“Facilitating further Minerals Beneficiation in South Africa · • The vast majority of manufacturing beneficiation (jewellery fabrication & diamond cutting) takes place in countries

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“Facilitating further Minerals Beneficiation in South Africa ”

Presentation to GIBS Forum

By Roger Baxter, Senior Executive, Chamber of Mines of South Africa,

22 May 2013

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PRESENTATION OUTLINE

Side-stream beneficiation

How is South Africa doing in terms of manufacturing beneficiation?

General principles of beneficiation

Key drivers of manufacturing beneficiation?

Conclusion & policy implications

Broad business support on the concept of growing beneficiation

Working collectively and strategically to facilitate beneficiation?

DMR beneficiation strategy – strategic framework to facilitate beneficiation

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� The mining sector and business in general is of the view that adding value to South Africa’s minerals is a meritorious objective.

� Of course the key questions include:

– How much beneficiation is already taking place?

– How to define beneficiation?

– Who are the lead agents to drive beneficiation?

– How to encourage/facilitate beneficiation?

– How to coordinate the efforts and actions of stakeholders to create this enabling framework?

THERE IS BROAD SUPPORT FROM BUSINESS ON THE OBJECTIVE OF ADDING VALUE (BENEFICIATION) TO SOUTH AFRICA’S MINERALS

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THE AMOUNT OF DOWNSTREAM BENEFICIATION ALREADY TAKING PLACE IN SOUTH AFRICA IS SIGNIFICANTLY UNDERESTIMATED

� Where the commercial opportunities exist, significant downstream beneficiation is already taking place.

� The Chamber conservatively estimates that about another R300 billion of value & >150 000 jobs are created by downstream beneficiation:

– E.g. In 2012 43 tons of pgms converted into catalytic converters in RSA (13% of global production) creating 5000 jobs & >R20 billion in value.

– 125 MT of coal converted into >200 000 gWh of electricity that fired South Africa’s economy.

– 45 MT coal valued at R11 billion converted into liquid fuels, plastics, polymers, waxes, fertilisers, etc., valued at R165 billion & creating >30 000 jobs.

– 8.4 MT iron ore converted into 5 MT of steel creating sales of >R29 billion and about10 000 jobs.

– 14 MT of cement produced creating R20 billion in sales and many jobs.

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DMR BENEFICIATION STRATEGY – STRATEGIC FRAMEWORK TO PROMOTE AND FACILITATE BENEFICIATION

� The government has adopted the Beneficiation Strategydeveloped by the DMR. The new IPAP5 also talks to beneficiation.

� Given the cross-cutting nature of the issues that are necessary to promote beneficiation – an integrated strategic approach to the matter is critically important.

� Not only do all the stakeholders need to work together (labour, business and government), but multiple government departments and agencies also need to play a constructive role (i.e. critical need for cross-coordination between government departments).

� The Beneficiation Strategy needs to work with the NDP, NGP, IPAP5 and IRP2010.

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DTI IPAP5: PROPOSALS

� The new IPAP5 also talks to beneficiation.

� Proposes:

� Investigation of 5 key value chains (including side-stream).

� Modifications to MPRDA to ensure local availability of supply, the investigation of the issue of strategic minerals, critical feed-stocks and domestic pricing conditions.

� All possible levers to be considered.

DMR IS THE LEAD DEPARTMENT AND IS WORKING ON THE BENEFICIATION IMPLEMENTATION PLAN (NOT YET READY), WHICH LINKS

BACK TO THE BENEFICIATION STRATEGY

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DMR BENEFICIATION STRATEGY – STRATEGIC FRAMEWORK TO PROMOTE AND FACILITATE BENEFICIATION

Broad support for:

� Coordinated strategic approach to facilitating beneficiation.

� Need for identification of cross-cutting constraints to beneficiation (and development of appropriate solutions).

� Building on the work of existing beneficiation structures and previous research work done on the issue.

� Investigating SWOTs of top 5 mineral beneficiation chains.

� An appropriate consultative process to ensure stakeholder buy-in and workable proposals emerge from the process.

