South Africa all but off BHP Billiton’s radar screen

 South Africa has all but fallen off the radar screen of BHP Billiton, the world’s biggest mining company, which on Tuesday reported an 8.7% fall in revenue to $65.9-billion for the year ended June.

The name of the country did not cross the lips of new CEO Andrew Mackenzie and one got the impression that this region’s aluminium, thermal coal and manganese interests are hanging on by a thin thread in a company dominated by iron-ore, oil, copper and coking coal.

When BHP and Gencor/Billiton of South Africa merged at the start of the new millennium, the South African assets helped to lift the chin of a then downcast BHP.

The performance of then standalone BHP, which in merged form has paid out more in dividends than the rest of the mining world put together, was so mediocre that the Economist of London scoffed that the letters BHP really stood for Broken Hearted People, and not Broken Hill Proprietary.

But the powers that be are clearly in no mood to return the favour; instead they are directing any tender, loving care they still have towards potash risk at Jansen in Canada, which is still a cost centre.

South Africa, a long-standing profit centre, has gone ex growth and no longer features at all on the company’s pipeline of 21 projects.

Such short shrift by the world’s biggest mining company, and indeed others too, does not augur well for South Africa, given that the country has come to rely on the multiplier benefit that the mining sector provides to the rest of the economy.

Mining has the potential to grow South Africa’s gross domestic product (GDP) significantly, which is its main potential contribution to the country.

But it needs investment flow and currently investors are deserting it, and the huge advantage of capital inflow is being lost to South Africa.

In the mining sector as a whole, hundreds of millions of dollars of planned capital investments in projects are being delayed or cancelled.

The industry is going ex growth, which is the ugly anti-developmental story of 2013.

How can South Africa reverse this devastatingly dangerous trend?

The main objective of governments the world over is, or should be, to improve the incomes of every single one of their citizens.

But in order for South Africa to achieve that goal, it needs investor confidence, political certainty and the capacity to deliver, without which there can be no economic growth and thus no economic transformation, as has been proved globally.

Because the mining economy can grow the overall South African economy, it is essential that South Africa places positive emphasis on its mining economy.

Gold Fields CEO Nick Holland, who addressed the Gordon Institute of Business Science (Gibs) last week, has analysed 40 mining-driven global economies and his analysis shows that in each case, more than a quarter of total export revenue is derived from the sale into the world of mined products.

The economies of countries like South Africa are crippled without mining exports.

Mining’s direct weighted average contribution in the Brics, or Brazil, Russia, India, China and South Africa, bloc countries and seven selected resource-rich countries found that a 3% GDP growth translates into $340-billion worth of benefit for the country concerned.

With the 2.6-times multiplier effect that mining provides, the contribution rises to 7% of GDP, or $850-billion.

“That’s the win-win pie,” says Holland, who points out that such a win-win has been achieved in Chile, which has a consistent mining regime that supports incoming foreign investment and where BHP Billiton is continuing to invest.

Mining’s direct benefit to Chilean GDP in 2010 was 14%, not because of its State-owned copper company Codelco but the result of new private-sector investment from mining giants.

MINING MAGNIFICENT MULTIPLIER

The multiplier effect of mining creates significant value in an economy, the GDP contribution of mining first manifesting itself through direct mine supply and then through indirect supply to the mine suppliers.

This puts more money into the pockets of the people at home, who can, in turn, invest and spend it in the general economy.

Adding all that up proves that every 1% GDP growth in mining is worth 2.6% for the overall economy.

But there is another multiplier, too, in that mining is also a proxy for capital inflows, skills, other industries, technology transfer, infrastructure development and community upliftment.

EVERY MINING JOB HELPS 27 PEOPLE

In South Africa mining employs 500 000 people directly and 900 000 indirectly, totalling 1.4-million jobs.

In turn, on average, every direct and indirect worker has nine dependants.

The secondary and tertiary sectors then extend the number of dependants to 14 and the informal sector adds another two, which takes the total number of dependents to a very substantial 27.

Mining’s outreach to 27 people gives it the potential to dig deep into poverty alleviation.

RESOURCE NATIONALISM IS NOT NATIONALISATION

Holland, in his talk at Gibs, defined resource nationalism – as distinct from the very different nationalisation concept – as the effort of countries to extract the maximum value and developmental impact for their people from their finite natural resources.

“In our view, there’s nothing wrong with resource nationalism. In fact, it is very rational for governments to have this as a key objective. Surely governments are correct to want to extract as much as they can, for the benefit of their country and people, out of what are finite resources.

“In fact, we would even go further and say that, not only is it legitimate, but it’s actually the duty of government to see that a country’s natural resources benefit its people,” added Holland.

The central government debt of 40 countries analysed has rocketed to 75% of GDP over the last year, from 20% in 2003, making it understandable for governments to want a bigger piece of the mining pie.

The South African government has got to work out how it can help to save mining operations from closing.

“They’ve got to consider fiscal relief. We can ill afford carbon taxes. Royalties were put in and they are also an extra burden for the industry,” Holland said at Gibs.

“If we don’t get people to the table to start debating, we are going to accelerate the industry’s decline. We need to find some common ground on wages. The road to disaster is continuing to pay above-inflation wage increases when productivity keeps declining. Mining companies have no option but to cut costs.

“Retrenchments are taking place across all levels and a lot of senior mining people are already on the streets,” Holland added.

Also, as big as it is, BHP Billiton has been pushed around and insulted by Canada's potash cartel and it should at least acknowledge that it has had a far better deal out of South Africa than it is having out of Saskatchewan.