Beneficiation and Job Creation in the South African Diamond Industry A Mining Industry Perspective o

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Facilitating Minerals Beneficiation in South
Africa
Presentation by Roger Baxter, Chief Economist,
Chamber of Mines, to the launch of the DME draft
Beneficiation Strategy 31 March 2009 Gallagher
Estate
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PRESENTATION OUTLINE
Broad business support on the concept of growing
beneficiation
Draft beneficiation strategy strategic
framework to facilitate beneficiation
General principles of beneficiation
Side-stream beneficiation
Key drivers of manufacturing beneficiation?
How is South Africa doing in terms of
manufacturing beneficiation?
Working collectively and strategically to
facilitate beneficiation?
Conclusion policy implications
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THERE IS BROAD SUPPORT FROM BUSINESS ON THE
OBJECTIVE OF ADDING VALUE (BENEFICIATION) TO
SOUTH AFRICAS MINERALS

• The mining sector and business in general is of
  the view that adding value to South Africas
  minerals is a meritorious objective.
• Of course the key questions include
• How to define beneficiation?
• Who are the lead agents to drive beneficiation?
• How to encourage/facilitate beneficiation?
• How to coordinate the efforts and actions of
  stakeholders to create this enabling framework?

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PRESENTATION OUTLINE
Broad business support on the concept of growing
beneficiation
Draft beneficiation strategy strategic
framework to facilitate beneficiation
General principles of beneficiation
Side-stream beneficiation
Key drivers of manufacturing beneficiation?
How is South Africa doing in terms of
manufacturing beneficiation?
Working collectively and strategically to
facilitate beneficiation?
Conclusion policy implications
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DRAFT BENEFICIATION STRATEGY STRATEGIC
FRAMEWORK TO PROMOTE AND FACILITATE BENEFICIATION

• The publication of the draft Beneficiation
  Strategy is a welcome development.
• Given the cross-cutting nature of the issues that
  are necessary to promote beneficiation an
  integrated strategic approach to the matter is
  critically important.
• Not only do all the stakeholders need to work
  together (labour, business and government), but
  multiple government departments and agencies also
  need to play a constructive role (i.e. critical
  need for cross-coordination between government
  departments).

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DRAFT BENEFICIATION STRATEGY STRATEGIC
FRAMEWORK TO PROMOTE AND FACILITATE BENEFICIATION

• Broad support for
• Coordinated strategic approach to facilitating
  beneficiation.
• Need for identification of cross-cutting
  constraints to beneficiation (and development of
  appropriate solutions).
• Building on the work of existing beneficiation
  structures and previous research work done on the
  issue.
• Investigating SWOTs of top 10 mineral
  beneficiation chains.
• An appropriate consultative process to ensure
  stakeholder buy-in and workable proposals emerge
  from the process.

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PRESENTATION OUTLINE
Broad business support on the concept of growing
beneficiation
Draft beneficiation strategy strategic
framework to facilitate beneficiation
General principles of beneficiation
Side-stream beneficiation
Key drivers of manufacturing beneficiation?
How is South Africa doing in terms of
manufacturing beneficiation?
Working collectively and strategically to
facilitate beneficiation?
Conclusion policy implications
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A WORKABLE DEFINITION FOR DOWNSTREAM MINERALS
BENEFICIATION
The term beneficiation, used broadly to
describe the successive processes of adding value
to raw materials from their extraction through to
the sale of finished products to consumers,
covers a wide range of very different activities.
These include large-scale and capital-intensive
operations like smelting and technologically
sophisticated refining as well as
labour-intensive activities such as craft
jewellery. Minerals Policy White Paper, Oct
1998
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THE FOUR STAGE DOWNSTREAM BENEFICIATION PROCESS
Mining
Manufacturing
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DEFINING DOWNSTREAM BENEFICIATION
MINING BENEFICIATION Mining has competency/skill
in the mining and in certain parts of the
concentrating/smelting areas.
MANUFACTURING BENEFICIATION From refining to the
fabrication of a final consumer
product. Manufacturing companies have core skills
and competency in this arena (understanding
customer needs, product development, design,
skills, markets, distribution chains, technology).
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PRESENTATION OUTLINE
Broad business support on the concept of growing
beneficiation
Draft beneficiation strategy strategic
framework to facilitate beneficiation
General principles of beneficiation
Side-stream beneficiation
Key drivers of manufacturing beneficiation?
How is South Africa doing in terms of
manufacturing beneficiation?
Working collectively and strategically to
facilitate beneficiation?
Conclusion policy implications
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SIDE-STREAM BENEFICIATION