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“The term beneficiation, used broadly to describe the successive

processes of adding value to raw materials from their extraction through to the sale of finished products to consumers, covers a wide range of

very different activities. These include large-scale and capital-intensive operations like smelting and technologically sophisticated refining as

well as labour-intensive activities such as craft jewellery”.

Minerals Policy White Paper, Oct 1998

A WORKABLE DEFINITION FOR DOWNSTREAM MINERALS BENEFICIATION

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THE FOUR STAGE DOWNSTREAM BENEFICIATION PROCESS

StageMineral beneficiation

process categoryProcess flow-chart Labour

intensity

Capital

intensity

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2

3

4

The action of mining and

producing an ore or

concentrate (primary

product)

The action of converting a

concentrate into a bulk

tonnage intermediate

product (such as a metal

or alloy)

The action of converting the

intermediate goods into a

refined product suitable for

purchase by both small &

sophisticated industries (semis)

The action of

manufacturing a final

product for sale

Run-of-mine

ores

Washed &

sized

concentrates

Mattes/slags/

bulk

chemicals

Ferro alloys/

pure metals

Steel/ alloys

Worked

shapes &

forms

Worked

shapes &

forms

Worked

shapes &

forms

High High

Low High

Low High

Medium to

high

Medium to

high

Industry

Cluster

Mining

Mining

Refining /

Manufacturing

Manufacturing

Mining

Manufacturing

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MINING BENEFICIATION

Mining has competency/skill in the mining and in certain parts of the concentrating/smelting areas.

MANUFACTURING BENEFICIATIONFrom refining to the fabrication of a final consumer product.

Manufacturing companies have core skills and competency in this arena (understanding customer needs, product

development, design, skills, markets, distribution chains, technology).

DEFINING DOWNSTREAM BENEFICIATION

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SIDE-STREAM BENEFICIATION

�Much of the focus has been on defining downstream beneficiation (adding further value to the primary minerals generated by mining).

� Little attention has been given to the significant side-stream beneficiation sectors that exist because of mining. Mining creates the “critical-mass” necessary for the establishment of other industries, such as stock markets, financial services, contracting services, heavy engineering, power, transport, manufacturing, etc.

� The multiplier effects of mining are so large as to generate an estimated doubling of the direct contribution of the sector to the economy.

� In countries such as Canada and Australia the side-stream beneficiation industries have been given due recognition and have been supported by their governments.

�Side-stream beneficiation requires more recognition in South Africa.

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THE CONTRIBUTION OF MINING IS SIGNIFICANT, WITH SIDE-

STREAM BENEFICIATION PLAYING AN IMPORTANT ROLE

• Creates 1.3 million jobs (500 000 direct & 800 000 indirect).

• Accounts for about 19% of GDP (9% direct, 10% indirect & induced).

• Critical earner of foreign exchange >50%.

• Accounts for 20% of investment (12% direct).

• Attracts significant foreign savings (R1.4 trillion/ 29% of value of JSE).

• 17.7% of corporate tax receipts, 2011 R26bn & R5.5 billion in royalties.

• R437 billion in expenditures, +/- R389 billion spent locally.

• R89 billion spent in wages and salaries

• 50% of volume of Transnet’s rail and ports

• 94% of electricity generation via coal power plants

• 15% of electricity demand

• About 37% of country’s of liquid fuels via coal

• R4 billion spent on skills development

• R1.4 billion spent on community investment

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THE LINKAGES OF MINING TO THE ECONOMY

Mining’s direct contribution:

•GDP R230 Billion or 9% of GDP

•Jobs 499 217

The Induced Impact:

•GDP R136,1 billion or 6% of GDP

•Jobs 496,319

First round impact:

•GDP R59 billion or 2.3% of GDP

•Jobs 207 949

Indirect impact

•GDP R42.7 billion or 1.7% of GDP

•Jobs 149,898

The Total Contribution of Mining to the Economy

•GDP R468 billion or 18.7% of GDP

•Jobs 1,353,383 (16.6% of total employment)Source: Quantec & IDC, 2010 data

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Minerals & Metals in South Africa: A Significant Value Added Cluster

ScienceTechnology

Exploration

Geoscience

Suppliers

Mining is one of the most extensive and best developed South African industrial clusters

Extensive sciences & technology network/research

Broad expertise in geoscience

Large exploration expertise

Large number suppliers of equipment and services

World class educational and skills development systems and institutions

Sophisticated financial institutions (JSE, banks, legal)

Large scale smelting and refining.

