PCTI/20140826/ CoB /PJ/33 Mineral Value Chains (MVCs) Resource-based Industrialisation?

1. PCTI/20140826/CoB/PJ/33 Mineral Value Chains (MVCs) Resource-based Industrialisation? Minister’s IPAP Update Briefing Paul Jourdan DTI, Tshwane, April 2013

2. Structure of Each MVC Report The upstream value added of each mineral value chain will be consolidated into a single report as they tend to be common – mining, mineral processing and beneficiation inputs (capital goods, consumables and services)

3. DTI/IDC Mineral Value Chains (MVC) Study Project Elements and Time-line for Reports: MPRDA Review Report - January 2013 MVC Context Report – February 2013 Ferrous MVCs Report – April 2013 Coal/gas MVCs (Polymers) Report – June 2013 Titanium MVCs Report – August 2013 PGM MVCs Report – October 2013 Mining Inputs Report – November 2013 Close-out (composite) report – December 2013

4. South Africa is well-endowed with mineral resources South Africa’s Mineral Reserves, World Ranking, 2009 Production & Nominal Life (assuming no further reserves) at 2009 Extraction Rates Source: SAMI 2009/2010, DMR 2010; and Wilson & Anhaeusser 1998: “The Mineral Resources of South Africa”, CGS Pretoria (for BC- Bushveld Complex)

5. The in-situ value of South Africa’s mineral resources is estimated at an astounding $6.24 trillion (2012). By value they comprise: Source: EcoPartners 2012, www.ecopartners.co.za

6. Global Context (demand) Global Minerals Intensity of GDP (steel proxy) Source: Adapted from http://advisoranalyst.com

7. What is Beneficiation? • Narrow definition: • Value-added above a “base” state (ore, conc, metal) • Broader definition: • Total domestic value-addition (excluding all imported inputs) Imports + local VA Imports + local VA Imports + local VA Imports + local VA Imports + local VA Imports + local VA Ore exports Bene= ∑VA Conc exports Bene= ∑VA Alloy exports Bene= ∑VA Metal exports Bene= ∑VA Int. exports Bene= ∑VA Beneficiation is the sum of local VA in the exported product = VA in all inputs plus the VA in the process. = both backward and forward linkages Manu. exports Bene= ∑VA

8. The MVC “cluster” = the 5 key beneficiation linkages 5. FORWARD Value-addition: (beneficiation) Export of resource-based articles 1. FISCAL: Capture & invest of resource rents (RRT) in long-term economic physical & human infra (inter-generational) Use depleting assets to change national endowment structure 4. KNOWLEDGE Linkages (HRD & R&D): “Nursery” for new tech clusters, adaptable to other sectors 2. SPATIAL Puts in critical infra-structure to realise other economic potential & could stimulate LED 3. BACKWARD Inputs: Capital goods, consumables, services, (also export) HRD, R&D Narrow “beneficiation” = forward linkages; Total product beneficiation = back- & forward linkages (∑VA), Total economy-wide beneficiation = all the linkages

9. The MVC “cluster” (Mineral Linkages) Spatial Linkages: Infrastructure (transport, power, ICT) and LED Forward Linkages: Intermediate products => Manufacturing; Logistics; other sectors (agriculture , forestry, fisheries, etc.) Backward Linkages Inputs: Capital goods Consumables Services Resource Extraction Mining: Concentration, smelting, refining => metal/alloy Fiscal linkages: Resource rent capture & deployment: long-term human & physical infrastructure development Knowledge Linkages HRD: skills formation R&D: tech development Geo-knowledge (survey) Knowledge linkages are a prerequisite for developing the crucial back/forward beneficiation linkages!

