Theoretically, any country that mines materials should process and add value to these products before exportation. A minerals beneficiation policy for SA appears to make perfect sense then. However, the country’s proposals for such beneficiation have spooked an already skittish mining sector.

This is, at least in part, because policy appears complicated, contradictory and incoherent. For one it is located in three different departments: Economic Development, Trade and Investment (dti) and Mineral Resources, as well as the National Planning Commission under Trevor Manuel.

The policies – the Amended Mineral Resources and Petroleum Development Act of 2013 (MRPDA), the National Growth Path (NGP) and the Industrial Policy Action Plan (IPAP) appear to pull in different directions. An attempt by President Jacob Zuma to square matters away by insisting that ‘they all fall under the umbrella of the National Development Plan (NDP)’ – created by Manuel’s commission – has only served to confuse matters further.

While all policies hope to create jobs, they have vastly different ambitions and mechanisms in mind. The NDP emphasises small business, which none of the others do. IPAP is a sectoral growth programme that hopes to identify ‘winning manufacturing sectors’ such as biofuels and agriprocessing, which it plans to support. The NGP’s greatest ambitions are in national infrastructure investment. Head of the Centre for Development and Enterprise Anne Bernstein, and UCT academic David Kaplan, a former dti chief economist, warn that differences give rise to very different policy approaches.

For example, they point out that ‘the NDP lays great emphasis on the removal of barriers and constraints to new-firm entry, an issue that gets little attention in the other documents’. Policy confusion can be sorted out with appropriate leadership. However, the mining industry’s problems go well beyond this issue.

The 2012 ANC policy paper on the subject – the State Intervention in the Minerals Sector (Sims) – is viewed by the mining industry as harsh and punitive. Comments from one of its authors Paul Jourdan are even more alarming. Jourdan has been quoted as saying that if mining cannot ‘make the [beneficiation] linkages … they should leave the minerals in the ground’.

‘If you’re just a dirt digger and that’s your core competency, then fine, go to Australia,’ he said.

Mining companies have long complained that beneficiation policies are an attempt to force them outside their core competencies. Platinum miners might well argue that their core competency is getting the mineral out of the ground. They know – and want to know – little of the process of transforming it into autocatalytic converters.

The essence of the complaint is that government wants ever more from a deeply stressed industry at a time when global commodity prices have fallen sharply as local costs have risen.

But government’s requirements – with the notable exception of the NDP – all demand a lot from the mining industry while paying little attention to wider investment climate factors. Miners argue the policy is likely to fail if nothing is done to address, for example, the high costs of energy and domestic skills shortages. They also say the local market for beneficiated products is small and access to international markets – especially the EU, China and India – is constrained by a whole host of tariff and regulatory barriers.

‘A major factor inhibiting growth and causing the industry to shrink is the lack of consultation from [government and industry]’

ERNEST BLOM, PRESIDENT, WORLD FEDERATION OF DIAMOND BOURSES

Surely governments’ priority should be dealing with these matters, they suggest. It is worth noting that while state interventions have a poor reputation, some have previously worked, both in SA and elsewhere. The Motor Industry Development Programme (MIDP) in SA is one such example, although it does operate behind a 40% tariff barrier. This means South Africans pay, not surprisingly, about 40% more for the same SA-produced vehicle sold offshore. The industry has created beneficiation and jobs, notably in ferrochrome inputs and autocatalytic converters, a downstream product of the platinum industry.

However, initiatives to locally beneficiate diamonds and gold by establishing a diamond cutting and polishing industry with jewellery manufacturing, have floundered. These contrast dramatically with the success of India’s diamond industry. This difference provides useful insight into the future beneficiation prospects in this area.

India’s diamond cutting and polishing industry has grown from almost nothing to the largest in the world since that country’s independence in 1947. By the millennium the industry employed literally millions of people. In Diamond: The History of a Cold-Blooded Love Affair, author Matthew Hart observed that there were between half a million and 700 000 cutters and polishers in Mumbai alone, ‘depending on market demand’.

The Indian government made only one intervention – in the late 1940s it banned the importation of polished diamonds. The country’s industry grew on the back of a willingness to cut and polish stones that no one else would touch, mainly those that were extremely small in size and low in quality. Today India accounts for 50% of the market by value and 80% by volume. Bombay and Surat have reduced the traditional diamond centres of Antwerp and Tel Aviv to what Hart calls ‘shells of what they were’.

SA started a diamond beneficiation programme in 2007 with the establishment of the State Diamond Trader (SDT). This organisation was set up ‘to promote equitable access to, and local beneficiation of the republic’s diamonds’.

Its intention was to buy 10% of all diamonds produced in SA and to distribute them to local cutters and polishers. It effectively replaced a private sector operation, Diamondel, owned and operated as a profitable enterprise by giant diamond mining firm De Beers.

The initiative has failed. President of the World Federation of Diamond Bourses, Ernest Blom, observed that the number of diamond polishers in the country had dropped from 4 500 some 20 years ago, to fewer than 600 in 2013. SA jewellery designer Yair Shimansky said total employment in the cutting and polishing sector, including non-technical staff, had dropped from 20 000 five years ago to about 2 000 today.

Much finger-pointing has ensued, a lot aimed at the SDT. Although it is not entirely clear who or what is to blame (demand for gem diamonds has plummeted in the wake of the 2008 global recession) there do appear to be significant inefficiencies in the state-owned operation.

For example, the SDT required clients to ‘pre-finance’ purchases of raw diamonds – in other words to pay upfront before the SDT would source their goods. As far back as December 2009, Blom accused the SDT of being ‘inefficient’ and argued that ‘restrictive legislation and bureaucratic obstacles [were] the main contributing factors to the decline of the country’s diamond manufacturing and trading sectors’.

Interviewed in 2013 Blom has a slightly different take on the issue: ‘The relationship between government and industry needs to be developed more. A major factor inhibiting growth and causing the industry to shrink is the lack of consultation from both parties.’

The failure of development in the diamond cutting and polishing space has implications for precious metals. No large-scale gold beneficiation is likely to happen outside the jewellery industry and much the same applies to platinum. But local demand is insufficient on its own and globally it is almost impossible to compete with India’s volumes, quality and prices.

The essential problem is that state intervention is notoriously insensitive to markets. The biggest problem is poor timing. It takes all too long to set up a bureaucratic intervention and, in that space, markets change dramatically.

The political delay in setting up a second automotive incentive scheme in SA to replace the MIDP has seen the country’s supply of platinum-based autocatalytic converters slip from 20% of the global market to 13%.

What scares mining companies most is the fear of being ordered to beneficiate or lose their formal licences to mine.

This is a discretionary power granted to the Minister of Mineral Resources in the amended MRPDA. The industry has simply given up fighting the threat.

Chamber of Mines COO Roger Baxter, addressing a 2013 hearing in parliament, stated that the industry ‘supports a policy of greater beneficiation of raw materials’. He said SA minerals production was already beneficiated to the value of R96 billion and that the main concern was ‘developmental pricing’.

Plainly put, the SA mining industry is currently preoccupied with survival. Negotiating a workable beneficiation policy comes a long way down its list of priorities at this point.

By David Christianson
Image: Fredrick Broden/reneerhyner.com