Mining

SmeltersRefineries

GovernancePolicy

EquityFinancing

(JSE)

Professional

schools

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� This is a crucially important issue because much of the focus in the beneficiation debate in the past has been on why the mining sectorhas not done enough to drive the manufacturing/fabrication beneficiation area - despite acceptance by stakeholders that the beneficiation being focused on is at the manufacturing level.

� Given the globally accepted and driven model of specialisation, it is very unusual to see a mining company operating at all levels of the value chain.

THE SEPARATION OF MANUFACTURING BENEFICIATION FROM MINING BENEFICIATION IS VERY IMPORTANT

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• For precious metals and diamonds the products are generally available in any of the world’s markets at internationally determined prices.

• The vast majority of manufacturing beneficiation (jewellery fabrication & diamond cutting) takes place in countries that have little or no mine production of precious metals and diamonds.

• So the answer is that the availability of mined precious metals and diamonds at world determined prices does not necessarily provide a competitive advantage.

• For bulk mined commodities prices are generally determined at the international level, but most manufacturing processing takes place near the market for the product (such as steel).

• The challenges for bulk commodity beneficiation is the pricing of intermediate products (steel) which challenges final fabrication (e.g. steel wire, gas bottles, etc), rather than actual mined commodity prices (iron ore).

DOES THE AVAILABILITY OF MINERALS CONSTITUTE AN ADVANTAGE FOR THE MANUFACTURING BENEFICIATION SECTORS?

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THE COUNTRIES THAT MINE THE DIAMONDS ARE NOT NECESSARILY THE COUNTRIES THAT CUT DIAMONDS

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THE COUNTRIES THAT MINE THE GOLD ARE NOT NECESSARILY THE COUNTRIES THAT FABRICATE GOLD PRODUCTS

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5

10

15

20

25

30

% o

f w

orld

Gold, share of world mine production by volume versus share of jewellery fabrication by volume 2012

Share of mine production volume Share of gold fabrication demand

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THE COUNTRIES THAT MINE PGMS ARE NOT NECESSARILY THE COUNTRIES THAT FABRICATE PGM ARTICLES (JEWELLERY/CATS, ETC)

MIDP driven

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COMPARATIVE ADVANTAGE issues such as natural resources are no longer considered to be a key driver of

manufacturing beneficiation investment.

MANUFACTURING BENEFICIATION IS DRIVEN BY COMPETITIVE ADVANTAGE ISSUES & NOT NECESSARILY BY THE AVAILABILITY OF RAW MATERIALS

COMPETITIVE ADVANTAGE issues such as cost competitive production, skills and craftsmanship, etc., are now the key drivers of manufacturing beneficiation

investment.

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COMPARATIVE ADVANTAGE VERSUS COMPETITIVE ADVANTAGE

Type of advantage Source Beneficiary Description and policy implication

Comparative

advantage as

traditionally

defined

Endowed

All firms in

industries,

regions

Cheap resources, low cost labour. Endowed

advantages remain critically important to South

Africa’s primary industries. Microeconomic

reforms that improve the country’s ports,

transport and electricity will support the country’s

comparative advantages in these areas.

Dynamic

comparative

advantage

Created

All firms in

industries,

regions

World class human and physical infrastructure, as

well as clusters that develop capacities useful to

all firms. Here South Africa is weak and policy

objectives should be on the enhancing of physical

infrastructure, a better educated and skilled

workforce, market reforms, support for R&D, etc.

Competitive

advantage

Created

Individual firms

The fostering and nurturing of world class firms.

Policy issues here include competition law

responses to the need for scale in global markets,

tax regimes relative to competitors, domestic non-

tariff barriers, government procurement, overseas

market development support, export facilitation,

etc.