10. MVCs and Mineral Deposit Variability • Mineral deposits embody a massive variation in resource rents (returns above those necessary to attract investment = average return on investment: ROI), much greater than any other sector except for hydrocarbons (oil and gas). • In SA ROI in mining varies from average (ca 15%, e.g. marginal gold deposits) to several hundred percent (e.g. iron and manganese ore deposits) = resource rents. • Consequently it is difficult to design a minerals regime with generic linkage conditions (local content, value-addition, skills formation, etc milestones) that will efficiently maximise the potential development impact of all deposits over time. • In general, a mineral regime will set minimum linkage development obligations in order to make investment into marginal deposits attractive. • The best way to flush out the maximum linkage development that any specific mineral deposit could support, would be to get a market response through the public tender of the property against linkage development commitments (a form of developmental “price discovery”).

11. Customising mining leases to max MVCs Hybrid free mining (FIFA) and tender system Define 3 Types of Mineral Terrains: 2.Partially Known 1.Unknown Mineral assets 3.Known Mineral assets Delineation Terrain (Auction) Exploration Terrain (FIFA) Geo-Reserve Terrain Exploration License (Mining Licence Automaticity) Public Tender on: • Further geo-survey: CGS SMC, or sub-contractors • Tech & Fin Capability • Rent share (tax) • Up/downstream beneficiation • Infra development • HRD & R&D, tech transfer Resource Rent Tax • Risk exploration for future step-in rights. “Mining Charter” type socio/labour conditions & Minimum up- & down- beneficiation milestones Mining Concession/Licence

12. Customising mining leases to max MVCs Hybrid free mining (FIFA) and tender system Define 3 Types of Mineral Terrains: 2.Partially Known 1.Unknown Mineral assets 3.Known Mineral assets However, this hybrid regime requires substantial amendments to the MPRDA! Delineation Terrain (Auction) Exploration Terrain (FIFA) Geo-Reserve Terrain Exploration License (Mining Licence Automaticity) Public Tender on: • Further geo-survey: CGS SMC, or sub-contractors • Tech & Fin Capability • Rent share (tax) • Up/downstream beneficiation • Infra development • HRD & R&D, tech transfer Resource Rent Tax • Risk exploration for future step-in rights. “Mining Charter” type socio/labour conditions & Minimum up- & down- beneficiation milestones Mining Concession/Licence

13. Resources provide opportunities for up-, down- & side-stream linkages: MVCs • mining capital goods • drilling • cutting • hauling • hoisting, etc. • Fabrication Cap.goods • Rolling • Moulding • Machining • assembling • processing cap. goods • crushers/mills • hydromet plant • materials handling • furnaces, etc. Mining Smelting & Refining Fabrication (manufacturing) Mineral Processing Exploration • mining services • mine planning • consumables/spares • sub-contracting • financing • analytical, etc • processing services • comminution • grinding media • chem/reagects • process control • analytical, etc • exploration services • GIS • analytical • data processing • financing • etc • Refining services • Reductants • Chemicals • Assaying • Gas & elec supply • Value adding services • Design • Marketing • Distribution • Services • Refining Cap. Goods • Smelters • Furnaces • Electro winning cells • Casters • expl. capital goods • geophysical • drilling • survey • etc. Resources inputs sector (up-stream) has a comparative advantage in: Relatively large local market Development of techs for local conditions National asset: permits for concessioning with strong linkages conditionality

14. Putative strategies to grow the upstream (inputs) MVCs • Amend the MPRDA to include upstream value addition (backward linkages: local content) as an objective of the Act and strengthen the Minister’s power to include such conditions in the mining concession/license. • Make local content commitments a bid variable with significant weighting (30%?) for all new competitive mineral concessions (auctions); • Base the B-B BEE purchase requirements in the Mining Charter on the BEE proportion of local value added in the goods or services supplied, rather than the total value of the goods or services, to eliminate destructive BEE fronting for foreign suppliers and to increase the upstream developmental impact; • DTI, DMR, EDD and DST to jointly comprehensive industrial sub-sectoral strategies to grow the mineral upstream sectors (capital goods, services, consumables) including the use of instruments such as import tariffs, investment incentives, innovation stimuli, market access, access to finance, competitive inputs, tech development, etc. • Task the nascent SMC and IDC with developing appropriate capital goods, with the private sector and technology institutions,. • Establish “Beneficiation SEZs” e.g. The mooted “PGM SEZ • Develop Regional Trade Strategies for growing inputs markets

15. Backward (upstream) Value Addition (Inputs) Economies of Scale (exports) are critical to growing mineral inputs Share of diversified manufacturing exports, by region Source: Roberts 2012 Mining Capital Equipment Exports to Africa ($mn) Source: Kaplan 2011 Note that this excludes mining based services. The export of mining-based services is extensive and growing very rapidly.

