Oral Evidence on Mining Sector Job Losses

08 July 2016
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Basic economics of job losses in the mining industry

1. “Job losses” defined – either
1.1. Declining/contracting mining industry (like “job losses” in the ox wagon industry).
or
1.2. Rising productivity (ie. fewer workers producing the same output).

2. Causes of:
2.1. Declining/contracting mining industry (1.1):
2.1.1. Lower demand (eg declining demand for (and thus price of) coal).
2.1.2. Resource depletion (eg declining gold reserves).
2.1.3. Rising costs:
2.1.3.1. Energy (esp. Eskom catastrophe)
2.1.3.2. Transport (esp. railways).
2.1.3.3. Plant/materials (esp. weak Rand).
2.1.3.4. Labour (esp. employment costs exceeding inflation).
2.1.3.5. Tax (tax as % GDP highest ever and rising; one of the world’s highest).
2.1.4. Less investment/closures:
2.1.4.1. Hostile investment environment:
2.1.4.1.1. Lack of security (eg nationalisation, discretionary
2.1.4.1.2. Regulatory barriers
2.1.4.1.3. Uncertainty:
2.1.4.1.3.1. Insecure property rights (eg nationalisation and rule of law threats).
2.1.4.1.3.2. Regulatory uncertainty (incl. political uncertainty, discretionary power instead of objective criteria.)
2.1.4.1.3.3. Extraneous uncertainty (incl. global economic conditions)
2.1.4.1.3.4. Other (eg hostile labour).

2.2. Rising productivity (1.2):
2.2.1. Technology – spontaneously improved technology.
2.2.2. Capital-labour substitution – labour cost exceeding technology cost.

3. National culture (attitudes/values):
3.1. Investor perceptions (versus reality).
3.2. Labour perceptions (versus reality).
3.3. Government anti-business sentiment (employers as enemies).

4. Beneficiation:
4.1. Popular and dangerous rhetoric and mythology.
4.2. One of the few areas of economist consensus.
4.3. Economically irrational:
4.3.1. Causes net job losses.
4.3.2. Do only what you do well (ie competitively).
4.3.3. Commodities are globally priced and universally available.
4.3.4. Irrational to process anything inefficiently (just because a mineral happens to be present).
4.3.5. Mining has nothing in common with processing (mining companies should mine).
4.3.6. Beneficiation reduces forex, raises import costs, penalises the poor.

5. Nationalisation (of mineral rights):
5.1. Gigantic reduction of mining capital.
5.2. Reduced resource allocation/efficiency.
5.3. Increased uncertainty (reduced long-term investment incentive/capacity).

6. Rule of law:
6.1. Global correlation with prosperity.
6.2. Not ‘rule of man’ (ie objective criteria instead of discretionary power).
6.3. Separation of powers (substantive law/rules made by legislature, not executive; rulings made by judiciary, not executive).
6.4. Transparency (no real or suspected bias).
6.5. Secure/enduring ‘rules of the game’.

Leon Louw
Executive Director

Subsequent media release

Leon Louw pointed out that there are two reasons for job losses in any sector: firstly, a decline in the sector and secondly, rising productivity.

A sector may decline for various reasons, most of which cannot and should not be avoided by policy interventions. The ox wagon industry declined and disappeared which is precisely what it should have done when ox wagons were replaced by superior forms of transport. 100% of jobs in the ox wagon industry were and should have been lost.

In mining, decline could be because of resource depletion. Britain wasted absurd sums of money trying to prevent the decline of its coal mining industry when rich deposits had been exhausted. They finally abandoned the futile exercise of trying to preserve coal mining jobs when the subsidies per worker exceeded the cost of sending every worker on permanent holiday to the Spanish Riviera.

Sectoral or “structural” decline can be avoided where it is due to counter-productive policies. Examples in South Africa are the excessive cost raising impacts of energy policy, transport policy, labour policy, and mining regulation. The catastrophic failure to implement electricity reforms in terms of the energy White Paper and the NDP has meant that one of the highest costs of mining has risen excessively thereby rendering marginal mines not viable.

The failure of South African railways to transport mining equipment and output efficiently forces mines to use costly road transportation which in turn imposes billions of rands of damage on South Africa’s road infrastructure.

The nationalisation of mineral rights confiscated a substantial proportion of mining company assets worth tens of billions of rands. This deprived mines of capital with which to invest and create or sustain jobs. Labour policy has raised the cost of mining significantly thereby also causing marginal mines and jobs to be lost.

During evidence Louw was asked about the ethics of mining companies not wanting to pay “decent” wages and having exorbitant CEO remuneration. He responded that just as workers do not work for any reason other than income, investors do not invest for any reason other than profit. Their motives and morals are irrelevant. Regarding CEO pay, he said that if South Africa wanted the world’s best CEOs to run our mines thereby ensuring we have the world’s best mining sector, creating the most jobs, we should offer to pay more not less. If a good CEO is worth R10bn, paying them R5bn is a bargain. Conversely, Louw offered himself to any mining company at half the cost of their existing CEO. The reason they do not employ him, is because the advantage to the company and its workers of a higher-paid better CEO is sensible.

Regarding mining regulations, he handed the committee a copy of the legislation in which discretionary powers are highlighted. Virtually every provision entails arbitrary discretion by officialdom which creates so much uncertainty that mining companies have no way of predicting the viability of investments. Even if regulations are bad, investors can cope if there is stability and certainty.

Turning to job losses through productivity improvements, Louw pointed out that there is policy schizophrenia. On one hand government wants higher productivity. In the mining sector that means greater tonnages processed per worker or more output by some other measure. This has been achieved in the mining industry. Output per worker has risen by hundreds of percent during recent decades. This is not because of better management or harder work. On the contrary, workers work fewer hours under improved conditions. Spectacular productivity gains are due to technology improvements or “capital-labour substitution”. In plain English this means that machines replaced people – higher productivity means more output per person and less employment.

If, on the other hand, government wants more jobs, it can achieve that by lowering the cost of labour though less favourable employment conditions and wages. He cited the example of an American engineer who, on a visit to China, encountered a crew of men building a dam with picks and shovels. He pointed out to the supervisor that if they used earth-moving equipment, they would complete the dam in considerably less time. The supervisor replied that using equipment would destroy jobs. “If job creation rather than dam building is your goal,” suggested the economist, “why not employ additional men and let them dig with spoons?”

Louw said that one of the most dangerous and nonsensical ideas is that “beneficiation” can create jobs in the mining sector. The first part of this myth is that beneficiation is neither mining nor in the mining sector. Mines mine, they do not process materials or manufacture products. More seriously though, there is no rational reason whatsoever for believing that it is economically sensible to process minerals simply because they happen to be in a country. If you are efficient at processing copper then you should do so regardless of where copper is mined. If you are bad at diamond cutting you should leave it to those who are better at it. As the governor of the reserve bank Lesetja Kganyago put it, all raw materials are available to all manufacturers in countries at precisely the same price everywhere and where a particular material is produced is completely irrelevant.

Louw concluded by suggesting the only way to avoid job losses in the sector is to make investment in mining attractive. This can be done by liberalising labour law, lowering taxes, removing threats of nationalisation, and reforming mining laws so as to replace discretionary power with objective criteria and long-term certainty that the “rules of the game” will not be continuously revised. 

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