The mining sector could be the Achilles heel to the expected economic recovery in South Africa this year as output remains sluggish, pressured by ongoing power cuts and a three-month strike in the gold sector.
This comes as South Africa mining output struggled to fully recover in May, firmly remaining on a contractionary trajectory even though it fell less than expected.
Data from Statistics South Africa (StatsSA) yesterday showed that mining production shrank by 7.8 percent year-on-year in May following a downwardly revised 14.8 percent slump in April.
Though this production reading was better than market forecasts of a 10.8 plunge, it marked the fourth consecutive month of a downturn in mining activity.
StatsSA’s principal survey statistician Juan-Pierre Terblanche said production was driven lower by decreases in gold, coal, manganese ore, iron ore and diamonds.
Conversely, platinum group metals (PGMs) grew by a modest 3.3 percent, adding 0.8 percent points to the top-line number and preventing a larger contraction.
“Gold was the biggest drag on overall production, falling 28.3 percent year-on-year,” Terblanche said.
“On a positive side, the country produced more platinum group metals, nickel, copper and chromium ore.”
Gold prices have also continued to decline, yesterday falling to a three-month low of $1 707 per ounce as global investors increasingly bet for aggressive interest rates hike of 100 basis points in the US later this month.
Stocks also retreated, as the JSE All Share index fell more than 2 percent to around 64 600 points led by losses in the commodity-linked sector.
Northam Platinum, Sibanye-Stillwater and Kumba Iron Ore lost 9.3 percent, 8.3 percent, and 8.1 percent, respectively.
Investec economist Lara Hodes said the yellow metal was depressed by the expected 100 basis points by the US Federal Reserve (Fed), which has raised concerns over recession and allowed the bullion to fall further.
Hodes also said the logistical challenges at Transnet had set the sector back amid declining commodity prices.
“The Fed’s hawkish monetary policy stance has weighed on gold, despite the heightened global geopolitical situation, with the war in Ukraine persisting,” Hodes said.
“Moreover, logistical bottlenecks, due in part to ageing infrastructure and theft, continue to weigh on export potential,” she said.
On a seasonally adjusted monthly basis, mining production increased by 0.7 percent in May from a downwardly revised 3.6 percent contraction in April and an increase of 3.0 percent in March.
However, in the three months ended May, mining production declined by 1.3 percent compared with the previous three months.
The sluggish performance by the sector does not bode well for South Africa’s gross domestic product (GDP) in the second quarter after a promising start to the year.
The mining sector, which up until now has been a key contributor to the economy amid the recent revenue windfalls which have been driven by elevated commodity prices, contracted by 1.1 percent from the first quarter.
Performance within the sector has remained constrained by regulatory obstacles, poor infrastructure, and policy uncertainty, and the ongoing and intensifying electricity supply constraints pose a significant threat to productivity.
Nedbank economist Liandra da Silva said the country continued to experience significant power cuts in May and this has likely constrained the recovery.
As a result, Da Silva said the outlook for the mining sector was dimming progressively.
Da Silva said demand was likely to slow and thus weigh on overall sales with the increasing risk of a global recession in the near-term and the re-emergence of new Covid-19 variants.
“Although miners may continue to benefit from higher commodity prices, a recessionary global slowdown will weigh on demand and may ultimately push prices lower,” Da Silva said.
“However, rising US interest rates and global risk-off sentiment has already seen the domestic currency face immense pressure, which will boost miners’ profits.”
Meanwhile, the rand weakened further yesterday to R17.24 against the US dollar, the lowest since early August 2020, pressured by the dollar strength.
BUSINESS REPORT