16. Markets: Sub-Saharan Africa & World GDP Growth Source: IMF, World Economic Outlook (WEO) Database, October 2012 Regional Trade Strategies are Critical to Growing the Backward MVCs

17. Two approaches to downstream MVCs: 1) “Supply-side” Methodology: Starts from the national mineral endowment and then develops strategies for their beneficiation. (This generally appears to be the DMR approach in “A Beneficiation Strategy For The Minerals Industry Of South Africa”) For rapid Job Creation, the domestic demand driven methodology is preferable, except for minerals with potential “producer power”. The DTI/IDC value chains selection reflects this approach. 2) “Demand-side” Methodology: Identifies critical mineral inputs into the economy needs for rapid job creation and then develops strategies for the cost-effective supply of those mineral inputs.

18. Downstream Beneficiation Linkages The Principal Mineral-Based Feedstocks for rapid JOB CREATION SA has ample resources for the cost-effective production of almost all of these critical feedstocks for downstream job creation!

19. Ferrous MVCs Iron, chromium, manganese into steels & specialty steels

20. SA Steel Production and Location Source: Kumba 2011, “The South African iron and steel value chain”, Joburg, March 2011 Plus stainless steel (Columbus 600ktpa) in Middleburg

21. Steel flows in South Africa in 2008 Source: Kumba 2011, “The South African iron and steel value chain”, Joburg, March 2011

22. SA Steel Demand Sectors

23. However, the monopoly pricing (IPP) of steel severely curtails manufacturing jobs Value received on local sales (IPP) Transport costs might be as high as 47% of the cost of importing flat steel! Hot rolled coil steel prices, US$/t Amount that local customers pay above exports World export price Value received on exports (EPP) Source: Iscor 2004 in DTI presentation to the Portfolio Committee of Trade & Industry, 24 Aug 2010

24. Putative Steel Strategies • Use state ownership of mineral rights to apply cost-plus ore pricing conditions to local customers and on local customers (for their domestic on-sales) for select “strategic” mineral feedstocks, particularly iron/steel. This will require amendment of the MPRDA. • Strengthen the Competition Act to allow for the effective imposition of competitive pricing in the domestic market: Regulate steel prices against a basket of international prices. • Introduce competition through state facilitation of new players- • Progress the IDC Masorini/Scaw projects • Assess the viability of the NMM and Cascades projects • Reserve resources for tender against the establishment of a steel plant to supply the domestic market at competitive prices • Ban all exports of base & ferrous scrap, to lower domestic scrap prices • Use state infrastructure tariffs (energy, transport) to leverage competitive prices, through applying a surcharge to companies that monopoly price (IPP) in the domestic market. • Trade a user-concession (BOT) on the Saldanha ore line, with establishing a new steel plant (NMM?) and local ore sales at cost-plus with an on-obligation to the customer (steel plants). • Invest in technology development to configure a large scale process to economically exploit the appropriate BC magnetite seams to produce titanium dioxide and pig iron, which could form the basis of a new steel competitor.