• Much of the focus has been on defining downstream
  beneficiation (adding further value to the
  primary minerals generated by mining).
• However, little attention has been given to the
  significant side-stream beneficiation sectors
  that exist because of mining. This is because
  mining creates the critical-mass necessary for
  the establishment of other industries, such as
  stock markets, financial services, contracting
  services, heavy engineering, power, transport,
  manufacturing, etc.
• The multiplier effects of mining are so large as
  to generate an estimated doubling of the direct
  contribution of the sector to the economy.
• In countries such as Canada and Australia the
  side-stream beneficiation industries have been
  given due recognition and have been supported by
  their governments.
• Side-stream beneficiation requires more
  recognition in South Africa.

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THE CONTRIBUTION OF MINING IS SIGNIFICANT, WITH
SIDE-STREAM BENEFICIATION PLAYING AN IMPORTANT
ROLE

• 6.8 directly of GDP and 17.2 (direct, indirect
  induced).
• 33 of merchandise exports gt50 if secondary
  beneficiated mineral exports are added
• 8.9 of total fixed investment and 18 if the
  indirect effects are added
• 35 of the market value of the JSE (R2 trillion)
• 33 of all BEE deals done in SA over past 11
  years
• Employed 495 474 worker, i.e. 6 of formal
  employment. Some 5 million people are dependent
  on these mineworkers for their daily subsistence.
• Another 500 000 people employed due to the
  multiplier and induced effects of mining.
• 18.5 of direct corporate tax receipts (R22
  billion)
• 50 of volume of Transnets rail and ports
• 93 of electricity generation via coal power
  plants
• 15 of electricity demand.
• About 37 of the production of liquid fuels via
  coal, which saves about R30 billion annually in
  foreign exchange

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MINING INDUSTRY SIGNIFICANT NET EARNER OF
FOREIGN EXCHANGE
Source StatsSA
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THE SIGNIFICANT MINING INDUSTRY VALUE CHAIN
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MINERALS METALS IN SOUTH AFRICA A SIGNIFICANT
VALUE ADDED CLUSTER
Science Technology

• Mining is one of the most extensive and best
  developed South African industrial clusters
• Extensive sciences technology network/research
• Broad expertise in geoscience
• Large exploration expertise
• Large number suppliers of equipment and services
• World class educational and skills development
  systems and institutions
• Sophisticated financial institutions (JSE, banks,
  legal)
• Large scale smelting and refining.

Exploration Geoscience
Professional schools
Mining
Equity financing
Suppliers
Governance Policy
Smelters Refineries
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SA Mining industry, income and expenditure 2007
Total income R310 billion, total expenditure
R302 billion
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PRESENTATION OUTLINE
Broad business support on the concept of growing
beneficiation
Draft beneficiation strategy strategic
framework to facilitate beneficiation
General principles of beneficiation
Side-stream beneficiation
Key drivers of manufacturing beneficiation?
How is South Africa doing in terms of
manufacturing beneficiation?
Working collectively and strategically to
facilitate beneficiation?
Conclusion policy implications
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THE SEPARATION OF MANUFACTURING BENEFICIATION
FROM MINING BENEFICIATION IS VERY IMPORTANT

• This is a crucially important issue because much
  of the focus in the beneficiation debate in the
  past has been on why the mining sector has not
  done enough to drive the manufacturing/fabrication
  beneficiation area - despite acceptance by
  stakeholders that the beneficiation being focused
  on is at the manufacturing level.
• Given the globally accepted and driven Anglo
  Saxon model of specialisation, it is very unusual
  to see a mining company operating at all levels
  of the value chain.

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DOES THE AVAILABILITY OF MINERALS CONSTITUTE AN
ADVANTAGE FOR THE MANUFACTURING BENEFICIATION
SECTORS?

