growth rate (CAGR) of 5.4% and produce more than 500 million tons of minerals by 2015.
The expansion of South Africa’s mining industry is closely linked to the success of its construction industry, which has experienced rapid expansion in recent years due to the country’s hosting of the 2010 FIFA World Cup. Furthermore, the construction of infrastructure for power generation, roads, water supply and communication lines will continue to increase the demand for related minerals, such as iron ore, aluminum and copper.
Growth of emerging markets will increase coal production
Demand for coal is set to increase due to the increasing demand from the domestic power and synthetic fuels sectors. It is estimated that, over the next decade, state power supplier Eskom alone will require an average of more than 200 million tons of coal annually.
In order to meet demands from India and China, which have rapidly growing industrial markets, coal production is expected to increase to reach a capacity of more than 350 million tons by 2015.
The Richards Bay Coal Terminal, the largest coal exporting terminal in the world, expanded its coal capacity to 91 million tons per annum at the end of 2010 to meet demand, an increase of almost 20 million tons of coal annually.
Coal is the largest category in the South African mining industry in terms of production, contributing over two-thirds of the total production volume in 2009. The metallic mineral category accounted for almost a fifth share of total mineral production in the same period, while the non-metallic mineral category held the remaining 13% share. The growth of the metallic minerals category in will be driven by iron ore, which accounts for more than three-fourths of metallic mineral production.
New constructions increase coal production
The power sector accounted for nearly two-thirds of domestic coal consumption in 2009. Eskom is to continue to upgrade and expand the national electricity infrastructure of the country over the next three years. The building of new capacity, in the form of three power stations and two open-cycle gas turbines, added more than 2,000 megawatts to South Africa’s total power capacity in 2009.
Plans to construct a new generation of power stations, with the first due to come online in 2012, will also increase mineral usage, both in the construction of the stations and daily operation.
Eskom began construction on the Medupi Power Station, Limpopo, in August 2007. The first unit of the power station is scheduled for completion in 2012, with the entire station to be completed by 2015.
Sasol announced plans to conduct feasibility studies for the expansion of its existing synthetic fuels plant at Secunda by 20% and the construction of a new plant in Mafutha with a capacity of 80,000 barrels a day. Once operational, these projects could raise the demand for coal by approximately 25 million tons a year.
Gold exploration set to rise
Despite a fall in gold production by nearly 150 million tons in 2009 – due to a premature downscale operation because of the electricity crisis – the rising price of gold and a fall in consumer expenditure on a global level due to financial recession has changed the structure of the gold market. A surge in investment demand and a decline in mine output have increased gold prices, resulting in increased gold exploration in South Africa. Indeed, gold exploration currently accounts for 42% of the total expenditure on mineral exploration.
Gold mining in the country is dominated by three major companies, AngloGold, Gold Fields and Harmony, which hold almost 80% of the value of the market. Similarly, the top three companies in platinum mining, Anglo Platinum, Implats and Lonmin, account for 95% of the value of the domestic market.
Diamond production to fall in 2011
Diamond production is expected to decline in 2011, despite the recovery of the global economy.
The decline in the global demand for diamonds during the financial crisis was significant, resulting in the closure of a large number of diamond mines. The US market, which accounts for almost half of the global demand for diamonds, remains slow, without any significant signs of a recovery in sales of diamond jewelry.
Furthermore, DeBeers Ltd., South Africa’s largest diamond producer, has announced a 40% cut in diamond production from all its operations in the country.
Mineral and Petroleum Resources Royalty Act will reduce profit
The Mineral and Petroleum Resources Royalty Act 28 of 2008, which came into effect in March 2010, is likely to change South African mining administration, as mining companies must compensate the state for the permanent loss of non-renewable resources.
Under the act, the country imposes royalties on both refined and unrefined minerals. The minimum royalty payable is 0.5% of gross sales for both refined and unrefined minerals, while the maximum royalty payable is 5% for refined minerals and 7% for unrefined minerals.
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