Thomas White Global Investing
South Africa
South Africa Stamp
May 7, 2010
A Postcard from Africa
South Africa: The Paradox of Mining Riches

Metal ore

South Africa’s mines have an average life span of 100 years.

It is a well known fact that South Africa has some of the richest mining reserves in the world. Actually, make that the richest. A recent Citigroup report states that the country has around $2.5 trillion worth of metals and minerals, even more than Russia and Australia, which rank second and third respectively. But these undoubtedly impressive figures hide an underlying story.

Of the $2.5 trillion metal and minerals cache, almost $2.3 trillion is found in the world’s rarest and most precious metal – platinum. And here is where Citigroup analyst Craig Sainsbury believes that South Africa could go wrong. Sometimes abundance and richness can be a burden if not handled well, otherwise known as the “paradox of plenty”. And analysts at Citigroup and elsewhere fear that South Africa’s dominance in the platinum market could well lull the mining-rich nation into complacency.

South Africa easily corners the platinum market – but as this commodities market expands, and platinum exports rise, the country may find itself in a quixotic situation. It may face the curse of “Dutch disease”, an economic term so named after the 1977 discovery of natural gas in the Netherlands which led to the decline in the country’s manufacturing sector. Likewise, in South Africa, as the mining industry substantially increases its exports in platinum, causing its currency to appreciate, the country’s other manufacturing and agriculture export industries may become less competitive, to their detriment.

This is not the only problem that the mining industry faces. South Africa has traditionally faced a conundrum of issues in its mining sector. Because the industry itself has suffered from bureaucratic hurdles to confusing government policies, South Africa has not been able to completely capitalize on the commodity booms in the past. Power outages have also seriously affected mines recently, and strikes have been a notoriously frequent occurrence, which have dragged productivity down. What’s more, there have been numerous rumors that the government may consider the nationalization of mines, something which the African National Congress Youth League has advocated. The government, however, has insisted that nationalization is neither on its agenda nor part of its policy, stating that it advocates free market principles. Still, the uncertainty of all these issues together has weighed heavily on the South African mining industry.

There is no doubt that South Africa will continue to be the richest mineral and metal resource for at least another 100 years. However, there are other nations that are snapping at its heels – India and China both offer competitive labor advantages, while Australia has already benefited from China’s voracious demand. For now though, South Africa is sitting pretty, with its status as the world’s largest platinum producer keeping the country comfortable. Platinum, as a commodity, has not yet touched its 2008 highs of $2,250 per ounce, and expectations are that the precious metal may surpass that milestone if demand continues to rise. At this stage, South Africa has everything to gain and very little to lose. But it is now up to South Africa to prove that possessing plenty of resources does not necessarily pose a paradox.

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