• For precious metals and diamonds the products are
  generally available in any of the worlds markets
  at internationally determined prices.
• The vast majority of manufacturing beneficiation
  (jewellery fabrication and diamond cutting) takes
  place in countries that have little or no mine
  production of precious metals and diamonds.
• So the answer is that the availability of mined
  precious metals and diamonds at world determined
  prices does not necessarily provide an advantage.
• For bulk mined commodities prices are generally
  determined at the international level, but most
  manufacturing processing takes place near the
  market for the product (such as steel).
• The challenges for bulk commodity beneficiation
  is the pricing of intermediate products (steel)
  which challenges final fabrication (e.g. steel
  wire, gas bottles, etc), rather than actual mined
  commodity prices (iron ore).

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THE COUNTRIES THAT MINE THE DIAMONDS ARE NOT
NECESSARILY THE COUNTRIES THAT CUT DIAMONDS
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THE COUNTRIES THAT MINE THE GOLD ARE NOT
NECESSARILY THE COUNTRIES THAT MAKE GOLD JEWELLERY
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THE COUNTRIES THAT MINE PGMS ARE NOT NECESSARILY
THE COUNTRIES THAT FABRICATE PGM ARTICLES
(JEWELLERY/CATS, ETC)
MIDP driven
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MANUFACTURING BENEFICIATION IS DRIVEN BY
COMPETITIVE ADVANTAGE ISSUES NOT NECESSARILY BY
THE AVAILABILITY OF RAW MATERIALS
COMPARATIVE ADVANTAGE issues such as natural
resources are no longer considered to be a key
driver of manufacturing beneficiation investment.
COMPETITIVE ADVANTAGE issues such as cost
competitive production, skills and craftsmanship,
etc., are now the key drivers of manufacturing
beneficiation investment.
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COMPARATIVE ADVANTAGE VERSUS COMPETITIVE ADVANTAGE
Primary industries
Competitive Manufacturing
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WHAT ARE THE KEY DRIVERS OF THE MANUFACTURING
BENEFICIATION INDUSTRY (E.G. JEWELLERY
FABRICATION)?

• Significant entrepreneurial base looking at
  opportunities to service local and export markets
• Competitive production, high productivity, low
  costs vs competitors.
• Craftsmanship and specific skills.
• Access to markets (domestic and foreign). Most
  successful jewellery producers have started with
  a large domestic market.
• Good market intelligence (what customers want,
  the latest designs?)
• Low costs of doing business (smart tape not red
  tape).
• Low materials funding costs (i.e. low interest
  rates).
• Special economic zones (duty free, VAT free and
  low tax rate areas for manufacturing).
• Quality assurance (Hallmarking) for final
  markets.
• Research development innovation incentives
  and capabilities.
• Appropriate and competitively priced
  infrastructure.

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PRESENTATION OUTLINE
Broad business support on the concept of growing
beneficiation
Draft beneficiation strategy strategic
framework to facilitate beneficiation
General principles of beneficiation
Side-stream beneficiation
Key drivers of manufacturing beneficiation?
How is South Africa doing in terms of
manufacturing beneficiation?
Working collectively and strategically to
facilitate beneficiation?
Conclusion policy implications
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SOUTH AFRICAS MANUFACTURING SECTOR IS IN TROUBLE

• Manufacturing as a of GDP at 16.4 has
  continued to decline over the past three decades,
  versus 22 in the 1980s and 19 in the 1990s.
• With the exception of some niche products and the
  motor industry (because of the MIDP), most
  components of the manufacturing sector have
  battled to become competitive in the face of a
  volatile currency and slow progress on improving
  total factor productivity.
• Manufacturing as a of GDP at 16.4 is now just
  above the comparative number for the USA and
  compares unfavourably versus a number of
  countries (China 35, South Korea 30, Malaysia
  33, Ireland 25, etc.).
• Low growth rates in MVA in South Africa (only
  2.8 in 2000-2006) versus high MVA growth in
  competitors (China 11.2, South Korea 7.3, India
  7.7, etc.) means that the gap between South
  Africa and the competitors will continue widening!

