Quarterly Bulletin
Sustainable Resource Management Economic Analysis Unit Gauteng Treasury March 2008
THE ROLE OF THE MINING SECTOR IN GAUTENG: THE SECTORAL IMPLICATIONS OF THE ELECTRICITY SHORTAGE?
The Gauteng economy was formed as a result of the discovery of gold within the region in 1886. Previously having been an untouched savannah, Gauteng was to then bear witness to dramatic changes over the next century 1. The mining sector that emerged subsequent to the discovery of gold would drastically transform the Gauteng economy and provide the foundation for the future economic success story that Gauteng has become. During the course of the previous century the Gauteng economy has made the transition from being based largely on the primary sector, mining activity in particular, to being based on the more knowledge-intensive secondary and tertiary sectors of the economy2. This paper provides an analysis of the current role of the mining sector within Gauteng in terms of both magnitude and composition. The paper also explores the medium term performance for the mining sector given its energy-intensive nature within the context of the electricity shortage that the South African economy is currently experiencing.
1 2
http://www.vuvuzela.com/goldjohannesburg/ Gauteng Treasury, 2007, Provincial Economic Review and Outlook (PERO), pg: 25
Table 1: Sectoral GDP and Employment Contributions in Gauteng, 2006
Sectors Primary Sector Agriculture, forestry & fishing Mining & quarrying Secondary Sector Manufacturing Electricity & water Construction Tertiary Sector Wholesale & retail trade Transport and communication Finance, real estate and business services Community, social and other personal services General government services GDPR at market prices and Total Employment
Source: StatsSA, 2007a and 2007b
GDP (Constant 2000 prices, R mil) % Share 9,336 1,478 7,858 101,657 77,933 8,453 15,270 260,130 59,556 35,836 90,675 15,037 59,026 407,407 2.30% 0.40% 1.90% 25.00% 19.10% 2.10% 3.70% 63.90% 14.60% 8.80% 22.30% 3.70% 14.50% 100.00%
Employment 1,572,442 1,166,859 405,583 2,915,185 1,757,428 121,493 1,036,264 8,551,846 3,107,027 614,512 1,339,772 2,354,707 1,135,827 13,039,473
% Share 12.10% 8.90% 3.10% 22.40% 13.50% 0.90% 7.90% 65.60% 23.80% 4.70% 10.30% 18.10% 8.70% 100.00%
Table 1 provides sectoral contributions to Gross Domestic Product (GDP) and employment in Gauteng province in 2006. The table shows the economic role of the mining sector within the Gauteng economy by providing a sectoral comparison of both GDP and employment contributions for 2006. The table also provides a comparison of the provincial mining sector with all the other sectors of the Gauteng economy. It reveals that in 2006, the mining sector contributed a mere 1.9% to the GDP generated in Gauteng. This was the second lowest contribution in 2005 after the agriculture, forestry and fishing sector, which contributed a mere 0.4%. In addition, the mining sector employed about 3.10% of all individuals employed in Gauteng in 2006. Amongst the largest GDP contributors were the finance and business services, manufacturing and general government services sectors, which contributed approximately 22.3%, 19.1% and 14.5% to provincial GDP respectively. In terms of employment, the largest contributors were wholesale and retail trade (23.8%), community, social and other (18.1%) and manufacturing (13.5%) respectively. This is a testament to the fact that the Gauteng economy has made the transition from historically being based on the primary sector to being based on the more knowledge-intensive secondary and tertiary industries. It is important to note that although the mining sectors’ contribution to both GDP and employment in Gauteng is relatively small, mining has indeed formed the basis
of industrial development within the province and it continues to play a dominant role in respect of international trade by providing a vital contribution to South Africa’s foreign exchange reserves. Output produced within the mining industry, such as gold, platinum group metals (PGMs) and coal, are very important within the South Africa and the Gauteng economy as they contribute positively to the trade balance and account for a large amount of South African foreign exchange.3 South Africa has experienced a sustained and dramatic current account deficit since 2004 and it is forecast that this deficit will reach approximately 8% of GDP by 2010. 4 Within this context, the foreign exchange that is generated by the mining sector is vital to the continued positive performance of the South African economy. Figure 1: Mining Exports for Gauteng, 1995-2005
50,000 45,000 40,000 35,000 20.0%
Total M ining Exports M ining Exports as %of Total Exports
25.0%
R million
30,000 25,000 20,000 15,000 10,000 5,000
15.0%
10.0%
5.0%
0.0% 1998 1999 2000 2001 2002 2003 Year 2004 2005 2006 2007
Source: Derived from Quantec Research, 2008
Figure 1 illustrates the role of the provincial mining sector within the export industry at a provincial level by providing both the Rand value of exports from the mining sector as well as mining exports as a percentage of total exports in Gauteng from 1998 to 2007. The share of mining to total exports have increased substantially from an estimated R11,278 billion or 13% in 1998 to over R47,409 billion or 16,8% in 2007. Although mining exports account for a relatively large share of total exports, the figure reveals a declining trend in the share of mining exports as a percentage of total exports. Mining exports in Gauteng accounted for 20.5% of total exports in
