Commodity prices are expected to rebound strongly this year and pull the global mining industry out of the doldrums, despite uncertainty about the pace of world economic recovery, according to research and consulting firm Frost & Sullivan.
However, this comes amid lingering concern that challenges particular to the South African industry — such as a strong rand, higher production costs and labour wage demands — may put a damper on local prospects.
Last year, mining companies were forced to retrench and restructure their cost bases in response to plummeting demand as a result of the global recession. However, towards the end of the year some — particularly ferrochrome miners — began increasing production as demand slowly started to improve, led by Chinese buyers.
Mining and metals analyst Wonder Nyanjowa said this week that the global mining industry was likely to be buoyed by growing physical demand for commodities, the strong possibility of speculative buying and rising prices.
“This is likely to encourage miners to expand production capacity,” Nyanjowa said.
Metals such as gold, diamonds, platinum and palladium have already started to show signs of a strong rebound. Nyanjowa warned that SA may not reap the full benefits of this price recovery because of several problems.
“Many of the local challenges that adversely affected production last year, such as electricity supply shortages, a lack of skills and safety concerns, are likely to continue affecting the performance of the mining industry this year.
“In addition, the prospect of higher commodity prices, particularly in the gold, platinum and coal sectors, is likely to lead to tough wage demands from unions.”
Nyanjowa said he believed that growing concern about inflation in the developed world, a volatile dollar, threats of another recession from expansionary fiscal and monetary policies and negative real interest rates pointed towards strengthening investment demand for gold as a buffer.
“A price range of 1300- 1500/oz this year looks likely, supported by gold demand and supply fundamentals,” he said. “Investors are likely to continue turning to gold as a hedge against uncertainties in the global economy.”
However, SA’s gold production was likely to slip further this year, to about 200 tons, which should see the country drop to fourth place among the world’s gold producers, behind China, the US and Australia. Last year SA fell in the production stakes from second spot to third, behind China and Australia.
While platinum was one of the biggest casualties of the global recession, Nyanjowa expected better prospects this year, with the industry expected to recover as a result of stronger recovery in the global automotive sector, particularly in China and India.
Local coal miners, which escaped from the global slowdown with relatively minor bruises, should also remain robust.
“The bulk of the country’s coal production is consumed in the electricity generation and synthetic fuel manufacturing industries, with only a third being exported to Europe and Asia,” Nyanjowa said.
“The domestic demand for coal is set to continue growing in 2010, following expansion programmes at Eskom and Sasol that will require an additional 75- million tons of coal.”
However, SA’s production was likely to remain stagnant at about 240-million tons this year as the industry waited for new coal fields to be opened in the Waterberg basin in Limpopo.
Source: Business Day
