Since the fall of apartheid, the ANC's foundation of power has revolved around promoting social and economic equality through Black Economic Empowerment initiatives such as subsidizing electricity, water and housing for those who were excluded from the formal economy for much of the 20th century. Many of these disenfranchised people work in the mining sector. Though South Africa is the world's largest producer of platinum-group metals, the largest exporter of manganese and chromium, the third-largest exporter of iron ore, and a major producer of diamonds, gold and coal, many feel that the common citizen receives little benefit from its mining industry.
As a result, the ANC has made a point of seeking reform in the country's mining sector to bring accountability to companies that, as exporters, have always been externally minded. Using reform as a pro-labor policy tool, the party has fought for non-wage compensation in the form of housing allowances in addition to seeking pay bonuses while pressuring companies to adopt programs for job and economic development.
Under consideration in some form or another since 2008, the Mineral and Petroleum Resources Development Amendment Bill is meant to take these policy decisions further and do several things South Africa's labor groups have long sought. It will facilitate wider state participation in the mining sector while encouraging more domestic ownership, increasing the government's revenues from the sector.
The version Zuma vetoed last month would have empowered the mining minister to declare a particular mineral as strategic according to his or her sole judgment. Going forward, the ability for the minister to decide which minerals are listed will likely be removed, increasing transparency and accountability to industries. Zuma's announcement of listed minerals is intended to be a show of good faith to industries as well.
The bill would also let the mining minister decide how much of each mineral extracted would have to be processed and consumed in South Africa. So far there are no limits, so the minister could decide that all of the country's coal must be destined for South African markets, for example.
Finally, and perhaps most threatening to mining companies, the bill would set domestic price controls for strategic minerals at the cost of production plus transportation. This issue has been particularly important over the past decade as companies entered the South African coal market in hopes of exporting to China, a development that raised the domestic price of coal. South Africans feared they would completely lose the crucial commodity that forms the basis of the country's electricity sector.
The proposed export controls have raised concerns over the bill's legality and constitutionality, putting the mining sector reform back into limbo, and quite likely, sending it back to the drawing board. Mining companies operating in South Africa can breathe a sigh of relief, for now.
Even if it had passed, the bill would not have solved the structural issues affecting the South African mining sector and its industrial sector. The ANC has worked with mining companies to ensure that a new bill will incorporate a degree of balance for all interests, but this has caused problems for the party.
Many ANC constituents feel that the mining companies, especially those extracting platinum (but less so gold), are uninterested in the quality of life of their low-level employees. The ANC has carefully considered policy responses because it does not want to be accused of placating companies and lose voters to other parties, such as the Economic Freedom Fighters. Indeed, the party was hesitant to step in and support the mining sector during the five-month strike in the platinum sector last year. At the same time, failing to secure mining reform undermines the ANC's ability to appeal to South Africans, alienating voters in its support base.
Inflation in the Mining Sector
As Stratfor has noted, the country's mining sector suffers from several issues. First, frequent labor strikes plague the country, and given the ANC's base of support among pro-labor groups, Pretoria often sides with the workers. The result has been significant labor costs increases, either through wages or other forms of compensation such as housing allowances. These increases were a sticking point last year in the platinum sector, and the gold and coal sectors will enter more labor negotiations this summer when their two-year labor agreement expires in June.
Second, the country often experiences widespread electricity shortages. This summer, Eskom, South Africa's national electric utility, has had to institute frequent rolling blackouts while the country's aging coal-fired power plants have gone offline during several unplanned maintenance periods. The Medupi and Kusile coal-fired power plants were supposed to begin operations, but they have run into delays, leaving Eskom with a supply gap. In addition to the shortages, rising domestic coal costs and increasing electricity tariffs to finance the new (and delayed) infrastructure projects have combined to make South Africa's electricity costs rise about 10 percent year-on-year since 2008.
Even as the power grid struggles to keep up with demand, increasing beneficiation projects and heavy industrial demand are increasing, exacerbating the problem. This problem is particularly the case in the platinum and gold sectors, where beneficiation demands high amounts of electricity. A decline in ore quality at many mines will only make things worse.
Impact on the Sector
Because coal is the backbone of South African power generation, the government will almost certainly designate it as a strategic commodity, a move that would take some pressure off Eskom. The ANC does not want to see the crucial commodity exported unrestrained to China, India and other markets with little benefit to South Africa. Pretoria is also considering a bailout of the struggling utility in addition to a broader plan to help the company restructure.
Reducing pressure on Eskom would reduce electricity costs. It would also give mining companies more breathing room to increase compensation for labor at a time when global commodity prices have fallen, making the ANC's pro-labor policies easier to work with.
The biggest risk in signing the mining reform bill into law, of course, is the potential loss of investment in South Africa's mining sector. Implementing widespread price controls or even export quotas while pushing for greater equity participation through Black Economic Empowerment initiatives makes investors cautious. Zuma realized this and subsequently vetoed the latest draft of the bill.
Still, even without the bill, the uncertainty around the mining sector is problematic. No one knows how long the strategic mineral list will be or how high the quotas for domestic processing will be, making Zuma's Feb. 11 announcement important. Most likely, the list will include commodities in a way that solves multiple problems at the same time. Coal, for example, plays well into South Africa's problems with energy. Platinum may also be a decent choice because a lot of its processing is already done domestically, and there are few alternative producers abroad.
With the new mining reform bill, South Africa is betting on its ability to solve its energy problems while increasing processing jobs and providing cheaper raw materials to its domestic market, something voters want. The ANC is aware that, if it fails to implement reform, its relationship with the National Union of Metalworkers could worsen. The union could align itself with the Economic Freedom Fighters, a move that would erode the ANC's base of support while empowering its rival. Passing mining reform will be a major priority for the party.