Munich Personal RePEc Archive The Mining Dynamics and Economic performance in South African Mineral Resources Using Quantile Regression Falakahla, Lwazi Nelson Mandela University 22 July 2019 Online at https://mpra.ub.uni-muenchen.de/95284/ MPRA Paper No. 95284, posted 03 Aug 2019 10:35 UTC The Mining Dynamics and Economic Performance in South African Mineral Resources: Using Quantile Regression Lwazi Falakahla Department of Economics, Nelson Mandela University Email: [email protected] Abstract The paper analyses the performance of the South African mineral resources such as gold, coal, Platinum Group Metals (PGMs), iron ore, manganese and diamonds, by assessing the dynamics of commodity total production and sales over the period 1990-2018. The empirical evidence is based on Monge-Kantorovich Multivariate Quantile regression. The change in revenue, exchange rates, mining production oil prices, Producer Price Index (PPI) as well as the dummy variable which presents the shock of a global financial crisis, are proposed indicators of the study. The results are nevertheless ambiguous in some sectors. The findings provided that the depreciation of exchange rates is associated with positive and significant increases in total production and sales, particularly in the coal and diamond sectors. In particular, oil prices only contribute unfavorably to coal, PGMs and diamond production. The results might be interpreted to provide some useful implications for minerals and mining policy strategy. Keywords: South Africa; Mining; Gold; Coal; PGMs; Iron ore; Manganese; Diamonds; Quantile Regression 1. Introduction The South African mining industry performance relies on certain aspects that ought to participate positively towards improving its output. In the past decades, the South African mining industry sector became one of the highest contributors to GDP value globally. Historically, South Africa’s total reserves were once rated number one in the world followed by China in terms of gold production (Hartnady, 2009). Despite the boom, periods occurred after the discovery of gold when the mining sector experienced severe challenges. In summary, historical sub period challenges include: Kimberly diamond strike (1868), Anglo – Boer war (1899-1902), First World War (1914-1918), Rand Rebellion in 1922, Second World War (1939-1945) and the Recession in 1980 (Department Minerals and Energy; 2008, South African History Online (SAHO) 2018). Recently, it was declared that approximately 75 % of South African gold mines are facing a major crisis of not making a profit. The preceding observation was due to the price of the commodity, fluctuating exchange rates, labour costs wage negotiations (Mining Council (2018) and RT International (2018)). In addition, in 2007 a strike took place in gold, platinum and coal mines due to demands for better and safer working conditions. The Lonmin strike that occurred in 2012 which took about 5 months was confirmed as the longest strike in the South African platinum mining history (LaFraniere (2007) and SAHO (2014)). Therefore, this research paper will investigate the nexus between South Africa’s total mining production output with the changes in sales, mining production oil prices, exchange rates, Producer Price Index (PPI) and the uncertain global financial crisis shock. More specifically, the paper will be assessing the dynamics of these recommended indicators towards enhancement of potential mining industry performance growth. In particular, this research intends to answer the questions: Does a change in mining industry revenue alter the total production output? Do the fluctuations in crude oil prices contribute to mining total output? How do changes in the exchange rate affect South Africa’s locally produced mining output through its effect on the country’s exports? How are increases in production costs in the mining industry associated with changes in total production revenue? Last, how did the global financial meltdown phenomenon alter the mining industry? This current paper will touch base with well-organised topics that numerous articles have covered; however the topic of this article has not been efficiently addressed by other researchers. More specifically, the content of the study will outline multiple factors that ought to deter the total mining output in South Africa, including the impact of the 2008 global financial crisis. The following section of the study is organised as follows: section two is the literature review assessing the determinants of total mining output; section three presents the data and methodology employed by the study; section four presents and discusses the empirical results; then section five will be verifying the quality of the model; while sections six and seven present the concluding remarks and research recommendations. 