PCTI/20140826/CoB/PJ/33

Mineral Value Chains (MVCs)

Resource-based Industrialisation?

Minister’s IPAP Update BriefingMinister’s IPAP Update Briefing

Paul JourdanPaul JourdanDTI, Tshwane, April 2013DTI, Tshwane, April 2013

Structure of Each MVC Report

The upstream value added of each mineral value chain will be consolidated into a single report as they tend to be common – mining, mineral processing and beneficiation inputs (capital goods, consumables and services)

DTI/IDC Mineral Value Chains (MVC) Study

Project Elements and Time-line for Reports:

1.MPRDA Review Report - January 20132.MVC Context Report – February 20133.Ferrous MVCs Report – April 20134.Coal/gas MVCs (Polymers) Report – June 20135.Titanium MVCs Report – August 20136.PGM MVCs Report – October 20137.Mining Inputs Report – November 20138.Close-out (composite) report – December 2013

South Africa is well-endowed with mineral South Africa is well-endowed with mineral resourcesresources

South Africa’s Mineral Reserves, World Ranking, 2009 Production & Nominal Life (assuming no further reserves) at 2009 Extraction Rates

Source: SAMI 2009/2010, DMR 2010; and Wilson & Anhaeusser 1998: “The Mineral Resources of South Africa”, CGS Pretoria (for BC- Bushveld Complex)

The in-situ value of South Africa’s mineral resources is estimated at an astounding

$6.24 trillion (2012). By value they comprise:

Source: EcoPartners 2012, www.ecopartners.co.za

Global Minerals Intensity of GDP (steel proxy)Global Minerals Intensity of GDP (steel proxy)

Source: Adapted from http://advisoranalyst.com

Global Context (demand)Global Context (demand)

What is Beneficiation?What is Beneficiation?• Narrow definition:

– Value-added above a “base” state (ore, conc, metal)• Broader definition:

– Total domestic value-addition (excluding all imported inputs)

Ore exportsBene= ∑VA

Conc exportsBene= ∑VA

Alloy exportsBene= ∑VA

Metal exportsBene= ∑VA

Int. exportsBene= ∑VA

Manu. exportsBene= ∑VA

Beneficiation is the sum of local VA in Beneficiation is the sum of local VA in the exported product =the exported product =VA in all VA in all inputs inputs plus the VA in the process.plus the VA in the process.

= = both backward and forward both backward and forward linkageslinkages

5. FORWARD5. FORWARDValue-addition: Value-addition: (beneficiation)(beneficiation)

Export of Export of resource-based resource-based

articlesarticles

3. BACKWARD3. BACKWARDInputs: Capital Inputs: Capital

goods, goods, consumables, consumables, services, (also services, (also

export)export)

4. KNOWLEDGE 4. KNOWLEDGE Linkages (HRD & Linkages (HRD &

R&D):R&D):““Nursery” for new Nursery” for new

tech clusters, tech clusters, adaptable to other adaptable to other

sectorssectors

2. SPATIAL2. SPATIALPuts in critical infra-Puts in critical infra-structure to realise structure to realise

other economic other economic potential & could potential & could

stimulate LEDstimulate LEDNarrow “beneficiation” = forward linkages; Narrow “beneficiation” = forward linkages;

Total product beneficiation = back- & forward linkages (∑VA), Total product beneficiation = back- & forward linkages (∑VA), Total economy-wide beneficiation = all the linkagesTotal economy-wide beneficiation = all the linkages

1. FISCAL: 1. FISCAL: Capture Capture & invest of resource & invest of resource rents (RRT) in long-rents (RRT) in long-

term economic term economic physical & human physical & human

infra (inter-infra (inter-generational)generational)

Use depleting assetsUse depleting assetsto change nationalto change national

endowment structureendowment structure

HRD, R&D

Forward LinkagesForward Linkages:Intermediate products =>Manufacturing; Logistics;

other sectors (agriculture , forestry, fisheries, etc.)

Backward Backward LinkagesLinkages

Inputs:Capital goodsConsumables

Services

Knowledge LinkagesKnowledge LinkagesHRD: skills formation

R&D: tech developmentGeo-knowledge (survey)

Spatial LinkagesSpatial Linkages:Infrastructure (transport,

power, ICT) and LED

Fiscal linkagesFiscal linkages:Resource rent capture &

deployment: long-term human & physical infrastructure

development

Knowledge linkages are a prerequisite for developing the crucial back/forward beneficiation linkages!

• Mineral deposits embody a massive variation in resource rents (returns above those necessary to attract investment = average return on investment: ROI), much greater than any other sector except for hydrocarbons (oil and gas).

• In SA ROI in mining varies from average (ca 15%, e.g. marginal gold deposits) to several hundred percent (e.g. iron and manganese ore deposits) = resource rents.

