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

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


1
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
1
2
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
3
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?

4
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
5
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).

6
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.

7
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
8
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
9
THE FOUR STAGE DOWNSTREAM BENEFICIATION PROCESS
Mining
Manufacturing
10
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).
11
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
12
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.

13
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

14
MINING INDUSTRY SIGNIFICANT NET EARNER OF
FOREIGN EXCHANGE
Source StatsSA
15
THE SIGNIFICANT MINING INDUSTRY VALUE CHAIN
16
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
17
SA Mining industry, income and expenditure 2007
Total income R310 billion, total expenditure
R302 billion
18
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
19
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.

20
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).

21
THE COUNTRIES THAT MINE THE DIAMONDS ARE NOT
NECESSARILY THE COUNTRIES THAT CUT DIAMONDS
22
THE COUNTRIES THAT MINE THE GOLD ARE NOT
NECESSARILY THE COUNTRIES THAT MAKE GOLD JEWELLERY
23
THE COUNTRIES THAT MINE PGMS ARE NOT NECESSARILY
THE COUNTRIES THAT FABRICATE PGM ARTICLES
(JEWELLERY/CATS, ETC)
MIDP driven
24
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25
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.
26
COMPARATIVE ADVANTAGE VERSUS COMPETITIVE ADVANTAGE
Primary industries
Competitive Manufacturing
27
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.

28
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
29
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!

30
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31
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32
These countries are attracting large amounts of
investment into manufacturing
These countries attract very little investment
into manufacturing
33
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34
THE MVA PRODUCTIVITY GAP BETWEEN SA AND
COMPETITORS IN MANUFACTURING IS WIDENING
35
GIVEN THE COST DIFFERENTIAL BETWEEN SOUTH AFRICA
AND INDIA
Cutting polishing costs
/ct
FRIDGE estimates
Medium price differential
73 /ct
47
99
Medium estimated price differential between SA
and India 65 /ct
/ct
De Beers estimates
Medium price differential
40
74
57 /ct
No data
36
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.

37
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38
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39
RED TAPE CONTINUES TO INHIBIT ENTREPRENEURSHIP
AND INDUSTRIALISATION IN CERTAIN AREAS
Top half
Bottom half
40
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!
41
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
42
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.

43
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.

44
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
45
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.
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