BRIEFING ON UPSTREAM AND DOWNSTREAM MINING LINKAGES

Portfolio Committee on Trade and Industry20 August 2014

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CONTENTS

1. INTRODUCTION – PROBLEM STATEMENT

2. BACKGROUND ISSUES AND SUMMARY CHALLENGES

3. KEY POLICY LEVERS

4. PLANS FOR:

1. FERROUS

2. POLYMERS

3. TITANIUM

4. PGM’S

5. MINING INPUTS

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.

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.).

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.

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

TRADE BALANCE

-400

-300

-200

-100

0

100

200

300

2000 2002 2004 2006 2008 2010 2012

R B

illio

n

Trade balance according to broad sector

Agriculture Mining

Manufacturing Trade balance

Source: IDC, compiled from SARS data

'13*

Note: * 2013, Jan-Oct

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

KEY POLICY AND PROJECT LEVERS

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:

1. iron-ore and steel

2. polymers

3. titanium

4. platinum group metals

5. Upstream mining inputs

6. (Work also underway on Oil and Gas)

Quantec HS - 4 digit, 2013 Export Value, Rands

Downstream Potential Downstream Jobs

H7110: Platinum, unwrought, semi-manufactured or powder form R 81 319 519 856 High to medium Medium (catalysts)

H2601: Iron ores and concentrates, roasted iron pyrites R 73 998 564 487 Very High

Very high (manufacturing-autos, construction)

H7108: Gold, unwrought, semi-manufactured, powder form R 63 571 314 217 Medium to low Low (jewellery)H2701: Coal, briquettes, ovoids etc, made from coal R 55 855 559 400 High to medium Medium (polymers)H7202: Ferro-alloys R 34 821 623 292 Medium to low Low (SS)H2602: Manganese ores, concentrates, iron ores >20% Manganese R 15 029 874 497 Medium to low

Low (Fe-alloys & Stainless steel)

H2610: Chromium ores and concentrates R 13 131 271 379 Medium to lowLow (Fe-alloys & Stainless steel)

H7102: Diamonds, not mounted or set R 12 162 947 876 Medium to low Medium (jewellery)H7601: Unwrought aluminium R 11 064 742 022 High to medium Medium (parts)H2614: Titanium ores and concentrates R 5 999 252 818 High to medium Low (pigment, metal)H7204: Ferrous waste or scrap, ingots or iron or steel R 4 802 413 299 Very High

Very high (manufacturing)

H7606: Aluminium plates, sheets and strip, thickness > 0.2 mm R 4 584 915 868 High to medium MediumH2603: Copper ores and concentrates R 4 541 138 458 High to medium Medium (wire, brass)H7404: Copper, copper alloy, waste or scrap R 4 439 989 630 High to medium Medium (wire, brass)H2615: Niobium, tantalum, vanadium zirconium ores, concentrates R 4 331 548 972 Low LowH2618: Granulated slag (slag sand) from iron & steel industry R 3 420 317 958 High High

FERROUS VALUE CHAIN

Action Plan Status Timeline Lead Support

1. State utility tariffs to support value addition

TNPA and the dti working on framework for Beneficiation Promotion Programme (reduced tariffs for beneficiated goods). Engagement with TFR in progress

2014/15Q1-Q4

the dti, TNPA, TFR

DPE, DOT

2. Industry analysis, opportunities in the downstream steel sector (wire, tube, pipes..)

Study to develop key action programmes in progress

2014/15 Q1-Q3

the dti, IDC, SAISI

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

POLYMERS VALUE CHAIN

Action Plan Status Timeline Lead Support

1. LNG and Shale Gas: the dti undertaking a study to investigate opportunities and develop a strategy (up and downstream localisation, low cost energy, infrastructure requirements)

