A general discussion on the health of mining in SA

FELICITY DUNCAN: South Africa's economy was built on mining, especially gold mining, it brought people to the country, it's laid the foundations for the stock exchange and our banking system, but nowadays it looks as if South African mining is far from shiny. Statistics SA put out numbers today saying overall mining output for the quarter to April is almost 9% lower than last year's first quarter, and gold mining was down 13%. Now what's scary is that the first quarter of last year is when Eskom was in trouble, and there were rolling blackouts. Henk Groenewald of Coronation Fund Managers joins me now. Henk, just how healthy is the local mining sector, given these lower production levels, the lower commodity prices and so on?   

HENK GROENEWALD: Hi, Felicity. I think it's always tough being a miner, and it's surprising that the production is down so much, especially since you said the period you are comparing it to was a very poor period for mining. I think it's very tough. If you look at what commodity prices have done since last year, it's down 6% from the peak - it looked like the rand was going to help us out a little bit at the beginning of the year, but it's since strengthened by 20%.

FELICITY DUNCAN: It seems like the miners are getting it from all angles. They have the strong rand to contend with, they have high wage demands, they have the commodity prices coming off a little in some areas. It seems like a perfect storm.

HENK GROENEWALD: Yes, it's tough out there. I think we have got to realise that our mining companies compete in a  global market - they don't compete against each other in South Africa. They compete against mining companies across the world. And if you look across the world, pretty much for all the other mining companies their costs are falling at a rapid rate. They are cutting costs, raw materials are coming down, they are closing high-cost capacity, and in most instances the currencies are actually helping them. In South Africa the costs might fall a little bit, but they are going to fall less. You can just imagine - electricity is a big part of mining costs, and that's going to possibly go up to even 35%. Labour again a very big part of your costs, almost 30-60% in some mines, and again it looks like it will increase above inflation. And then lastly, the currency. The rand has strengthened 26% off its weakest. Now, other currencies have strengthened as well, but not as much as the rand. If you look at the Chilean peso, for example, it has only strengthened by 13%. So in general it looks like the South Africa mining companies are getting less competitive in a  global mining world.

FELICITY DUNCAN: So relatively we are actually going backwards in a way. The mineworkers' unions - they have just rejected the 7% offer that the Chamber of Mines made them, and they are going to strike for 15%. What do you think when you see that kind of thing happening?

HENK GROENEWALD: Well, it's always at this time of the year when wage negotiations are going on. There is a lot of posturing on both sides, and I think eventually normally an agreement is reached. I don't think union demands are necessarily bad, but clearly they always start at a high level and negotiate down. But eventually sanity must prevail in this market. I think a mining company can afford an above-inflation increase only if it's met by productivity increase by the workforce, so if you are going to pay people more than inflation, you'd expect to get a little more tons out of each person who works on the mine next year to make up for that additional payment. And if that doesn't happen over time, and it hasn't been happening in South Africa - we haven't seen productivity increases - your cost base just increases and increases relative to the rest of the world and your competitors. 

FELICITY DUNCAN: Henk Groenewald is a portfolio manager at Coronation Fund Managers