Grim outlook for mining sector

Another monthly contraction in the mining sector suggests the pace of recovery in the economy will not be sustained.

Production in the sector, which has been hard hit by high input costs, waning global demand and subdued commodity prices, contracted by 3.8% compared to the month before.

The figures point to renewed weakness in the sector, which suggests that SA’s economic recovery in the second quarter faded at the start of the third, Capital Economics economist Virág Fórizs said.

The sector, which accounts for about 8% of GDP, was a key contributor to growth in the second quarter. However, this reflected favourable base effects following the end of a five-month-long labour strike at Sibanye-Stillwater’s gold mine in April, and the worst bout of load-shedding the country has seen in the first quarter of the year.

“Ongoing concerns regarding US import tariffs on the steel and aluminium sectors, high electricity prices, and hefty wage demands and potential labour strikes amid wage negotiation season, are headwinds that will continue to strain the mining sector in the coming months,” NKC economist Jacques Nel said.

While on a year-on-year basis the sector saw growth for the first time in nine months in July, analysts say the month-on-month change is a more accurate reflection of the sector’s current health.

“The year-on-year figure doesn’t really tell you what’s going on and so we could say this is overblown,” Minerals Council SA chief economist Henk Langenhoven said. “We’re hoping that production will pick up this year but, realistically, the improvement in commodity prices we’ve seen recently is slowing down.” 

This could factor into the Reserve Bank’s monetary policy committee (MPC) decision on interest rates next week.

While Fórizs expects a rate cut of 25 basis points (bps), Nedbank expects an unchanged stance.

“The MPC generally errs on the side of caution, which might suggest unchanged interest rates at next week’s meeting,” Nedbank economist Isaac Matshego said. However, the rand’s recent pullback and subdued inflation figures could see the Bank act, he said.

The total sales of SA’s mining industry in July came to R44.2bn, a jump from R37.1bn a year ago but down from R48.1bn in June.

Stats SA showed that coal is SA’s biggest revenue earner, with sales of R10.29bn in July, followed closely by platinum group metals (PGMs) with total sales of R9.58bn, and gold at R7.9bn.

menons@businesslive.co.za