No quick fixes for SA’s mining headwinds regardless of elections outcome, says Fitch

The BMI analysts have projected that prices for the energy commodity will remain downbeat “as the global economy progresses on its shifts away from energy derived from fossil” fuels. Picture: Oupa Mokoena Independent Newspapers

The BMI analysts have projected that prices for the energy commodity will remain downbeat “as the global economy progresses on its shifts away from energy derived from fossil” fuels. Picture: Oupa Mokoena Independent Newspapers

Published May 16, 2024

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South Africa’s coal and platinum group metals (PGM) sectors will likely remain muted in terms of productivity and earnings for the remainder of this year, analysts at BMI Research said yesterday, citing the persistent challenges afflicting the industry and dim prospects for a quicker turnaround post the May 29 elections.

This comes as PGM and coal production for South Africa fell 3.6% and 9%, respectively, during the quarter of March, dragging down overall mineral output to an 5.8% nosedive for the quarter compared to the year earlier, according to data from Statistics SA.

Analysts at the Fitch Solutions-run BMI Research said yesterday that there was likely to be little respite for South Africa’s mineral productivity post this month’s elections in which the ANC is seen remaining in control of policy, despite expectations that its vote will dip below the 50% majority.

Although there are slim scenarios of a narrow margin for an ANC outright victory, the BMI analysts said President Cyril Ramaphosa’s governing party will likely need a coalition with either the EFF or MK Party, although it will remain in control of policy formulation.

“We do not expect an immediate turnaround for the mining sector post-election with unreliable energy and transport infrastructure along with an uncertain and inefficient regulatory environment resulting in significant administrative challenges,” said Olga Savina, mining and metals analyst at BMI yesterday.

“The South African mining industry is to face further contraction in 2024 as persistent challenges linked to power supply disruptions, rail and port bottlenecks and the weak outlook for coal prices weigh on the sector.”

Lower mineral commodity prices were also worsening the situation, with price forecasts of $135 (R2 474) per ton for coal, marking a significant departure from the annual average of $358 per ton reached in 2022.

Worse still, the BMI analysts have projected that prices for the energy commodity will remain downbeat “as the global economy progresses on its shifts away from energy derived from fossil” fuels.

“The coal industry represents a large portion of the broader mining markets in south Africa (and) we forecast coal prices to average $135 per ton,” added Savina.

“It will be challenging to offset the losses resulting from the structural decline of the industry.”

Although there is some upward trajectory in the outlook for PGM – another key commodity focus for South Africa – there is likely to be little respite for the sector which is suffering production headwinds from power outages, job retrenchments and curtailed investment.

The World Platinum Investment Council said this week that South Africa’s platinum supply to world markets will dip by 2% this year.

Despite the positive price outlook for PGM, Savina said it looked less likely that this will be beneficial for the sector “given the logistical challenges as well as energy challenges” besetting the industry.

“We do not expect an immediate turnaround even when it comes to a positive price outlook for PGM,” she said.

Lara Wolfe, senior analyst for sub-Saharan Africa country risk at BMI, said even if the ANC was to consummate a coalition, the policy stance of possible coalition partners such as the EFF on increasing business regulation and union support would weaken the attractiveness of South Africa as an investment destination.

In the power market, BMI said the outcome of South Africa’s May 29 elections “will not change or immediately ease the existing structural power challenges” with the likelihood that “load shedding will remain a risk” factor for industries such as mining and manufacturing.

“As we look ahead to the winter months, June, July and August, it comes with increased consumption and demand, and we believe that the country is at risk of at least Stage 4 load shedding,” said Sithobile Khoza, power and renewables analyst for BMI.

“If peak winter demand for electricity is anything like last year, where it peaked at 32GW, and Eskom does maintain an availability of just over 28GW, we are looking at a shortage of just 4GW in the months of June and July, where winter is expected to peak,”

However, over the past few weeks Eskom has managed to improve its fleet performance as reflected in the increased energy availability indicators.

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