Economic conditions and commodity markets move in cycles. From the early 1990s to 2004 commodity prices were relatively stable (in real terms). Since that time strong Chinese demand has driven high commodity prices.
Many mining companies responded by investing in new capacity growth in 2010 and 2011, anticipating that strong demand growth would continue. In recent times we have seen a structural slowdown in demand, associated with China’s economic rebalancing from investment-led to a services orientated economy.
Excess supply also needs to leave the system. Economically and rationally it just should not exist.
Today’s low commodity prices are deterring new investment capital in production, but also creating opportunities for companies, like South32, to optimise their portfolio and operations. South32 is a relatively new company. We demerged from BHP Billiton last year and are 266 days old.
Face challenges
We have been operating in South Africa for almost 80 years and produce aluminium, energy coal and manganese. In fact, we are the world’s largest producer of manganese ore.
Host countries that are dependent on mining, like South Africa, will also need to face the challenges associated with the structural slowdown in global commodity demand.
South Africa holds 80 percent of the world’s known high-and-medium grade manganese ore mineralisation. Manganese is important to South Africa today and in the future, if the industry is managed well.
Other major suppliers of high-grade ore are Australia (Gemco), Gabon and Brazil. There are no other major reliable sources of high-grade ore and this will remain true even in the long run.
Chinese domestic ore is swing supply, being very sensitive to an imported ore price.
Sufficient supply exists to satisfy demand growth, and low-cost growth options for supply occur mostly in South Africa by virtue of the available reserves and high grades.
The challenge for manganese has been fragmented growth in South Africa’s Kalahari basin over the past five years, leading to suboptimal outcomes in rail allocation and export logistics supply chain management.
Lots of capital investments have been made by junior miners. The lack of industry discipline has led to painful consequences.
The industry supply curve is flattening rapidly (driven in part by real and dollar cost deflation) which has exacerbated the recent price decline.
At present, South Africa is the “marginal producer”, and more than 70 percent of the industry is losing money.
Most South African mines are grouped together on the cost curve, given that they all operate in the same basin, produce similar products, have similar cost structures (including significant logistics costs) and sell to the same customers.
Like many other sectors at present, many of the manganese ore producers are operating at a loss.
With steel demand weakening associated with China’s structural slowdown, demand is unlikely to provide the support required to spark a price recovery.
Rather, it will need to come from supply continuing to adjust to the current price environment. With the supply curve in South Africa relatively flat already, demand growth slowing, major South African producers have been cutting supply to mitigate losses. But more will be required.
South African supply growth outpaced demand over the past couple of years. We don’t need this to continue in the future.
The industry should reassess the requirement for increased export capacity from South Africa.
While the thinking of building Coega and expanding exports formed a good plan in the past when demand projections were more optimistic, the market dynamics have changed and there is the risk of an undisciplined fragmented supply increase amidst a demand slowdown.
What we need is the industry to make rational decisions, or risk South African supply growth outpacing the slow demand growth and prolonging the downturn. South32 has made this rational decision, taking our own view of the market.
All manganese participants have a role to play in supporting a healthy, sustainable manganese industry. The industry cannot depend on a quick demand and price recovery as market fundamentals have changed.
Looking ahead, the industry needs to make rational decisions and take a disciplined supply approach. The industry’s future depends on it.
* Graham Kerr is the chief executive of South32.
** The views expressed here do not necessarily reflect those of Independent Media.
BUSINESS REPORT