3 4
http://www.southafrica.info/doing_business/economy/key_sectors/mining.htm National Treasury, Budget Review 2008, http://www.treasury.gov.za/documents/national%20budget/2008/review/chap2.pdf
1995, decreased to 13% in 1998 before peaking at 16.8% in 2007. The decrease in the mining exports was due to the decline in the price of gold in the last few years, mainly because of competition from cheaper gold from Russia and Australia while the peak in 2007 is attributed to the improvement in the gold price. The mining sector’s energy source is mainly electricity. In the light of load shedding incidences being experienced as a result of capacity constraints to produce more electricity, the mining sector has been largely affected. The current electricity shortage that is being experienced in South Africa stems from the fact that the surplus margin between electricity generating capacity and electricity consumption has been steadily declining over the past few years. Figure 2: Peak Electricity Demand and Eskom Operational Capacity, 19882007
Peak Demand (MW)
42000 40000 38000
Re se rve Margin = 8-10%
Reserve M argin Aspiration = 15%
Reserve Margin = 16%
Peak demand & capacity (mw)
36000 34000 32000 30000 28000 26000 24000 22000 20000
Reserve Margin = 20%
Reserve Margin = 25%
88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07
Peak Demand Operational Capacity(MW Sent Out)
Source : Eskom
Source: Econometrix, 2008 MW= Megawatts
Figure 2 shows Eskom’s estimated electricity peak demand and surplus capacity. It is estimated that there is only about 1,800 megawatts (MW) or less than 10% surplus capacity to cater for unforeseen interruptions that are required in order to undertake maintenance work. The surplus capacity is then further plunged into negative
territory (-5%) when one accounts for the additional capacity that is needed in the face of unforeseen technical difficulties that may occur. It is imperative that one attempts to analyse the potential implications that the electricity shortage could have within the mining sector in Gauteng for two reasons. Firstly, on account of the fact that the mining sector plays an important role in respect of international trade stemming from Gauteng which could have spillover effects to other areas within the provincial economy. Secondly, the potential effects within the mining sector could be widespread due to the energy-intensive nature of this sector. Although the geo-thermal conditions in South Africa are favourable for mining activity, immense machinery and air-conditioning are required to make the working conditions underground tolerable. In order to illustrate the energy-intensive nature of this sector, one need not look further than the resources required to produce one fine ounce of gold: 3,3 tons of ore, 5,440 litres of water, 572 kilowatt hours of electricity, 12 cubic metres of compressed air, a lot of dynamite and tons of chemicals.5 Mining Weekly forecasts that the losses for the entire mining sector in South Africa could be in excess of R200 million a day. In addition to this, it is further estimated that gold mining production could decline by about 20% for 2007 due to the closure of marginal mine shafts. This would essentially bring gold production levels to those witnessed 100 years ago, therefore threatening to seriously stunt the industry.6 The consequences of this potential stagnation within the gold mining subsector has particular significance for Gauteng due to the fact that 25% of the Rand value generated from the mining sector is directly attributable to gold mining in particular.7 In conclusion, given the significant impact that could arise within the mining sector due to the electricity shortages, it is essential that the mining sector find innovative means by which to reduce their reliance on energy in the medium to long term. In so doing one must acknowledge the fact that there are search and implementation costs associated with the introduction of energy-saving and energy efficient technology.
5 6
http://www.southafrica-travel.net/north/a1johb04.htm Prinsloo, L. 2008. “Energy shortage weighs heavily on gold-mining sector’s shoulders”. Mining Weekly. 22 February 2008 7 Derived from Quantec Research, 2007
This will serve to substantially increase the production costs within the mining sector which could temporarily dampen performance further within this sector. However, the implementation of technology that reduces reliance on energy could essentially enable the longevity of a sector that is already experiencing declining importance within both the provincial and national economy.
REFERENCES Econometrix. 2008. “Electricity Outages in Perspective: Longer Term Implications More Serious than Short-Term Disruption” in Ecobulletin, No. 1608/0116. 24 January 2008. Gauteng Treasury. 2007. “Provincial Economic Review and Outlook” National Treasury. 2008. “Budget Review 2008”. Accessed: http://www.treasury.gov.za/documents/national%20budget/2008/review/chap2.pdf Prinsloo, L. 2008. “Energy shortage weighs heavily on gold-mining sector’s shoulders”. Mining Weekly. 22 February 2008. StatsSA, 2007a. Gross Domestic Product, Statistical Release P0441 StatsSA, 2007b. Labour Force Survey, Statistical Release P0210