Mining: Nationalization Cloud Hangs Over Mining Industry

It has been a busy year for South Africa. First it was the World Cup, then labor strikes, and now nationalizing the mining industry, which represents 5-7 percent of the country’s GDP. The very public discussion about who is best fit to run South Africa’s mines has made foreign investors nervous. This uncertainty extends to local mining suppliers who depend on larger corporations to procure business as well as the corridor of services around the mines.

Mining generates 30 percent of export revenue for the country, 18 percent of its corporate tax base and 500,000 direct jobs, according to the Mines Ministry. Valued by Citigroup at $2.5 trillion, the sector is host to Australia-based BHP Billiton and London-based Rio Tinto Group and Anglo American, some of the biggest companies in the world.

Although no actions have been taken to nationalize mines, the ruling ANC has said it is considering greater state control in the mining sector. This is probably an appeal to Julius Malema and the ANC Youth League, the main force behind the call for nationalization, which plans to spend the next two years organizing support. Still, Minister Susan Shabangu of South Africa’s Department of Mineral Resources has repeatedly said no to nationalization.

So far the private sector and analysts have said the move will have a negative effect on the country’s economy. The Mail and Guardian newspaper has estimated that the cost of such a move would be at least $280 billion, more than double the annual state budget.

The economic downturn, which led to less demand for minerals, has played a part in forcing companies to underperform, leading to layoffs and closures in some mines or forcing them to hire on only short-term basis. Other reasons include unreliable power supplies and high labor costs. By nationalizing mines, the hope is that workers will be assured job security and pensions. But it is not clear if such moves will solve the problems as the government is not immune to the same market forces that negatively impacted the private sector. It is also not clear if the government will assume the responsibility of supplier diversity initiatives that are being carried out by corporations, potentially leaving these suppliers in limbo. If you look at Brazil’s iron ore industry in the 1980s, for instance, it was privatization and not nationalization that led to an increase in productivity in previously state-owned enterprises as well as existing private firms. Increased productivity would mean more opportunity for suppliers to differentiate their products and services from the competition and an incentive to innovate.

If history is to serve any purpose, nationalization in Africa has simply not worked. Although the nationalization discussion won’t be addressed fully until 2012, suppliers are already planning for tougher times.