It’s hard to assess effect of lockdown on mines, says economist
Minerals Council SA is working on data to put reliable numbers into the market and warns against simplistic conclusions
The orders from SA’s government to lock down an entire country and freeze the movement of its people is unprecedented, but the nuances in the instructions make it impossible to judge the economic affect on a sector like mining.
An easy yet dangerous calculation is to take the annual value of mining output, divide it by the days of the year and multiply the answer by the 21 days the government is locking down SA to curtail the spread of the Covid-19 viral pandemic.
By Friday morning, one person in SA had died of the virus since it was first detected in SA on March 5. More than 1,000 people have tested positive.
Focusing on just one industry, mining, many are trying to ascertain what the cost of the three-week shutdown will be and the ramifications.
Henk Langenhoven, chief economist at the Minerals Council SA, which represents 90% of the country’s mineral output, noted it was an almost impossible calculation and he warned against simplistic and alarmist conclusions.
“It’s a very nuanced situation and it hinges on so many factors,” he said.
“I’d encapsulate this uncertainty by looking at production between the different companies, sales, which come from stocks or from processing, whether it can be exported and then what the global demand and prices are for various commodities,” he said.
The council is working on data to put reliable numbers into the market.
The industry reported mineral sales of R540bn in 2019.
“Working out a daily loss from that number would be blunt and not really tell you anything. It does not reflect so many nuances we are dealing with,” Langenhoven said, pointing out this was the first day of 21 and companies were applying for exemptions to continue production.
First, the department of mineral resources & energy has allowed a fair amount of leeway for mines that produce critical minerals and have furnaces and refineries that could be damaged if shut down and restarted in a short while.
Energy minister Gwede Mantashe has said another deciding factor was the balance between keeping employees safe and ensuring that mines and processing plants could restart as quickly as possible once the lockdown ended, generating wealth once again for the country.
Against this backdrop, Anglo American, one of the largest global diversified mining companies, said on Friday its subsidiaries Kumba Iron Ore, Anglo American Platinum (Amplats) and its coal mines remained in operation albeit at reduced levels of production.
Gold miners have shut their labour-intensive, deep-level mines where thousands of employees are gathered in the morning and late afternoon to be lowered into the ground in tightly packed lifts, a situation that nullifies all efforts to sanitise and keep safe distances between people.
Coal mines supplying state-owned electricity generation and supply monopoly Eskom as well as JSE-listed coal-to-liquid fuels company Sasol continue to operate at reduced levels, while mines supplying export markets have to apply on a case-by-base basis for sales.
Langenhoven says these variable operating conditions make it difficult to assess the economic consequences for the sector, while there are limited rail and port export facilities further complicating any calculation.
Tharisa, a large chrome and platinum group metals producer, has declared force majeure on exports because of the suspension of mining and the inability to move chrome to the ports.
Another variable to consider is offshore demand and pricing for SA’s commodities, says Langenhoven.
SA is the world’s largest source of platinum group metals (PGMs). Mantashe has ring-fenced them as an essential industry yet Amplats has shut all its underground mines, keeping its large open pit Mogalakwena and mechanised Mototolo mines in production.
Amplats is an unusual case because of the breakdown of its converter plants that supply its refineries. It has stopped refining metals and does not expect to resume doing so until May 25 when one of the converter plants is repaired.
PGM producers can push surface material through their concentrators, smelters and refineries, but there are limited quantities of this material because underground mining has stopped.
It is difficult to know how much PGM will flow out of SA. Another factor to consider is the closure of European and US automakers, which use platinum, palladium and rhodium in antipollution devices, skewing the supply and demand balance.
One estimate is that the lockdown could take about 900,000oz of PGMs out of supply and this is worth about R21bn.
Another factor to consider is how companies compensate the 450,000 employees in the sector, with some opting to pay basic salaries and continue contributions towards pensions and medical aids during the lockdown. Marginal mines could opt for different remuneration systems, making it difficult to calculate an important element in the fixed costs of mining.