South Africa’s Mining Production Beats Expectations

Even though mining production continued to contract in March, dropping by 1.1% year-on-year, the March performance is considerably better than the 7% contraction that economists forecast.

The production decline softened unexpectedly against February’s 8.1% year-on-year plunge, revised upwards from 7.5% year-on-year.

On a quarter-on-quarter seasonally adjusted annualised basis, which is the measure used to calculate gross domestic product, production was down 12.7%, which financial services company Investec says implies that mining will again reduce topline economic growth in the first quarter of the year.

According to Investec, March’s mining production outcome revealed that the gold sector had the largest negative impact. Gold constituted 16% of the mining basket and production fell by 17.7% year-on-year, in turn, detracting 2.3% from the headline number.

Citing the Minerals Council, Investec says that “71% of gold mining operations were marginal or loss-making at the end of 2018”, with labour issues, declining output and rising prices continuing to burden the sector.

Conversely, the coal sector, which occupies the highest weighting in the mining index, lifted by 5.7% year-on-year, following two months of contractions. It added 1.4% to the topline number, preventing a more pronounced fall in overall mining production.

Domestically, State-owned utility Eskom continues to be a significant drag on the future sustainability of South Africa’s mining sector, Investec says, noting that above inflation electricity tariff increases and supply uncertainty continue to weigh heavily on production and new development.

Further, the imposition of a carbon tax next month will place a further load on already-constrained mining companies.

Globally, softening growth and investment continue to hinder commodity demand, with exports of resources a key driver of economic growth in South Africa, Investec says.

The Nedbank Economic Unit also states that the possibility of mining production staging a convincing recovery in the next few months is not that great, owing to slowing global economic momentum and stagnant commodity prices.

Demand for commodities out of key consumers, such as China, is likely to ease as China experiences slower economic growth.