South Africa Mining Unrest Crib Sheet

BMI View: We expect labour unrest to continue to plague South Africa's mining sector over coming years, intensified by weaker precious metal prices. Indecisive government action and greater inter-union rivalry will be key features of the struggle ahead. In this article we set out our core view for how the situation of unrest in South Africa's mining sector will play out and answer the most salient questions.

Core View

  • Precious metal prices will head lower, intensifying the situation on the ground as mining companies will be less able to consent to unions' demands for higher wages.

  • Strikes will become increasingly frequent and protracted. Each time they will end with unions accepting lower offers than their original demands, but also with the mining companies having conceded ground. Both parties will be dissatisfied, setting the stage for further strike action.

  • Gold miners will be more likely to exit South Africa's mining sector than platinum miners. This is because other jurisdictions offer attractive gold deposits, while global platinum reserves are concentrated in South Africa.

  • Greater inter-union rivalry will take place. The NUM and AMCU will continue to battle for membership amongst mining sector workers.

  • Violence between strikers and non-strikers is likely to occur meaning that the situation could escalate very quickly.

  • The government will remain torn between ideological principles and economic realities. It will prevaricate indefinitely and fail to act decisively to ameliorate the situation. Even so, we expect a modest shift to the left in favour of mine workers over coming years.

  • Mining companies will not budge without a fight due to very high sunk costs involved in mining operations.

  • Greater complications will ensue including mining companies threatening court action to criminalise strikes.

  • A weak South African rand will provide some respite as mining companies will have a little more leeway to increase wages, given that they receive revenue in US dollars and pay wages in rand.

  • South Africa's gold sector will continue its multi-year decline and the platinum sector will stagnate over the next ten years as investment in the industry fades.

Key Questions Answered

Mining Sector Wages Rising, Employment Falling
South Africa: Mining Sector Average Monthly Earnings At Current Prices, ZAR, (LHS) & Mining Sector Employees, thousands, (RHS)

South Africa Mining Unrest Crib Sheet

BMI View: We expect labour unrest to continue to plague South Africa's mining sector over coming years, intensified by weaker precious metal prices. Indecisive government action and greater inter-union rivalry will be key features of the struggle ahead. In this article we set out our core view for how the situation of unrest in South Africa's mining sector will play out and answer the most salient questions.

Core View

  • Precious metal prices will head lower, intensifying the situation on the ground as mining companies will be less able to consent to unions' demands for higher wages.

  • Strikes will become increasingly frequent and protracted. Each time they will end with unions accepting lower offers than their original demands, but also with the mining companies having conceded ground. Both parties will be dissatisfied, setting the stage for further strike action.

  • Gold miners will be more likely to exit South Africa's mining sector than platinum miners. This is because other jurisdictions offer attractive gold deposits, while global platinum reserves are concentrated in South Africa.

  • Greater inter-union rivalry will take place. The NUM and AMCU will continue to battle for membership amongst mining sector workers.

  • Violence between strikers and non-strikers is likely to occur meaning that the situation could escalate very quickly.

  • The government will remain torn between ideological principles and economic realities. It will prevaricate indefinitely and fail to act decisively to ameliorate the situation. Even so, we expect a modest shift to the left in favour of mine workers over coming years.

  • Mining companies will not budge without a fight due to very high sunk costs involved in mining operations.

  • Greater complications will ensue including mining companies threatening court action to criminalise strikes.

  • A weak South African rand will provide some respite as mining companies will have a little more leeway to increase wages, given that they receive revenue in US dollars and pay wages in rand.

  • South Africa's gold sector will continue its multi-year decline and the platinum sector will stagnate over the next ten years as investment in the industry fades.

Mining Sector Wages Rising, Employment Falling
South Africa: Mining Sector Average Monthly Earnings At Current Prices, ZAR, (LHS) & Mining Sector Employees, thousands, (RHS)

Key Questions Answered

Who are the major players?

The NUM (National Union of Mineworkers) and AMCU (Association of Mineworkers and Construction Union) are the major labour unions. AMCU emerged as the dominant union in South Africa's platinum belt in 2012 after a ferocious turf war between the two unions in which the AMCU successfully challenged NUM's 30-year dominance. AMCU is traditionally more radical and has attracted a larger following over the past five years as wage rise demands have grown stronger. This turf war has been responsible for multiple deaths and waves of wildcat strikes. Numsa is the National Union of Metalworkers South Africa, and is the largest single trade union in the country with more than 338,000 members.

