The South African rand is hurting gold mining in the country at a time when a boost in gold prices should be bringing life back into the industry.
A recent report by Bloomberg highlighted the impact the newly-boosted Rand is having on the gold mines in the country. Gold prices are up more than 4% in Rand value to their highest point since August 2016, but with the Rand itself growing in strength against the US Dollar it means that operating costs for mining and refining are becoming increasingly unsustainable.
Why is the Rand doing well?
In December last year the African National Congress (ANC) voted to replace President Jacob Zuma as the party leader in favour of Cyril Ramaphosa, his deputy. The move doesn’t affect Zuma’s presidency but likely means Ramaphosa will take over as the South African leader in the country’s 2019 general election. South Africa has a problem with corruption in both government and industry, and Ramaphosa – a businessman and union leader – promises tough action to crackdown on these problems. This has in turn given investors a new-found confidence to resume dealings in the markets.
Why is a strong Rand a problem?
Mining companies in South Africa pay the majority of their expenses in Rand. The result is that their profit margins are currently suffering, at a time when the boost in gold prices and demand should begin to repair the damage done to the industry over the last few years. Approximately 70,000 jobs have been lost since 2012 in the South African mining industry, according to Independent Media.
Criticising a strong currency is an unusual thing. On the surface a strong Rand is good. It provides economic stability and stimulus, and in turn leads to a chain reaction of investment. A stronger Rand means lower fuel prices, which traditionally inspires lower inflation. This knocks on to cheaper import costs and this keeps interest rates from shooting up.
The problem is that with no profit gain for the mining industry they cannot re-hire some of the lost personnel back to the industry, nor can they introduce new technology to extend the lifespan of the mines – already heavily depleted of their main gold deposits.
Will the strong Rand last?
The Rand’s growth isn’t expected to last, which will be of some relief to the country’s mining industry. The South African Reserve Bank are wary of weakness in the currency and have kept interest rates the same, just in case of a credit rating downgrade.
The country has a major issue with corruption in Eskom, a major electric utility company in the country. The corporation owes 20 billion Rand, leaving the government with a shortfall. A fuel levy is expected to be introduced to compensate for this, which would keep fuel prices at their current level despite the presumed reduction in price following the rise in value of the Rand.
The South African Reserve Bank and the World Bank both increased their forecasts for the nation’s economic growth to between 1.2% and 1.4% following this rise in the Rand, but the International Monetary Fund is less optimistic and foresees growth below 1% this year. This could be down to a belief that the Rand’s current growth is a short-lived and reactionary.
If the Rand’s value goes down and gold continues its steady and predicted growth then South African gold mining could get the jumpstart it needs to make the move into high tech mining and revitalise a waning industry.