Primary industries

Competitive Manufacturing

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• Significant entrepreneurial base looking at opportunities to service markets.

• Competitive production, high productivity, low costs vs competitors.

• Craftsmanship and specific skills.

• Access to markets (domestic and foreign). Most successful jewellery producers have started with a large domestic market.

• Good market intelligence (what customers want, the latest designs?)

• Low costs of doing business (smart tape - not red tape).

• Low materials funding costs (i.e. low interest rates).

• Special economic zones (duty free, VAT free and low tax rate areas for manufacturing).

• Quality assurance (Hallmarking) for final markets.

• Research & development & innovation incentives and capabilities.

• Appropriate and competitively priced infrastructure.

WHAT ARE THE KEY DRIVERS OF THE MANUFACTURING BENEFICIATION INDUSTRY (E.G. JEWELLERY FABRICATION)?

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SOUTH AFRICA’S MANUFACTURING SECTOR HAS SHRUNK

�Manufacturing as a % of GDP at 15% has continued to decline over the past three decades, versus 22% in the 1980’s and 19% in the 1990’s.

�With the exception of some niche products and the motor industry (because of the MIDP), most components of the manufacturing sector have battled to become competitive – in the face of a volatile currency and slow progress on improving total factor productivity.

�Manufacturing as a % of GDP at 15% is now just above the comparative number for the USA and compares unfavourably versus a number of countries (China 34%, South Korea 28%, Malaysia 27%, etc.).

�Low growth rates in MVA in South Africa (only 2.9% in 2010-2012) versus high MVA growth in competitors (China 8.8%, Turkey 5.5%, India 5.8%, etc.) means that the competitiveness gap between South Africa and the competitors will continue widening!

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SOUTH AFRICA’S MANUFACTURING SECTOR’S SHARE OF GDP CONTINUES TO FALL

Source: StatsSA

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SOUTH AFRICA’S MANUFACTURING SHARE OF GDP CONTINUES TO FALL

0

5

10

15

20

25

30

35

MV

A %

of

GD

P

.

Manufacturing value added as % of GDP in real terms, (source UNIDO)

1995

2006

2012

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COUNTRIES THAT HAVE HIGH MVA PRODUCTIVITY GROWTH ATTRACT SIGNIFICANT INVESTMENT INTO MANUFACTURING

10.6

7.6

2.3

5.3

2.83.4

2.93.7

4.7

0.4

8.1

5.8 5.54.7

3.0 2.9 2.8 2.6 2.4 2.0

-1

1

3

5

7

9

11

13

Ch

ina

Ind

ia

Tu

rkey

Mala

ysia

Au

str

alia

So

uth

Afr

ica

S-K

ore

a

Po

lan

d

Bra

zil

US

A

% G

row

th r

ate

.

Real growth rate in manufacturing value added for the period 2005-2010, and 2010-2012 (source UNIDO/WBG)

These countries are attracting large amounts of

investment into manufacturing

These countries attract smaller share of investment

into manufacturing

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THE MVA PRODUCTIVITY GAP BETWEEN SA AND

COMPETITORS IN MANUFACTURING IS WIDENING

If MVA growth in SA remains low vs China (10.2% growth) and

developing economies (5.2% growth) the productivity gap will

simply widen

100

120

140

160

180

200

220

240

260

1 2 3 4 5 6 7 8 9 10

years

10% MVAgrowth(China)

5% MVAgrowth(developingworld)2% MVAgrowth (SA)

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GIVEN THE COST DIFFERENTIAL BETWEEN SOUTH AFRICA AND INDIA…

Cutting & polishing costs

FRIDGE estimates

Industry estimates

0

20

40

60

80

100

120

USA Israel South

Africa

Belgium Thailand China India

$/ct

0

20

40

60

80

100

120

USA Israel South

Africa

Belgium Thailand China India

$/ct

40 74

73 $/ct

Medium price differential

57 $/ct

47 99Medium price differential

Medium estimated price differential between SA and

India: 65 $/ct

No

data

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•SA still spending about 1% of GDP on R&D.