2014/15 -2015/16 Q1

the dti, DOE, DMR

DST, PASA, CEF

2. Plastics sector strategy completed key interventions:-Cluster development (skills, training, testing)-Assess current incentives

the dti will facilitate the development of the cluster with Plastics SA and deploy policy instruments to support downstream manufacturers

2015/16 the dti EDD, IDC

3. Leverage state procurement of plastic products e.g. plastic pipes for construction

Designation study on 20 construction material inputs into infrastructure program DWA strategic sourcing program – 100% localisation of plastic pipes

2014/15 Q1 - Q3

ongoing

the dti, EDD (PICC), IDC, DWA

NT

4. New player:Eco-industrial project – Musina SEZ

Feasibility project for the development of coking coal, polymer, ammonia and urea plant

2014/15 Q1 – Q4

the dti IDC

Leverage SA producer power status to stabilise PGM prices, supply and facilitate local beneficiation

PLATINUM GROUP METALS

Action Plan Status Timeline Lead Support

1. SA Autocatalyst sector assessment:Sector exports R16 bn/year, and underpins 5,000 direct , 20,000 indirect jobsIndustry is in decline (15 10% global production)Low growth prospects in current support framework

Under APDP Review, the dti will prepare a position paper on the industry assessing current status, providing recommendations on high impact growth strategy:

2014/15 Q2 – Q3

the dti (Autos and Primary Minerals)

DMR, NT, DST

2. Fuel cells PGM SEZ programmes in support of commercial fuel cell opportunitiesHySA HRD and technology development initiative

- Feasibility project to demonstrate stationary fuel cell technology.

- Opportunities for collaboration with Japan and/or Germany

- Dev of prototypes , demonstrators and commercialisation

2014/15Q1-Q4

2014-2018

the dti (SEZ and Primary Minerals, ITED), DST

DOE

3. PGM Loans - Engage PGM miners, SA banks, the IDC to provide low cost PGM loans to local fabricators

Mining companies to be approached to extend this to other fabrication industries

2014/15Q3-Q4

the dti, DMR, IDC

>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

TITANIUM

Action Plan Status Timeline Lead Support

1. Investigate the viability of unlocking the vast magnetite resources in the Bushveld complex to produce iron-ore/steel and titanium

Scoping study on Bushveld complex 2014/15 Q4 – 2015/16 Q2

the dti, IDC DMR, DST

2. Incentives to stimulate energy efficient processing and beneficiationSA plants conversion to efficient technologies (including cogeneration from off-gases) to reduce electricity costs

Current incentives in support of energy efficiency – 12i (green and brownfield) and 12L tax incentives, MCEP

Ongoing DOE, the dti

DST

3. Ti metal powder industry developmentDST Ti initiative based on novel process for production of Ti metal powder and downstream aerospace and medical components

Proof of primary production and additive manufacturing technology at pilot scale

tba2014/15 – 2015/16

DST, CSIR, IDC

the dti

MINING INPUTSMining 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

Action Plan Status Timeline Lead Support

1. Revision of Mining Charter procurement provisions:Key policy tool for mining procurementCurrent criteria only includes a requirement for purchases from BEE entity

-Engagement with DMR for revision of Charter:-Local content targets for capital equipment, consumables and services-Supplier development

tba2014/15

DMR the dti

2. Resource Capital Goods Development Programme – develop a mechanism of support for the supplier industry (skills, R&D, capex, opex, exports)

Study on viability , interventions and mechanism of support to commence in Q2

2014/15Q2 –2015/16 Q2

the dti DMR, DST, IDC

3. Development of supplier clusters to collectively address challenges and opportunitiesCompetitivenessExport Promotion Development of capabilities

- SACEEC (Export council) and dti are strengthening clusters (i.e. minerals processing equipment)

- TIPS study on linkages, lateral migration and regional integration

ongoing the dti, DST

DMR

4. R&D and skills development –critical for technology intensive sector

R&D requirements will be identified through clusters

tba DST, the dti, CSIR

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

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THANK YOU

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