South Africa: Will The Mining Sector Be Nationalized?

Julius Malema, the controversial former leader of the Youth League of South Africa’s ruling African National Congress (ANC) party, has long declared that the country’s key mining industry should be nationalized.

He claims that such a measure would relieve unemployment (which is estimated to be as high as 40 percent and much higher for youth); provide a more equal distribution of wealth in the country; and alleviate racial inequalities almost two decades after the fall of apartheid.

Malema, who was recently expelled from the ANC, does not appear to have much support from the government for his calls for state ownership of the mining industry (South Africa is the world's largest platinum producer and is also a significant gold and diamond producer.)

Government officials counter that nationalization will never happen, partially due to a clause in the nation’s constitution. Indeed, South Africa's Deputy President Kgalema Motlanthe told BBC flat out It [nationalization] is not going to happen.”

Still, given the rather unstable nature of South African politics, the nationalization of mines is not entirely out of the realm of possibility.

International Business Times spoke to an expert on South Africa’s economy to discuss the topic.

Pat Thaker is the director of the Economist Intelligence Unit's Africa department. She is based in London, England.

IB TIMES: The South African government recently stated that the nation’s mining industry “will never be nationalized,” defying calls from some of the more radical members of the ruling ANC party. In the unlikely event South African mines were nationalized, what would be the economic impact on the country?

THAKER: It would have a devastating impact. Based on the experience in other jurisdictions, the mining sector would be starved of capital (as the state sucks out the profits), leading to declining production. Loss of private sector skills would also exacerbate the problem.

Nationalization without compensation (of foreign-owned assets) would also lead to lengthy legal battles -- because it would violate investment treaties -- and would bring foreign direct investment (FDI) into mining to an effective halt.

IBTIMES: Given the mining industry’s domination of South Africa’s economy, what are the reasons cited by those who favor nationalization?

THAKER: Those who endorse nationalization view the mines as highly-profitable “cash cows” and want to channel the earnings to the state. However, they fail to understand the long-term economics of mining, with its fluctuating commodity price and profit cycles.

These “pro-nationalizers” also think state control would help address wider and persistent (race-based) inequalities, but their arguments are as much political as economic: they think it could be a vote-winner and want to be seen to be “taking action.”

IB TIMES: Are South African mines still owned primarily by white owners and white companies? If so, is the call for nationalization a measure to increase black ownership of the mining industry?

THAKER: To the extent that large multi-nationals (such as the conglomerate Anglo American plc) can be described as “white”, then ownership still largely rests in “white” hands.

However, black economic empowerment laws call for the transfer of about 25 percent of mining equity to black South Africans -- and although there is no firm data, we estimate that about 15-20 percent has so far been transferred to date (making some individuals and groups very wealthy).

IB TIMES: South Africa is no longer the world's leading gold producer, but it remains the biggest platinum producer. Could we see the nationalization of certain mines (i.e., platinum), while others (gold) remain in private hands?

THAKER: Although full-scale nationalization appears to be a non-starter, there is undoubtedly a greater risk for some mineral activities entering into state ownership than others, especially “strategic” assets -- primarily uranium and coal.
Also, more profitable commodities like platinum could also conceivably be nationalized, especially given that South Africa is the dominant global producer (which could theoretically allow it to establish a cartel -- perhaps with Zimbabwe).

IB TIMES: Has South Africa successfully diversified its economy enough in recent years to lessen the country’s dependence on mining/commodity prices?

THAKER: No, to a large extent, South Africa has failed to diversify. Mining actually accounts for a relatively small proportion of GDP (about 5 percent of GDP directly and 10 percent of GDP indirectly) and a similar share of employment -- and manufacturing is far more important in both cases.
However, mining (including processed minerals and gemstones) continues to generate more than 50 percent of export earnings – and this figure has not changed significantly in recent years.

IB TIMES: Unemployment in South Africa amounts to 40 percent, with youth jobless rates much higher. What has the government done under President Jacob Zuma to alleviate unemployment and poverty?

THAKER: The government has spent significant sums on public works programs and training schemes – and generated jobs via industrial policy initiatives such as automobile investment incentives. But the overall impact has been relatively small.
The pragmatic center of the ANC recognizes that the private sector offers the best prospects for job-creation, but there are a raft of policy constraints inhibiting firms from taking on new workers, including onerous labor laws, widespread strikes (which reflect the political power of the trade unions), uncertainty about mining rights and the requirements of black economic empowerment.

IB TIMES: Labor strife and strikes are endemic is South Africa -- what are the main issues of the unions against the corporations and government? Has any progress been made in labor relations?

THAKER: Labor relations have deteriorated in recent years (the days lost to strikes surged to a record 20-million days in 2010 and may have been worse in 2011) largely because of the political power of the trade unions. The unions are partners in the ruling tripartite alliance -- which comprises the ANC, the South African Communist Party (SACP), and the Congress of South African Trade Unions (COSATU).
Labor militancy extends beyond the traditional areas of pay and work conditions into wider policymaking.
For example, COSATU called a one-day general strike on March 7th to demand the scrapping of labor brokers (despite the negative impact on jobs such a measure would have) and road tolls on Gauteng’s highways.
Business, labor and the government negotiate with The National Economic Development and Labour Council (Nedlac) -- and sometimes find common ground – but there is a complete deadlock over labor broking. Labor relations have worsened rather than improved.

IB TIMES: Do these frequent strikes significantly hurt mineral production?

THAKER: Unquestionably. To give one example, a recent six- week strike (which was both illegal and violent) at Implats’ Rustenburg property led to an estimated 2-billion Rand ($264-million) in lost platinum production.

IB TIMES: Who are the biggest foreign investors in South Africa’s mining sector? (Presumably, they would vociferously oppose any move towards nationalization).

THAKER: The biggest foreign investors – such as Anglo American, BHP Billiton, Lonmin plc and Xstrata plc -- are absolutely opposed to nationalization -- and will continue lobbying heavily against it.
But while the nationalization risk may have faded – other potential threats loom, such as mooted super-taxes.