When asked what makes mining matter, we at the Minerals Council pride ourselves on knowing that our industry continues to be a major contributor to transformation.
With industry ownership exceeding 30%, all employment equity targets met and exceeded, the fact is that the mining industry has been able to remain a key contributor to economic and social development. That and the R7.5 billion invested in skills development, R2 billion in community development, and R93 billion contributed to fixed investment.
These aspects all contribute to the sustainability of our industry.South Africa’s mineral potential assuming best practice is ranked by the Fraser Institute as 20 out of 91 mining jurisdictions.
Doubling investment would: create another 200 000 jobs in the economy (with 50 000 additional direct mining jobs); materially increase output, exports and procurement; increase direct and indirect taxes, and royalties paid to the fiscus; and fund substantial infrastructure development and social projects in mining-affected communities.
Given the industry’s commitment to real transformation, this would also materially advance the entire country’s transformation agenda. The industry’s fixed investment increased by 13.2% during 2018, possibly as a result of the shifts in South Africa’s and the industry’s political leadership.
However, the long-term nature of mining means that this increase needs to be sustained for a significant period before it translates to a growing industry.
Since the beginning of 2019, the industry has seen significant rises in the prices of commodities that had previously been disappointing for some time. Although employment in some sectors of the industry grew during 2018 (coal, iron ore, manganese and chrome), this growth was masked by reductions in employment in other sectors (gold, diamond and platinum), resulting in a net job loss in the sector.
Safety performance was more positive, with a slight improvement in the number of fatalities in 2018 compared to 2017, largely based on the considerable improvements in the final third of the year.
This improved performance has extended into 2019. Mining plays a significant role in the economy of South Africa.
Even in the absence of a greenfield exploration boom in South Africa, mining investment could almost double in the next four years if the country were to return to the top quartile of the most attractive mining investment destinations, making this is a high-priority goal – as South Africa has not realised its true mining potential in recent years. However, challenges remain.
Carbon tax implications
In August 2019, we undertook a Minerals Council South Africa survey of 18 of the larger mining companies across the sector, which confirmed the significant costs that will be incurred as a result of the introduction of carbon tax.
Across the companies surveyed, carbon tax costs are estimated at as much as R517 million a year in Phase 1. In the absence of the offsets allowed in the first phase (as this information is still not known), the carbon tax liability for these 18 companies is estimated to increase to R5.5 billion per year in Phase 2.
The Minerals Council both understands and recognises the science of climate change.
We recognise the role of fossil fuels in climate change, and that a shift to renewable energy sources is a global and national imperative. We fully support South Africa’s commitment to reducing GHG emissions in line with the Peak, Plateau and Decline (PPD) trajectory and Nationally Determined Contributions (NDC) under the Paris Agreement.
But the planned carbon tax – in the absence of any other climate change measures in the overall ‘toolbox’ that includes incentives and not only disincentives and necessary supporting regulation – is likely to be damaging to carbon-intensive sectors with no pathways for offsets.
The significant uncertainty associated with Phase 2 of the implementation of the carbon tax will be materially negative for South African mining, in the absence of any tax-free incentives.
We believe that the transition to a low-emissions economy should be balanced and supported by a competitive tax system, which is critical for investment in capital-intensive industries such as mining.
Mining projects involve high-risk exploration outlays, large upfront capital commitments, long-life assets, sophisticated technologies, and long lead times to profitability.
Unpacking the impact
The socio-economic implications of the tax and the regulatory uncertainty that negatively impacts on the competitiveness of the mining industry remain significant concerns. In the past decade, South Africa’s economy grew by an average of only 1.5% a year.
This has contributed to a continuous decline in GHG emissions per unit of GDP in a context where:
- The composition of South Africa’s growth shifted away from carbon-intensive industries, like mining and manufacturing, towards less carbon-intensive sectors like financial services and retail.
- The 523% increase in the electricity price in the past decade, in materially damaging the competitiveness of the mining and smelting industries, further contributed to the decline in carbon-intensive sectors.
It is, therefore, highly likely that South Africa will achieve its Paris Agreement commitments without implementing measures such as a carbon tax. We propose a toolbox of measures to mitigate climate change, but this should comprise both incentives and disincentives for behavioural change.
The Minerals Council is extremely concerned about the implementation of carbon tax in isolation, and in the absence of all the other parts of the toolbox that should be applied to mitigate climate change. In Phase 1, mining companies qualify for a 60% taxfree portion.
Given that the regulations to enable the implementation of the Performance Allowance, Carbon Offset, Carbon Budget and Trade Exposure.
Allowances are not finalised, it is impossible to determine whether mining companies will qualify for the remaining 35% tax-free portion. Based on this, the Minerals Council has no other option at this stage but to assume that mining companies will be liable for 40% of theR120/tonne CO2 equivalent (CO2e) on scope 1 emissions.
In Phase 2, the carbon tax would have risen to about R170/tonne CO2e. Mining companies are assuming that the full R170/tonne CO2e will apply to scope 1 and 2 emissions. Applying these assumptions, we estimate that this will cost the mining industry more than R5.5 billion in carbon taxes annually.
These challenges are exacerbated by the fact that mining companies that want to invest in renewable energy (solar) are faced with material regulatory hurdles, including the need to obtain IRP 2010 exemptions, licenses from NERSA, agreements with Eskom on wheeling and transmission fees, and traverse a web of environmental authorisations.
This significantly frustrates their ability to invest in and implement these new projects.
Delay the implementation of the carbon tax
The Minerals Council believes that the timing of the implementation of the carbon tax presents a major challenge and should be delayed until all the enabling regulations and the establishment of a legislative regime providing for carbon budget (as proposed in the Climate Change Bill) are in place.
Also, the pathways to investing in green energy need to be clear and the whole toolbox should be capable of application.
Failure to do so exacerbates the regulatory uncertainty, which in turn materially undermines investment in the mining sector.