S.Africa mines face existential threat even as strikes cool

AFP, Sunday 28 Oct 2012

Mine operators claim rising wage and electricity costs could shrink their profits and force closures

South Africa's mining sector is creeping back toward normality but large wage increases afforded to strikers mean the sector will face shrinking profit margins that could force companies to mechanise or close shafts.

On Thursday, gold operators agreed to pay raises of up to 20.8 per cent for some workers, a month after a platinum mine conceded a 22 per cent pay hike to end illegal stoppages.
The agreements offered the prospect of an end to crippling strikes, but also tighten the screws on the largest employer in Africa's number one economy.
It is a sector that has changed little in the last century and is battling for survival amid rising operating costs and a global crunch.
"We have seen rising wage costs and rising electricity costs in the mining sector," explained Roger Baxter, chief economist at South Africa's Chamber of Mines.
"The industry is very focused on reducing cost pressures and this is through looking at productivity improvement, the adoption of new technologies and in some cases some mechanisation may take place," he told AFP.
The mining industry lost 10 billion rand ($1.1 billion) since the start of the strikes in August, according to Baxter.
Individual operators are now looking hard at the books to see which mines can be considered a going concern.
"The most fundamental problem of the mining industry is that it has a 19th-century business model which depends on cheap labour, low-skilled labour, and therefore large numbers of workers," said Gold Fields chairwoman Mamphela Ramphele in a recent interview.
"It's not sustainable," she concluded.
South African mines employ masses of low-paid mineworkers, most of them migrant workers who travel from far-flung provinces and even neighbouring countries.
Many mines have tens of thousands of people working underground.
Despite low wages, the sheer number of employees represent the bulk of operating costs, and recent salary hikes drive up the bill even more.
At Gold Fields, the world number four gold producer, Thursday's agreement added 2.5 percent to a wage bill that already made up 55 per cent of operating costs.
On top of that, electricity bills now threaten to skyrocket. Public utility Eskom on Monday asked authorities to sign off on a 16 per cent tariff increase per year for the next five years.
The numbers are worrying for a sector that accounts for nine percent of the nation's output and employs 500,000 people -- and almost double that number if ancillary industries are included.
Companies therefore think about reducing an unproductive labour force that has become increasingly restless and rejects the authority of traditional labour unions.
"We would expect mining companies to shut down operations first and worry about mechanisation a very distant second. We also think it would be hard to finance mechanisation, especially now that trust from investors has dropped", said Nic Brown, head of commodities research at Natixis Bank, after agencies Moody's and Standard & Poor's downgraded the
country's sovereign rating.
Production costs rise by seven to eight per cent a year while the prices do not always keep up, he added.
Extraction costs for platinum amount to $1,400 an ounce in South Africa, which barely allows for searching for new seams and modernising current equipment, said Brown. An ounce traded at $1,571 on Friday, after falling below $1,400 in February.
But mechanising mine sites that have been criticised for dire living conditions is not simple, no matter how alluring, according to Peter Major, an analyst at Cadiz Corporate Solutions.
"It is very difficult to mechanise in gold and platinum mining because of the narrow reefs," he told AFP.
"The guys mechanised equipment back in the 1980's -- they have been trying for many years," he said.
Furthermore it's expensive to replace men with machines, and not always profitable, he added.
Some firms have even done the reverse: platinum producer Lonmin has invested 1.2 billion rand ($137 million) since 2008 in "demechanising" two shafts at its Marikana mine northwest of Johannesburg and returned to traditional extraction.
The wave of deadly mine strikes started there in August and police shot dead 34 strikers in a few minutes on 16 August before stoppages spread across the industry.
Gold Fields has already hinted at a restructuring however and analysts have predicted large job cuts in the sector.
Meanwhile, the South African government, faced with unemployment upward of 25 per cent, wants to create 140,000 more jobs in the mining industry by 2020.
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