25. Coal/gas: Polymers Most plastics are derived from petrochemical feedstock (naphtha) which in turn originates from oil, natural gas and coal. In SA the gas comes from coal

26. Coal/gas – Nitrogenous Fertilisers Fertiliser Raw Materials Producers *Taken over by Meridian/Farmers World. # Plant mothballed Source: Grain SA “Fertiliser Report”, 2011

27. International and local urea prices: IPP pricing Zerihun Gudeta Alemu 2010

28. Grain production Costs in SA Source: Corné Louw 2011, Fertilisers constitute 30-50% of grain/oil seeds input costs, and the IPP-EPP differential is 30% to 50% : Competitive fertiliser prices could have a significant impact on both job retention and expansion in the agricultural sector

29. Total employment in agriculture in South Africa, 1968-2010 Around 1 million jobs have been lost since 1970, aggravated by monopoly fertiliser pricing! Source: Sandrey, R. et al. (2011),

30. Putative Coal/Gas MVC Strategies • Use state ownership of coal mineral rights to apply cost-plus domestic polymer/fertiliser pricing conditions on Sasol; • Regulate polymer/fertiliser prices against a basket of international prices (ICISLOR, Platts, Harriman); • Strengthen the Competition Act to allow for the effective imposition of competitive pricing in the domestic market (amend the Competition Act) • Introduce competition through state facilitation of new players by the reservation of suitable coal/gas resources for tender against new capacity at EPP or cost plus into domestic market; • Increase state control of Sasol (currently 26% owned by the IDC & PIC) to >50%, through a strategic alliance with the Union pension funds; • Use state infrastructure tariffs (energy, transport) to leverage competitive prices from Sasol.

31. PGM MVCs Platinum and palladium resources in other countries, compared to South Africa Source: Cawthorn R.G. 1999 Pt 75% & Pd 50% Case for producer power to effect price stability and greater value addition?

32. Platinum Supply 2001-2012 SA dominates supply, but most PGM intensive manufacturing is done in OECD countries Source: JM 2012 Platinum Industrial Demand Source: JM 2012

33. Putative PGM MVC Strategies • Assert state’s right to market PGMs by amending the Exchange Control Regulations to require authorisation to market PGMs, as per gold. • Task the PGM miners with establishing a single export channel to stabilise prices and establish a “stockpile” which could be partly held by the Reserve Bank (portion of national reserves in the form of platinum) • Engage Russia & Zimbabwe on joining a single channel export mechanism. • Task the single channel mechanism with developing a 5-8 year plan for the value chain to be progressively relocated to the producer states. • Include value-addition milestones in PGM licenses; • Dramatically increase state & private PGM R&D activities

34. Titanium MVCs • South Africa is the 2nd largest producer of Ti feedstocks globally (mainly slag) and has the 2nd larges resources (excluding the BC magnetites); • Over 90% of Ti is used to make pigments (paper, plastics, paint, etc. industries) • A small quantity goes into Ti metal (aerospace, medical, sports) • SA has a tiny share of the downstream industry

35. Putative Ti tanium MVC s Strategies • Use state ownership of mineral rights to apply beneficiation milestones on titanium miners; • Encourage/facilitate Exarro to locate a world-scale pigment plant (>300ktpa) in SA, using chloride technology (Tronox); • Fund R&D into technologies to realise the huge Ti potential in the BC magnetites (Fe & Ti) resources (level 21 = 70% of world) • Continue to support the Ti powder and forming technology development initiatives;

36. Conclusions • MVCs should encompass all the SA value in the final consumed or exported product, i.e. both local content and beneficiation; • Little MVC headway has been made, principally due to widespread monopoly pricing (IPP) of mineral feedstocks and the decline in upstream industries and R&D due to exit of the old “Mining Houses”; • Nevertheless there appears to be strong case for MVCs, particularly the critical feedstocks in job-creating sectors: manufacturing, energy, agriculture and infrastructure, as well as minerals where SA has potential producer power, and in inputs industries (capital goods); • Regional markets (economic integration) could facilitate beneficiation (economies of scale), particularly in inputs industries (local content); • MVCs could gradually transform SA’s comparative resources advantage into a competitive advantage, especially the local content (capital goods & services) dimension; • Wide-ranging instruments could be available to the state to facilitate beneficiation, including conditions on mining licences, anti-trust legislation, incentives, HRD and R&D, but many will require amendments to current legislation; • There appears to be substantial potential for downstream beneficiation in the ferrous, coal/gas, PGM and titanium job-creating value-chains (MVCs).

37. Thank Youpaulj1952@gmail.com