South Africa is the second-largest economy within Africa. The path to this status has not been an easy one however, as the country languished under sanctions in the 1980s tied to the government’s apartheid policies. While South Africa has a relatively well-developed manufacturing sector by the standards of African economies (and developing economies in general), a meaningful percentage of the country’s economy still revolves around commodities [for more commodity news and analysis subscribe to our free newsletter].
Mining is arguably South Africa’s most recognizable industry, although it is less than a third of the size of the country’s manufacturing sector in terms of GDP contribution. It does, however, make up about 60% of the country’s exports; eight of the 10 largest individual export categories are commodities.
South Africa is a major player in platinum group metals, representing about 73% of the world’s platinum mine production supply in 2013. Gold is even more important to SA’s export base, as the country represents about 5% of global mining production and its gold accounts for about 11% of the world’s gold reserves. Diamonds, too, are a significant part of SA’s mining industry, as about 23% of the world’s supply came from their mines in 2014.
It’s not just precious metals and gemstones that fuel SA’s mining industry. The nation is the world’s sixth-largest exporter of coal (and produces over 30% of its internal liquid fuel needs from coal). Moreover, South Africa produces nearly half of the world’s chromium, and is a significant producer of iron ore, vermiculite, vanadium, rutile, as well as many other metals and minerals.
Summed together, the value of SA’s exports in coal and iron ore amount to slightly more than the value of its gold exports, while ferrochrome and chrome are both top 10 export categories as well [see also The Ten Commandments of Commodity Investing].
Although SA has a temperate climate and startlingly high biodiversity, it’s not an especially significant player on the global stage in terms of commodity agricultural exports. It is however, a meaningful player in niche categories like chicory and grapefruit, and does export a wide variety of cereal grains, nuts and fruits. The nation has also been working to increase the productivity and international profile of its wine industry.
When it comes to agriculture, South Africa does consume a fair proportion of the crops it produces. The southern-most African nation also has an under-appreciated manufacturing sector that makes use of some of the metallic ores it produces — particularly metals like aluminum and chromium that are used in its automobile industry. The country also consumes a significant percentage of its own coal production, as it is one of the most active nations in terms of converting coal into other hydrocarbons including lubricants and diesel fuel.
Not surprising for a country with a sizeable manufacturing base and relatively good standard of living, but little domestic petroleum reserves, petroleum products make up a large portion of the commodities imported into SA. Oil and various petroleum products are the top three import categories for SA, though the total value of these imports is only about 15% that of the gold exports.
SA also imports quantities of copper, cobalt and other industrial metals. In some cases, these ores are imported to take advantage of existing refining/smelting capabilities within South Africa, while some are also used to support the country’s manufacturing base.
Stocks/Funds To Play South Africa’s Strengths
There are a host of mining companies with significant positions and assets in the African nation. Major global miners like Rio Tinto (RIO), Xstrata, Anglo American and BHP Billiton (BHP) all have major assets in SA, ranging from platinum group metals to gold to coal to industrial metals and minerals [see also 10 Gold Miners That Pay a Dividend].
There are, not surprisingly, many major precious metals miners with major operations in SA. AngloGold Ashanti (AU) is headquartered in Johannesburg and 28% of the company’s gold production came from the nation in 2014. Gold Fields (GFI) and Harmony (HMY) are the second and third-largest gold producers of gold in SA, respectively. Anglo American Platinum (AGPP) is the largest platinum producer in the world (nearly 40% of global production), while Impala (IMPUY) produces nearly a quarter of the world’s supply and is a much more liquid stock in the United States.
While Anglo American is the largest coal miner in South Africa, Sasol (SSL) is known globally for its leadership in coal conversion technologies.
Due to its significance in the global precious metal market (excluding silver), South African companies feature prominently in many ETFs organized around precious metal mining. There is one fund that dedicates its assets solely to this country, the MSCI South Africa Index Fund (EZA), which affords about 6% of its assets to the basic materials sector, capturing a number of significant miners.
Trends/Developments To Watch
With enormous reserves and labor-intensive processes, mining is a major part of SA’s economy. Although mining directly accounts for about 8% of the country’s GDP, another 10% comes from related industries. Roughly 1 in 13 South African’s are employed by the mining industry—approximately 1 million people—500,000 directly, 500,000 indirectly; these numbers show the truly huge economic impact that mining has on the country.
Unfortunately, there are several trends working against the industry that investors should monitor. Labor unrest is becoming an increasingly serious problem, but many mining companies are reticent to increase labor costs in what are, in many cases, already high-cost mines. Inadequate electricity supplies have hampered many mines in recent years, and many mining companies are also finding that the remaining mineral reserves are increasingly difficult to access (which increases cost, complexity and risks to workers).
The South African government is also actively working to decrease its reliance on mining and diversify its economy. As the arid climate limits agricultural possibilities (and agricultural is not a high-paying industry), the government is looking to increase investment in manufacturing, construction, services and finance. All of that said, it is unlikely that gold, iron, coal, and platinum will be overtaken as leading export categories anytime in the near future.
Disclosure: Cape Town Photo courtesy of Adrian Frith.