1.2 The Overview of South African Mineral Resources The mining sector has played an influential role in generating economic activities over the past decades. South Africa’s economic history has been characterised by enrichment of mineral resources as diamond, gold, platinum, coal as well as other minor minerals such as chrome, vanadium and titanium. However, the study will pay more attention to gold, coal, PGMs, iron ore, manganese and the diamond sector. 1.2.1 Gold In June 1886, the first gold mine was discovered on the banks of the Witwatersrand by Gerrit Banjies. Around that time, both gold and diamonds began to dominate the South African economy, taking over from the indigenous agricultural sector such that gold mining in South Africa became the largest producer in the world (Mining Council, 2018). In South Africa, the exploration of gold is found in three provinces; namely Gauteng, North West and Free State. Throughout these parts, there are several gold producers such as AngloGold Ashanti, Harmony, Sibanye-Gold Stillwater, Goldfields, Pan African Resources, Village and defunct operations. Despite the growth, several challenges, which revolved around the political atmosphere, social factors and the global economic outlook, were confirmed. According to Neingo and Tholana (2016), some of the challenges included the global competition with countries such as Botswana. 1.2.2 Coal In 1864, the first coal mine was founded in the Eastern Cape in the town called Molteno named after an immigrant, John Molteno. Then the dispersion began into other provinces, and in the late 1880s another commercial coal deposit was discovered in KwaZulu-Natal and Gauteng provinces. More coal mining commenced in Mpumalanga, Limpopo and Free State provinces such that South Africa become the developing coal exporter globally. According to the Chamber of Mines South Africa (2018), the South African coal commodity accounts for almost 3.3 % of the world’s output, which is equivalent to 30 billion tonnes (Mining Council, 2018). 1.2.3 PGMs Geographically, the Platinum Group Metals (PGMs) are currently operating in nine provinces; namely Gauteng, Limpopo, North West, Mpumalanga, Free State, KwaZulu-Natal, Northern Cape, Western Cape and Eastern Cape such that South African PGMs hold over 80 percent of world reserves. Historically, the first platinum mine was discovered in 1924 and was known as the Bushveld Igneous Complex (BIC). During the time the platinum mine produced at least 75 percent of the world’s total output. Despite the invasion of World War II, platinum mine production grew substantially and also new innovative technology operational initiatives had a meaningful impact in growing the mining industry. In 1960, the platinum commodity market saw an increase in global demands for jewellery which allowed the platinum producers to maximise their operating profits. During the boom, in the 20th century, the major PGM producers produced almost 80 percent of the world’s total output, and these were housed within the following groups: Implats, Amplats and Lonmin. This was due to an amendment of the Mineral and Petroleum Resource Development Act of 2002. This led to an increase in foreign investors’ interest which was caused by high costs and increasing demand during the period 2002 to 2008. 1.2.4 Iron ore The key iron ore sector players are BHP Billiton, Rio Tinto, Companhia Vale do Rio Doce (CVRD) and Kumba Iron Ore (KIO). Globally, other countries that produce iron ore include the United States, Iran, Russia, Australia, India, Brazil, Canada, China, Sweden and Kazakhstan Mining Africa (2017). The common challenges encountered by the key role players are costs associated with extracting the ore and transporting it. As a result, like any other mining sectors, iron ore mining also required intensive investments in capital and infrastructure to functionally outperform competitors. South African iron ore mines saw global growth since their establishment, such that about 663.6 million tons of iron ore are produced locally, which equates to one percent of the world’s reserves. Furthermore, in 2014, the South African iron ore sector produced about 78 million tons and exported a total of approximately 86 % to its largest importer which is China (Conradie, 2015). Among the challenges in this sector, energy and production costs have been the most common factor in the mining industry. In many emerging economies such as South Africa, which are faced by currency instability, producers will always strive to maximize operational profits. 1.2.5 Manganese Predominantly, South Africa produces about 75 percent of the world’s manganese output making it the second biggest producer in the world. Nevertheless,