NEVA MAKGETLA: Beneficiation must consider opportunity cost

My five-year-old granddaughter designed a time machine by drawing a picture of it and labelling it with her robotics class motto: think/plan/do/review. As so often in SA policy process, she had envisioned the end state but hadn’t quite figured out the technical challenges. As a result, we still don’t have a working time machine.

Proponents of beneficiation have mostly pursued a similar approach. They argue, often passionately, that increased local processing of SA’s mineral resources should drive industrialisation because it expands manufacturing and increases local value addition. They have spent less time coming to grips with the very real obstacles.

In practice, local beneficiation has stagnated for the past 20 years. For iron ore, the share of local use plummeted from 35% in 1995 to 10% in 2015, then flattened out. Exports of iron ore nearly tripled in volume terms from 1995 to 2023, while domestic sales fell by half. For platinum, data by volume starts later. Still, from 2015 to 2023 the local share in sales dropped from 11% to 6% as exports climbed 20% in volume and domestic sales dropped more than 55%. In contrast, most coal by volume is used locally, at a rate of 70% from 1995 to 2018 and 80% since then.   

Expanding beneficiation faces two key obstacles. Mineral refineries use huge amounts of electricity but generate few jobs. And, beneficiation has only worked internationally (and historically in SA) where lower mining costs are passed on to downstream producers.

According to mineral resources department estimates, in 2023 metal ores and coal refineries used a quarter of SA’s electricity output, more than all households put together. Yet they only employ about 100,000 people, or 1% of all formal employees. The coal refineries include both Eskom, Sasol and the aluminium plants, which use imported bauxite and were set up to take advantage of SA’s (then) relatively cheap coal-fired electricity. All of the refineries now confront a toxic combination, from the degraded national grid to soaring Eskom prices, escalating foreign resistance and coal-fuelled production.   

The concept of beneficiation can also extend to downstream producers of final consumer and capital goods that use metals and chemicals — for instance, basic steel products such as gates and hand tools; machinery and equipment; and consumer chemicals and plastic products. That approach vastly improves the economic calculus. These industries use far less electricity and together directly create 600,000 formal jobs, or 4% of all formal employment.

More fundamentally though, the economic logic behind beneficiation is that SA’s mineral riches make it internationally competitive, whether on export or domestic markets. Downstream manufacturers share in SA’s comparative advantage in mining only if they get mining-based inputs at less than the global price.

In practice, the relationship between domestic and international prices has varied over time. Domestic prices have not kept up with an international price spike over the past three years. However, from 2010 to 2021 world markets stagnated while domestic prices for industrial minerals climbed in constant rand terms — by 10% for iron ore, 50% for coal and 25% for chrome. Sasol and Columbus Steel own their mines, making it easier for them to maintain competitive refineries.   

Since 2008, downstream manufacturing has faced particularly sharp price increases for coal-fuelled electricity. Eskom more than doubled its tariffs in real terms over the past 15 years, while its electricity supply deteriorated. Meanwhile, ArcelorMittal SA has lobbied to increase costs for competing mini mills by ending restrictions on scrap exports. That would ultimately raise prices for manufacturers that rely on long steel. In effect, it would shift the profit from SA’s scrap away from steel manufacturers and back to recyclers.

In short, a successful beneficiation strategy has to be more clear-eyed about the opportunity costs and — even more so — the economic and political viability of measures to restrain domestic prices for ores and coal. Otherwise, it will remain an attractive picture, not a reality.

• Makgetla is a senior researcher with Trade & Industrial Policy Strategies.