•Better R&D incentives (150% tax write-off) has helped, but local R&D expenditures off a low base.

•There are collaborative initiatives underway on downstream beneficiation e.g. The Advanced Metals Initiative administered by DST

THE TECHNOLOGY SECTORS HAVE NOT KEPT PACE WITH INTERNATIONAL DEVELOPMENTS

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RED TAPE CONTINUES TO INHIBIT ENTREPRENEURSHIP AND INDUSTRIALISATION IN CERTAIN AREAS

BadGood

0 50 100 150

Protecting investors

Getting credit

Doing Business

Dealing with construction …

Starting a business

Paying taxes

Closing a business

Registering property

Enforcing contracts

Employing workers

Trading across borders

World Bank Ease of doing business, South Africa's country ranking per category (doing business 2013)

2013

2012

2011

2010

2009

2008

2007

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RSA IS COMPETITIVE IN SOME AREAS, BUT UNCOMPETITIVE IN MANY OF THE DRIVERS OF MANUFACTURING BENEFICIATION

0

1

2

3

4

5

6Institutions

Infrastructure

Macroeconomic stability

Health and primary education

Higher education and training

Goods market efficiency

Labour market efficiency

Financial market sophistication

Technological readiness

Market size

Business sophistication

Innovation

WEF global competitiveness scores, South Africa vs other Efficiency Driven Economies, 2012-2013

South Africa Efficiency driven economies

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IN SOME AREAS THE GAP IS WIDENING!

The declining share of manufacturing is perhaps the best evidence that the business economics

environment for manufacturing is poor – versus the competitors.

Unfortunately the gap is widening!

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� National collective effort via the Beneficiation Strategy framework, IPAP5, NDP and NGP.

� A thorough assessment of why RSA has done poorly in respect of manufacturing beneficiation is necessary.

� Provide an enabling environment that attracts the manufacturing fabrication companies to come and invest in SA. This includes:

– Improving access to foreign markets for manufactured products.

– Enabling faster growth in total factor productivity.

– Develop special economic zones for manufacturing beneficiation (duty free, VAT free, US$ based accounts, tailor made infrastructure, etc.)

– Lowering the cost of capital in SA.

– Access to intermediate inputs at world competitive prices (e.g. steel)

– Providing the right types of skills for such projects.

– Improving logistical infrastructure (cost, efficiency, etc.).

– Incentives for R&D.

FOR SOUTH AFRICA TO PROMOTE GREATER MANUFACTURING BENEFICIATION WHAT IS REQUIRED?

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� The mining sector has played, and continues to play a critical role as a foundation industry, which helps the development of other industries (especially the side-stream input industries).

� The economic health of the mining sector will materially affect the economic health of these side-stream industries.

� As per the Australian and Canadian examples, due recognition is given to side-stream beneficiation. Active support of the capital goods sector, the financial services sector, the research sector and other side-stream mining related sectors will further grow the country’s competitiveness and export capability to the benefit of all.

BUT DO NOT FORGET SIDE-STREAM BENEFICIATION

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� The mining sector is so much greater than just the sum of its direct contribution to the economy.

� While business supports the concept of growing the downstream mineral beneficiation sector, we all agree that this can only be achieved by creating a facilitating investment environment that attracts manufacturing companies to invest or expand in South Africa.

� The contribution of mining to side-stream beneficiation has traditionally been overlooked.

� Supporting and facilitating downstream and side-stream beneficiation will create more value in the economy, help grow exports and investment to the benefit of all.

� The Chamber and its members looks forward to engaging with government, Parliament and other stakeholders in this important process.

CONCLUSION

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� What can mining companies do?

� Support the side-stream and downstream processes.

� Support R&D.

� Support materials funding arrangements (historically they have not worked)

� Provide inputs to the domestic fabricators at world determined prices.

� Support training.

� Support market development.

CONCLUSION

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CONCLUSION

Mining and minerals matter for the growth, development and transformation of South

Africa

Documents

“Facilitating further Minerals Beneficiation in South Africa · • The vast majority of manufacturing beneficiation (jewellery fabrication & diamond cutting) takes place in countries