BRIEFING ON UPSTREAM AND DOWNSTREAM MINING LINKAGES

1. BRIEFING ON UPSTREAM AND DOWNSTREAM MINING LINKAGES Portfolio Committee on Trade and Industry 20 August 2014

2. CONTENTS • INTRODUCTION – PROBLEM STATEMENT • BACKGROUND ISSUES AND SUMMARY CHALLENGES • KEY POLICY LEVERS • PLANS FOR: • FERROUS • POLYMERS • TITANIUM • PGM’S • MINING INPUTS

3. RESOURCE DRIVEN INDUSTRIALISATION – WHAT DOES IT MEAN? Problem statement: how to leverage the comparative advantage from a national resource endowment to build a dynamic industrial economy which secures sustainable development, radical economic transformation and job creation. • There are, inter-alia, five key areas which can be considered in the policy space: • Providing cost plus output from the mines to local mineral processing / beneficiation enterprises. • Ensuring that processing enterprises (e.g. steel, petro-chemicals) pass down the benefits of any cost plus inputs to downstream national industry. • Requirements (usually through licensing) that the mining industry directly invests (or a tax is imposed) to ensure adequate investment in capital goods and related component manufacturing enterprises. • Requiring that the mining industry procures in a manner that develops their direct local capital goods suppliers. • Requiring that the mining industry to also invests in resource processing or beneficiation enterprises. • The SA term ‘beneficiation’ is used to describe some/all these possible measures.

4. background issues • SA faces challenge of diversifying away from resource extraction and reliance on commodity exports towards a manufacturing, value adding and more labour intensive growth. Manufacturing sector has highest economic and employment multipliers with significant spill-over effects. • Recent economic data again underlines view that the current import intensive growth trajectory is unsustainable. GDP contraction evidence of importance of mining but critical need to move up the value chain. • Upstream mining and downstream beneficiation and linkages to the manufacturing sectors is critical (which should not be equated with further mega capital and energy intensive investment projects.).

5. BACKGROUND ISSUES • Deep structural problems in the economy. Minerals-energy complex characterised by capital/energy intensive beneficiation with strategic manufacturing inputs (steel, plastics, etc) not passed through to manufacturing despite the fact that SA enjoys comparative advantage in the form of enormous mineral resources. • Abuse of market power; import parity pricing, intermediation: contribute to domestic steel prices in highest global quartile in world. Wide range of SA manufacturers increasingly import steel – autos; medium, heavy, commercial and defence vehicles; mining equipment etc. • Offshore listings and the unbundling that followed has led to loss of capacity and capabilities in horizontally integrated mining companies divesting of ‘non-core’ assets. • The decline of SA’s public and private sector mining technology development (RDI) is a very significant problem.

6. BACKGROUND ISSUES • SA has a globally competitive upstream mining (Mining Capital and Transport Goods) Sector. Exports especially to Sub-Saharan Africa demonstrate steady increases over recent period. Mining capital equipment sector increasingly relying on exports with increasing import intensity to domestic mining companies. • Policy is not sufficiently supportive. Mining Charter contains no provisions for localisation of mining capital equipment and limited provisions for local RDI spend. Evidence points to globally competitive manufacturers moving off-shore. • Infrastructure and logistics costs and inefficiencies: examples • cost of export of value-added goods is higher than cost for primary commodities. Rebate for manufacturers yielding questionable results • Transnet and TNPA infrastructure and operations prioritise commodity exports

7. Trade Balance

8. Key policy AND PROJECT LEVERS DMR • Mining Charter DTI • IPAP – Ustream (Mining, Transport Capital Goods sector) and downstream beneficiation action plans • B-BBEE (aligned with localisation provisions) • SEZ’s and other incentives; investment and export promotion DPE/DOT • SOE shareholder compacts – ports/rail access and expansion conditional on developmental objectives • Rail and port tariffs EDD • IDC led projects and investment/investment facilitation • Competition Commission

9. Mineral value chain study • DTI initiated Mineral Value Chain Study in Jan 2013 to develop key interventions to advance beneficiation in SA. • Project steering committee - the dti, DMR, DST, IDC, TNPA • Develop strategies and proposals to advance Upstream (Mining and transport and capital equipment) and forward beneficiation across 5 priority value chains: • iron-ore and steel • polymers • titanium • platinum group metals • Upstream mining inputs • (Work also underway on Oil and Gas)

11. FERROUS value chain

12. POLYMERS value chain Despite coal feedstock advantage, IPP has severely constrained the downstream industry, Sasol’s vertical integration reinforces market power

13. PLATINUM GROUP METALS Leverage SA producer power status to stabilise PGM prices, supply and facilitate local beneficiation

14. titanium >90% is used in production of Ti pigment (SA market is small), Limited job creation potential in the primary industry but more significant potential downstream

15. MINING INPUTS Mining provides an important market to a wide variety of supplier industries, very large local and growing regional market for mining capital equipment. Growing favour of imports vs local

16. Conclusion and way forward • Significant opportunities in unlocking SA’s comparative advantage to drive industrial development and create jobs • In order to achieve and sustain this we need a strong primary mining industry that can support new upstream (input) and downstream (output) industries • Concerted combined public-private sector effort to develop competitive industries and harness the collective industrial capabilities • Enabling, aligned government policies and support measures • Beneficiation Action Plans to be integrated into next IPAP • Implementation requires a co-ordinated effort from lead and supporting departments/agencies

17. THANK YOU