• Consequently it is difficult to design a minerals regime with generic linkage conditions (local content, value-addition, skills formation, etc milestones) that will efficiently maximise the potential development impact of all deposits over time.

• In general, a mineral regime will set minimum linkage development obligations in order to make investment into marginal deposits attractive.

• The best way to flush out the maximum linkage development that any specific mineral deposit could support, would be to get a market response through the public tender of the property against linkage development commitments (a form of developmental “price discovery”).

• Mineral deposits embody a massive variation in resource rents (returns above those necessary to attract investment = average return on investment: ROI), much greater than any other sector except for hydrocarbons (oil and gas).

• In SA ROI in mining varies from average (ca 15%, e.g. marginal gold deposits) to several hundred percent (e.g. iron and manganese ore deposits) = resource rents.

• Consequently it is difficult to design a minerals regime with generic linkage conditions (local content, value-addition, skills formation, etc milestones) that will efficiently maximise the potential development impact of all deposits over time.

• In general, a mineral regime will set minimum linkage development obligations in order to make investment into marginal deposits attractive.

• The best way to flush out the maximum linkage development that any specific mineral deposit could support, would be to get a market response through the public tender of the property against linkage development commitments (a form of developmental “price discovery”).

MVCs and Mineral Deposit Variability

MVCs and Mineral Deposit Variability

Hybrid free mining (FIFA) and tender system

3.KnownMineral assets

1.Unknown Mineral assets

Mining Concession/Licence

2.PartiallyKnown

Define 3 Types of Mineral Terrains:Define 3 Types of Mineral Terrains:

Hybrid free mining (FIFA) and tender system

3.KnownMineral assets

1.Unknown Mineral assets

Mining Concession/Licence

2.PartiallyKnown

Define 3 Types of Mineral Terrains:Define 3 Types of Mineral Terrains:

However, this hybrid However, this hybrid regime requires regime requires

substantial substantial amendments to the amendments to the

MPRDA!MPRDA!

MiningMiningMineralMineral

ProcessingProcessingExplorationExplorationSmelting &Smelting &

RefiningRefiningFabricationFabrication

(manufacturing)(manufacturing)

expl. capital goods• geophysical• drilling• survey• etc.

mining capital goods• drilling• cutting• hauling• hoisting, etc.

processing cap. goods• crushers/mills• hydromet plant• materials handling• furnaces, etc.

Refining Cap. Goods•Smelters•Furnaces•Electro winning cells•Casters

Fabrication Cap.goods•Rolling•Moulding•Machining•assembling

exploration services• GIS• analytical• data processing• financing• etc

mining services• mine planning•consumables/spares• sub-contracting• financing• analytical, etc

processing services• comminution• grinding media• chem/reagects• process control• analytical, etc

Refining services•Reductants•Chemicals•Assaying•Gas & elec supply

Value adding services•Design•Marketing•Distribution•Services

• Amend the MPRDA to include upstream value addition (backward linkages: local content) as an objective of the Act and strengthen the Minister’s power to include such conditions in the mining concession/license.

• Make local content commitments a bid variable with significant weighting (30%?) for all new competitive mineral concessions (auctions);

• Base the B-B BEE purchase requirements in the Mining Charter on the BEE proportion of local value added in the goods or services supplied, rather than the total value of the goods or services, to eliminate destructive BEE fronting for foreign suppliers and to increase the upstream developmental impact;

• DTI, DMR, EDD and DST to jointly comprehensive industrial sub-sectoral strategies to grow the mineral upstream sectors (capital goods, services, consumables) including the use of instruments such as import tariffs, investment incentives, innovation stimuli, market access, access to finance, competitive inputs, tech development, etc.

• Task the nascent SMC and IDC with developing appropriate capital goods, with the private sector and technology institutions,.

• Establish “Beneficiation SEZs” e.g. The mooted “PGM SEZ• Develop Regional Trade Strategies for growing inputs markets

• Amend the MPRDA to include upstream value addition (backward linkages: local content) as an objective of the Act and strengthen the Minister’s power to include such conditions in the mining concession/license.

• Make local content commitments a bid variable with significant weighting (30%?) for all new competitive mineral concessions (auctions);

• Base the B-B BEE purchase requirements in the Mining Charter on the BEE proportion of local value added in the goods or services supplied, rather than the total value of the goods or services, to eliminate destructive BEE fronting for foreign suppliers and to increase the upstream developmental impact;

• DTI, DMR, EDD and DST to jointly comprehensive industrial sub-sectoral strategies to grow the mineral upstream sectors (capital goods, services, consumables) including the use of instruments such as import tariffs, investment incentives, innovation stimuli, market access, access to finance, competitive inputs, tech development, etc.

