Mining & the Economy
The Namibian economy started to flag signs of structural weaknesses in 2016, following two consecutive quarterly contractions, confirming the end of a pro-cyclical monetary and fiscal policy era. In the midst of this slow-down, avenues to pursue pro-growth policies have thus largely been exhausted as a result. In 2016, the Government debt to GDP ratio surpassed its sustainable threshold of 35%, reaching levels of around 42%. These developments lead to the international ratings agencies, Moody’s and Fitch, to change the outlook on investment ratings from stable to negative, placing even greater risk on external debt financing instruments and options for Government.
With the tabling of the mid-term budget review in 2016 and more recently, the 2017/18 budget, much required fiscal consolidation measures have taken center stage in the Medium Term Expenditure Framework. Economic growth is thus expected to remain weak in the foreseeable future.
The on-going drought and water shortages, and the continued contraction of the South African economy also contributed to weak growth in 2016 through strong trade ties with Namibia.
The mining sector was fortunately not directly impacted by these domestic challenges, with some mineral components performing better than others, and was largely buoyed by a broad based increase in the prices of precious and base-metals. Where other mineral commodities did not perform as well as expected, these were mostly a result of internal and operational challenges
Commodity Prices: A mixed bag of surprises
In 2016, commodity prices tended to follow trends which upended predictions and expectations. Metals commodity prices performed better than expected, driven by stronger demand in China, and while the performance of precious metals was volatile, they posted overall gains. The uranium price, however, bucked out at its lowest levels in a decade towards the end of 2016, amidst positive sentiment that the demand for this commodity would recover.
It was an interesting year for the spot price of gold, which performed exceptionally well in the first half of 2016, increasing by 25% following heightened political uncertainty hinged on the outcome of the Brexit vote and the US presidential elections. During the second half of 2016, however, the price of the precious metal retracted following policy announcements by the Trump administration to boost the US economy as well as a hike in the Federal Reserve rate in December 2016.
Gross Domestic Product
Preliminary statistics produced by the Namibia Statistics Agency show that the mining sector contributed 11.1% to GDP in 2016 and recorded an overall contraction of 4.9% in real terms. The contraction was largely the result of a decline in the output of diamonds, lead and zinc. However, the Chamber is of the opinion that this contraction has been overstated as it has not properly captured the trebling of high value refined copper production in 2016 and the 10% year-on-year increase in gold bullion output. In addition, the Chamber believes that contribution by these two minerals has been further understated in light of the recent increases in the prices of gold and copper as highlighted above.
Overall, mining contribution is also diluted by the exclusion of output from zinc refining and copper smelting activities.
Notwithstanding the decline in output of some minerals, the mining sector continued to create positive spin-offs in the Namibian economy. Statistics collated by the Chamber revealed that the mining sector generated some N$28.85 billion in foreign revenue earnings in 2016 in nominal terms. Of this N$11.7 billion was spent on locally procured goods and services which accounts for 64% of the total procurement spend by the mining sector.
Apart from the sector’s direct contribution to permanent employment, foreign exchange and government earnings, the sector’s biggest impact is made in the massive local spend through up-stream and side-stream linkages. Although much of this spend is on goods and services procured from local suppliers, the majority of inputs are still manufactured outside the country. There is thus a huge opportunity for the manufacture of some inputs locally to further increase value addition in these linkages.
Despite the recorded contraction, the mining sector is expected to continue growing. Swakop Uranium’s Husab mine produced its first barrel of yellow-cake on 30 December 2016 and is expected to ramp-up to full production in 2019 which will significantly boost mining’s contribution to GDP by approximately 5%. The Chamber also expects to see other mining related investments come to fruition as commodity markets improve and issues within the current policy and regulatory framework are resolved.
Fixed investment made by the mining sector continued to taper off from N$5.48 billion in 2015 to N$3.46 billion in 2016 from the record highs recorded in 2014, which was driven by the construction of three new mines and the sulphuric acid plant. Fixed investment levels are thus expected to remain steady at these levels following the extraordinary situation in which three mines were being constructed at once.
Exploration expenditure also remained stable at N$510 million, a slight increase from 2015, which was driven by a rise in commodity prices Investments into exploration underpin the livelihood of the sector, through the extension of operations in existing mines and the discovery of new ones. The Chamber thus remains hopeful that positive prospects in commodity markets and the resolution of policy propositions and proposals by Government will revive investors’ appetite for expenditure on such activities.
At the end of 2016 Chamber members directly employed 9,574 permanent employees, 699 temporary employees, and 5,400 contractors. In the last three years, the mining sector created above average direct employment ranging from approximately 16,000 jobs in 2013 to 19,000 in 2015, which dropped to approximately 16,000 in 2016 as Swakop Uranium completed the construction of its Husab mine.
The mining sector remains an important generator of Government revenue. In 2016 Chamber members paid a total of N$3.2 billion in taxes and royalties in 2016, a 15% reduction from N$3.76 billion paid in 2015. The decline was largely a result of reduced diamond output which constitutes the Lion’s share of mining taxes and royalties. This amount, however, excludes PAYE which totaled N$844 million and dividends of approximately N$1 billion, bringing the total contribution by the mining sector to Government coffers to roughly N$4.9 billion.