Anglo American Platinum (Amplats), Impala Platinum (Implats), Lonmin, Northam Platinum and Aquarius Platinum are the largest platinum mining companies. Gold mining companies include AngloGold Ashanti, Harmony Gold, Sibanye Gold and Gold Fields.

Which sectors of the mining industry are affected?

The gold and platinum sectors are predominantly affected, although all sectors remain at risk:

  • In 2012, Anglo American's iron ore unit, Kumba Iron Ore, had production disrupted as a result of spillover industrial action from the gold sector.

  • The coal sector was hit in March 2013. Miners began a wildcat strike at Anglo American's Kleinkopje mine following wildcat strikes at five mines operated by Exxaro.

  • In July 2013, all NUM members of De Beers' workers went on strike (diamond sector), pushing for a 13% wage increase while the company was offering only 6%.

Despite successful agreements over wage increases in all these cases, further labour unrest could pose a problem in the future for all of these sectors.

What do the strikers want compared to what's on offer?

We will take as an example the current strike action (Q114) in which 40% of platinum production has been halted in South Africa due to an AMCU strike in the platinum belt:

Platinum mining companies' latest offer is a pay rise of 7-9% over three years, which they claim "pushes the boundary of what is affordable and sustainable". This would guarantee minimum pay of ZAR9,390 to ZAR10,250 per month. AMCU is demanding more than a doubling of entry-level wages to ZAR12,500 per month. This is considered to be a "living wage" amongst AMCU membership.

Why is there such a large disparity?

Mining companies were compelled to offer large pay rises in 2012 and this set a precedent. For example, Lonmin offered a 22% pay rise for workers in the wake of the Marikana strike in 2012, which has provided a benchmark for future pay negotiations. Lonmin provided such a large increase due to the alarming violence of strikes during 2012, which resulted in 44 deaths.

The turf war between the NUM and AMCU has also been responsible, as both unions have attempted to outbid one another's wage demands in order to attract a greater following.

Why don't the mining companies just pay?

45% of platinum operations in South Africa are currently unprofitable due to rising production costs and weak global prices. We forecast further weakening of precious metal prices, with gold prices set to average US$1,150/oz over 2014, significantly lower than their 2012 average of US$1,669/oz. This will squeeze companies' margins making wage increases all the more difficult to stomach. Platinum prices are traditionally correlated to gold prices and thus we highlight downside risk for platinum prices over coming quarters.

Escalating power costs in South Africa are also weighing on company profit margins. Eskom, which supplies 90% of electricity in the country, continues to declare regular 'power emergencies', forcing industrial users to cut consumption by a minimum of 10% at short notice.

Production Costs Outstripping Prices
Select Companies - Average Cash Costs (US$/oz) & Global Platinum Prices (US$/oz)

Will the strikes become violent?

More than likely, yes. In this round of strikes violence has already ensued with one man killed outside an Amplats mine in early February 2014 and another non-striker reportedly killed by AMCU members as he went to work in late February.

What is the government doing about this issue?

We expect the ANC to continue to prevaricate, failing to prevent strikes from disrupting the mining industry as well as failing to force the mining companies to concede to union demands. The government will remain torn between its ideological allegiance to its citizens and economic realities which support the case of mining companies.

What does this mean for South Africa's mining industry over the long term?

We maintain a view for stagnation in the gold and platinum sectors over coming years. We anticipate the gradual demise of the gold industry over the long term, as the problem of increasingly depleted mines will be exacerbated by labour unrest and weak gold prices. The platinum sector should prove to be more resilient over the long term, largely because South Africa holds the largest platinum deposits worldwide so there are limited alternative jurisdictions for platinum miners to re-locate to.

We maintain a bullish outlook on iron ore and coal production in South Africa over the long term, as we expect investment to continue to flow into the sector and forecast a strong global demand picture especially for coal as Europe and Asia continue to rely upon the fuel for power generation. Therefore, we forecast South Africa's mining industry value to grow from an estimated US$32.4bn in 2013 to US$34.2bn in 2018.

Are there any potential game changers?

  • We highlight the general election set to take place this year as a potential game changer. We expect the ANC to win the election but with a significantly reduced majority. This could result in a policy lurch to the left.

  • An increase in violence similar to the 2012 Marikana 'massacre' could force the government to take decisive action.

  • A surprise exit of one or a number of major gold or platinum producers could bring about a more abrupt decline in mining sector output.

Gold Mining Costs In South Africa Higher Than Global Average
Select Companies Average Cash Costs & Global Average (US$/oz)
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