• Task the nascent SMC and IDC with developing appropriate capital goods, with the private sector and technology institutions,.

• Establish “Beneficiation SEZs” e.g. The mooted “PGM SEZ• Develop Regional Trade Strategies for growing inputs markets

Putative strategies to grow the upstream (inputs) MVCsPutative strategies to grow the upstream (inputs) MVCs

Share of diversified manufacturing exports, by regionShare of diversified manufacturing exports, by region

Note that this excludes mining based services. The export of mining-based services is extensive and growing very rapidly.

Source: Roberts 2012

Source: Kaplan 2011

Mining Capital Equipment Exports to Africa ($mn)

Mining Capital Equipment Exports to Africa ($mn)

Backward (upstream) Value Addition (Inputs)Backward (upstream) Value Addition (Inputs)

Markets: Sub-Saharan Africa & World GDP GrowthMarkets: Sub-Saharan Africa & World GDP Growth

Source: IMF, World Economic Outlook (WEO) Database, October 2012

Regional Trade Strategies are Critical to Growing the Backward MVCsRegional Trade Strategies are Critical to Growing the Backward MVCs

Two approaches to downstream MVCs:

1) “Supply-side” “Supply-side” Methodology: Starts from the national mineral endowment and then develops strategies for their beneficiation. (This generally appears to be the DMR approach in “A Beneficiation Strategy For The Minerals Industry Of South Africa”)

For rapid Job Creation, the domestic demand domestic demand driven methodology driven methodology is preferable, except for minerals with potential “producer power”. The DTI/IDC value chains selection reflects this approach.

For rapid Job Creation, the domestic demand domestic demand driven methodology driven methodology is preferable, except for minerals with potential “producer power”. The DTI/IDC value chains selection reflects this approach.

2) “Demand-side” “Demand-side” Methodology: Identifies critical mineral inputs into the economy needs for rapid job creation and then develops strategies for the cost-effective supply of those mineral inputs.

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The Principal Mineral-Based Feedstocks for rapid

JOB CREATION

SA has ample resources for the cost-effective SA has ample resources for the cost-effective production of almost all of these critical production of almost all of these critical feedstocks for downstream job creation!feedstocks for downstream job creation!

Ferrous MVCsFerrous MVCsFerrous MVCsFerrous MVCs

Iron, chromium, manganese into steels & specialty steels

SA Steel Production and LocationSA Steel Production and Location

Source: Kumba 2011, “The South African iron and steel value chain”, Joburg, March 2011

Plus stainless steel (Columbus 600ktpa) in Middleburg

Steel flows in South Africa in 2008Steel flows in South Africa in 2008

Source: Kumba 2011, “The South African iron and steel value chain”, Joburg, March 2011

SA Steel Demand SectorsSA Steel Demand Sectors

However, the monopoly pricing (IPP) of steel However, the monopoly pricing (IPP) of steel severely curtails manufacturing jobsseverely curtails manufacturing jobs

Hot rolled coil steel prices, US$/t

Value received on exports (EPP)

Value received on local sales (IPP)

Source: Iscor 2004 in DTI presentation to the Portfolio Committee of Trade & Industry, 24 Aug 2010

Amount that local customers pay above exportsWorld export priceWorld export price

Transport costs might be as high as 47% of the cost of importing flat steel!

• Use state ownership of mineral rights to apply cost-plus ore pricing conditions to local customers and on local customers (for their domestic on-sales) for select “strategic” mineral feedstocks, particularly iron/steel. This will require amendment of the MPRDA.

• Strengthen the Competition Act to allow for the effective imposition of competitive pricing in the domestic market: Regulate steel prices against a basket of international prices.

• Introduce competition through state facilitation of new players- • Progress the IDC Masorini/Scaw projects• Assess the viability of the NMM and Cascades projects• Reserve resources for tender against the establishment of a steel

plant to supply the domestic market at competitive prices• Ban all exports of base & ferrous scrap, to lower domestic scrap

prices• Use state infrastructure tariffs (energy, transport) to leverage

competitive prices, through applying a surcharge to companies that monopoly price (IPP) in the domestic market.

• Trade a user-concession (BOT) on the Saldanha ore line, with establishing a new steel plant (NMM?) and local ore sales at cost-plus with an on-obligation to the customer (steel plants).

• Invest in technology development to configure a large scale process to economically exploit the appropriate BC magnetite seams to produce titanium dioxide and pig iron, which could form the basis of a new steel competitor.