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These countries are attracting large amounts of
investment into manufacturing
These countries attract very little investment
into manufacturing
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THE MVA PRODUCTIVITY GAP BETWEEN SA AND
COMPETITORS IN MANUFACTURING IS WIDENING
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GIVEN THE COST DIFFERENTIAL BETWEEN SOUTH AFRICA
AND INDIA
Cutting polishing costs
/ct
FRIDGE estimates
Medium price differential
73 /ct
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99
Medium estimated price differential between SA
and India 65 /ct
/ct
De Beers estimates
Medium price differential
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74
57 /ct
No data
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THE TECHNOLOGY SECTORS HAVE NOT KEPT PACE WITH
INTERNATIONAL DEVELOPMENTS

• The lack of effective competition and continued
  high costs of usage plus poor service delivery
  has undermined internet access - and undermined
  the development of competitive advantage in this
  area. Policy uncertainty in telecoms has added to
  the confusion.
• Better RD incentives (150 tax write-off) has
  helped, but local RD expenditures off a low base.

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RED TAPE CONTINUES TO INHIBIT ENTREPRENEURSHIP
AND INDUSTRIALISATION IN CERTAIN AREAS
Top half
Bottom half
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THE GAP IS WIDENING!
The declining share of manufacturing is perhaps
the best evidence that the business economics
environment for manufacturing is poor versus
the competitors. Unfortunately the gap is
widening!
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PRESENTATION OUTLINE
Broad business support on the concept of growing
beneficiation
Draft beneficiation strategy strategic
framework to facilitate beneficiation
General principles of beneficiation
Side-stream beneficiation
Key drivers of manufacturing beneficiation?
How is South Africa doing in terms of
manufacturing beneficiation?
Working collectively and strategically to
facilitate beneficiation?
Conclusion policy implications
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FOR SOUTH AFRICA TO PROMOTE GREATER MANUFACTURING
BENEFICIATION WHAT IS REQUIRED?

• National collective effort via the draft
  Beneficiation Strategy framework.
• A thorough assessment of why South Africa has
  done poorly in respect of manufacturing
  beneficiation is necessary.
• Provide an enabling environment that attracts the
  manufacturing fabrication companies to come and
  invest in SA. These include
• Improving access to foreign markets for
  manufactured products.
• Enabling faster growth in total factor
  productivity.
• Develop special economic zones for manufacturing
  beneficiation (duty free, VAT free, US based
  accounts, tailor made infrastructure, etc.)
• Lowering the cost of capital in SA.
• Access to inputs at world competitive prices
  (e.g. steel)
• Providing the right types of skills for such
  projects.
• Improving logistical infrastructure (cost,
  efficiency, etc.).
• Incentives for RD.

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BUT DO NOT FORGET SIDE-STREAM BENEFICIATION

• The mining sector has played, and continues to
  play a critical role as a foundation industry,
  which helps the development of other industries
  (especially the side-stream input industries).
• The economic health of the mining sector will
  materially affect the economic health of these
  side-stream industries.
• As per the Australian and Canadian examples, due
  recognition is given to side-stream
  beneficiation. Active support of the capital
  goods sector, the financial services sector, the
  research sector and other side-stream mining
  related sectors will further grow the countrys
  competitiveness and export capability to the
  benefit of all.

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PRESENTATION OUTLINE
Broad business support on the concept of growing
beneficiation
Draft beneficiation strategy strategic
framework to facilitate beneficiation
General principles of beneficiation
Side-stream beneficiation
Key drivers of manufacturing beneficiation?
How is South Africa doing in terms of
manufacturing beneficiation?
Working collectively and strategically to
facilitate beneficiation?
Conclusion policy implications
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CONCLUSION

• The mining sector is so much greater than just
  the sum of its direct contribution to the
  economy.
• While business supports the concept of growing
  the downstream mineral beneficiation sector, we
  all agree that this can only be achieved by
  creating a facilitating investment environment
  that attracts manufacturing companies to invest
  in South Africa.
• The contribution of mining to side-stream
  beneficiation has traditionally been overlooked.
  This contribution is meaningful and has
  contributed significantly to the industrialised
  economy that South Africa is today.
• Supporting and facilitating downstream and
  side-stream beneficiation will create more value
  in the economy, help grow exports and investment
  to the benefit of all.
• The Chamber and its members looks forward to
  engaging with government and other stakeholders
  in this important process.