Mining violence cuts deep into socio-economic quandary of the region

Johannesburg - All is not well in the mining towns of South Africa. Strikes in South Africa’s mining industry are expected to reduce exports by Rand12.5bn ($1.4bn) and cut gross domestic product by 0.5% this year, according to South African finance minister Pravin Gordhan. The strikes across the gold, platinum, iron ore and coal sectors, which at their height involved 75,000 workers, have had a big impact on the country’s industry as a whole. The latest figures from Reuters suggest that South African factory output shrank in September, its worst performance in six months. Output contracted 1.1% year-on-year in September, more than the 0.5% reduction analysts had expected. It also compared to a 2.8% expansion in August. Government figures also showed 197,000 people lost jobs in the third quarter. “The industrial strikes have begun to take their toll. Strike action rapidly spread from mining to manufacturing and even the services sector well into October, closing plants and operations for weeks and resulting in vast losses of production volumes,” Anisha Arora, Emerging Markets Analyst at 4Cast, told Reuters. Rival news agency Bloomberg reported that the strikes have cut gold and platinum output by Rand10.1bn and coal production by Rand180m. The striking miners and the mining companies did agree a deal in early November as mining companies tried to stem the tide which had spread from platinum to gold, iron ore and possibly the next target, the coal mines. The unrest started back in January with a strike at the Impala Platinum Holdings, which resulted in four deaths. By August, the strike action had reached the Lonmin platinum mine at Marikana, where a six week strike ended in 46 deaths and headlines across the world. AngloGold Ashanti and Gold Fields are among other mining companies hit by this wave of strike action. ‘Export losses exceed direct losses as mining has strong linkages with other sectors of the economy, which are also negatively affected. Amongst the sectors most affected are fabricated metal products, machinery and equipment, rubber and basic iron and steel,’ warned Minister Gordhan in a letter to parliament. Meanwhile the mining companies are left considering their options. With platinum prices nearer to $1,400 an ounce, down from the boom prices of around $1,700 an ounce, it is not always an economic option to keep mines open when they are hit by labour unrest.hideStrikes impact Anglo Gold Ashanti is typical. It has just released its latest figures. It has cut its dividend and warned of ‘restructuring’ in South Africa, saying the strikes have wiped off $400m in output. Chief executive Mark Cutifani openly said: “We are in the middle of a review of our South African operations and there is no doubt that we are going to have to do some restructuring work.” He has been blunt about the options and analysts believe this could well mean marginal shafts are closed with associated job losses. Some even suggest that miners that took allegedly ‘illegal’ strike action could well have played into the hands of the mining companies which were possibly faced with some closures anyway. Government figures suggest South Africa’s gold output fell 11.1% in volume terms and production of platinum group metals slid 17.8% in September compared to the same month in 2011. David Davis, Mining Investment Analyst at SBG Securities, is quoted by Bloomberg as saying: “The onset of the strike action has accelerated the decline of mature mines and accelerated the likelihood of the downsizing of the operations.” The South African picture is, however, muddied by the historical political situation. Two unions are vying for control of the mineworkers while the central ANC party players are using the mines for their own political ends. The upcoming ANC Congress in December, which will likely decide the future direction of the ANC party, is acting as a catalyst for much of the political manoeuvring. Analysts say that much of the problem springs from the ANC’s first promises in a post-apartheid world that it would deliver on housing, power and education. So far there is a massive way to go on many of these promises and it is stirring resentment and even unrest. For now, however, risk and insurance managers in the sector will be reviewing their options carefully. “The strikes have affected a number of mines” said Jane March, Divisional Executive of Mining, Metals and Minerals for broker Marsh. “I think there are more underlying issues than the employers employee relationship. I think it is a symptom of other things rather than just pay and conditions at the mines.” She said that miners have been returning to work at some of the disrupted mines but the nature of mining in the area means it is not a simple matter of turning a switch on or off. “There are safety issues in returning to work at some mines and it is not something that can be done instantly. There are increased risks of returning underground and so while miners may be ready to go back to work it may not be that simple.” The effect on the wider economy is also a concern to risk managers, brokers and their insurers. “There are a large amount of suppliers around the mining industry and they have all been affected in terms of not having work. Added to that commodity prices globally are coming off and as a result the prices the minerals are fetching are not as attractive,” said Ms March. The broker said she believes that: “The situation needs to be managed for the long term and, as a country, we need to find a way to do things better. We need to make sure we learn from what has happened.”In terms of insurance, South Africa does have a government-backed scheme, the South Africa specialist risk association (SASRIA) which covers riots, strikes and civil commotion. “We are seeing increased interest in this cover,” said Ms March. However she explained that the cover needs a physical trigger for payments under a policy. So far there has been little actual property damage compared to the economic harm caused, which means relatively few insurance claims can be made. Business interruption policies also need a physical trigger and while there has been talk of some kind of financing mechanism, there has been little take up on the BI side, said Ms March.Her views were echoed by Andrew Wheeler, Mining Practice Leader at Willis in the UK. He sees the SASRIA scheme as a well-funded vehicle which has existed for many years and is established in the market. “It is well suited to most client needs,” he said. Thokozile Ntshiqa, Executive Manager: Stakeholder Management at SASRIA, reportedly stated: “In layperson’s terms we can think of a strike as a work stoppage followed by employees engaging in some form of protest action. And we respond to all strikes.” However she was supposedly quick to make a distinction that: “Ordinary criminal activity is not covered under the strike heading. Anything happening in stealth, in quietness, where there is no strike action, is regarded as normal damage and will be covered by the insured’s corporate, commercial or personal lines policy.” The bottom line If that is correct then for many of the mining companies the strikes are a direct cost to the bottom line and not something they are able to transfer. However, at the beginning of September, Ms Ntshiqa said there has been the introduction of net profit cover under a business interruption policy. “Clients have an option to buy net profit cover. In the event their net profit is affected during a strike, due to material damage to premises, the policy will respond,” she said. Mr Wheeler says one of the problems for the insurance market is that these types of policies with a non-physical damage trigger represent a crossover into the political risks market. “Then the question is whether there has been a political event. This can be very hard to prove for insureds. It may appear there is some political motivation. But can a direct link be fully established?” Mr Wheeler said that risk managers need to be careful and ensure that they understand the nuances in the different triggers and the way the insurance market will respond if they are looking for this type of cover. Like Ms March, he sees the South African mining disputes as a symptom of problems which have been rumbling on for some time. Until some of those longer-term problems are resolved along with some of the power battles, then it may be unlikely that the strikes will stop, he said.

Mining violence cuts deep into socio-economic quandary of the region

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