Putative Steel Strategies

Most plastics are derived from petrochemical feedstock (naphtha) which in turn originates from oil, natural gas and

coal. In SA the gas comes from coal

Coal/gas: Coal/gas: PolymersPolymers

Fertiliser Raw Materials Producers

*Taken over by Meridian/Farmers World. # Plant mothballedSource: Grain SA “Fertiliser Report”, 2011

Coal/gas – Nitrogenous Coal/gas – Nitrogenous FertilisersFertilisers

International and local urea prices: IPP pricingInternational and local urea prices: IPP pricing

Zerihun Gudeta Alemu 2010

Grain production Costs in SAGrain production Costs in SA

Source: Corné Louw 2011,

Fertilisers constitute 30-50% of grain/oil seeds input costs, and the IPP-EPP differential is 30% to

50% : Competitive fertiliser prices could have a

significant impact on both job retention and expansion in the agricultural sector

Total employment in agriculture in South Africa, 1968-2010Total employment in agriculture in South Africa, 1968-2010

Source: Sandrey, R. et al. (2011),

Around 1 million jobs Around 1 million jobs have been lost since have been lost since 1970, aggravated by 1970, aggravated by monopoly fertiliser monopoly fertiliser

pricing!pricing!

• Use state ownership of coal mineral rights to apply cost-plus domestic polymer/fertiliser pricing conditions on Sasol;

• Regulate polymer/fertiliser prices against a basket of international prices (ICISLOR, Platts, Harriman);

• Strengthen the Competition Act to allow for the effective imposition of competitive pricing in the domestic market (amend the Competition Act)

• Introduce competition through state facilitation of new players by the reservation of suitable coal/gas resources for tender against new capacity at EPP or cost plus into domestic market;

• Increase state control of Sasol (currently 26% owned by the IDC & PIC) to >50%, through a strategic alliance with the Union pension funds;

• Use state infrastructure tariffs (energy, transport) to leverage competitive prices from Sasol.

Putative Coal/Gas MVC Strategies Putative Coal/Gas MVC Strategies

Platinum and palladium resources in other countries, compared to South Africa

Source: Cawthorn R.G. 1999

PGM MVCs

Pt 75% & Pd 50%Case for producer power to effect price stability and greater value addition?

Source: JM 2012

Source: JM 2012

Platinum Supply 2001-2012Platinum Supply 2001-2012

Platinum Industrial DemandPlatinum Industrial Demand

SA dominates supply, but most PGM intensive manufacturing is done in OECD countries

• Assert state’s right to market PGMs by amending the Exchange Control Regulations to require authorisation to market PGMs, as per gold.

• Task the PGM miners with establishing a single export channel to stabilise prices and establish a “stockpile” which could be partly held by the Reserve Bank (portion of national reserves in the form of platinum)

• Engage Russia & Zimbabwe on joining a single channel export mechanism.

• Task the single channel mechanism with developing a 5-8 year plan for the value chain to be progressively relocated to the producer states.

• Include value-addition milestones in PGM licenses;• Dramatically increase state & private PGM R&D

activities

Putative PGM MVC Strategies Putative PGM MVC Strategies

Titanium MVCs

•South Africa is the 2nd largest producer of Ti feedstocks globally (mainly slag) and has the 2nd larges resources (excluding the BC magnetites);•Over 90% of Ti is used to make pigments (paper, plastics, paint, etc. industries)•A small quantity goes into Ti metal (aerospace, medical, sports)•SA has a tiny share of the downstream industry

• Use state ownership of mineral rights to apply beneficiation milestones on titanium miners;

• Encourage/facilitate Exarro to locate a world-scale pigment plant (>300ktpa) in SA, using chloride technology (Tronox);

• Fund R&D into technologies to realise the huge Ti potential in the BC magnetites (Fe & Ti) resources (level 21 = 70% of world)

• Continue to support the Ti powder and forming technology development initiatives;

Putative Ti tanium MVC s Strategies Putative Ti tanium MVC s Strategies

• MVCs should encompass all the SA value in the final consumed or exported product, i.e. both local content and beneficiation;

• Little MVC headway has been made, principally due to widespread monopoly pricing (IPP) of mineral feedstocks and the decline in upstream industries and R&D due to exit of the old “Mining Houses”;

• Nevertheless there appears to be strong case for MVCs, particularly the critical feedstocks in job-creating sectors: manufacturing, energy, agriculture and infrastructure, as well as minerals where SA has potential producer power, and in inputs industries (capital goods);

• Regional markets (economic integration) could facilitate beneficiation (economies of scale), particularly in inputs industries (local content);

• MVCs could gradually transform SA’s comparative resources advantage into a competitive advantage, especially the local content (capital goods & services) dimension;

• Wide-ranging instruments could be available to the state to facilitate beneficiation, including conditions on mining licences, anti-trust legislation, incentives, HRD and R&D, but many will require amendments to current legislation;

• There appears to be substantial potential for downstream beneficiation in the ferrous, coal/gas, PGM and titanium job-creating value-chains (MVCs).

Thank YouThank Youpaulj1952@gmail.com