September inflation tightens squeeze on South African mining

September’s consumer price index data showed inflationary pressure on costs that impact mining, such as transport, fuel, electricity and water.

The 10.8% year-on-year (y-o-y) rise in transport prices followed the 27.9% y-o-y and 4.6% month-on-month fuel price surge.

Passenger transport services rose 12.3% and the transport of goods rose 6.8%. Fuel is used in operations for mobile equipment, generators and operational vehicles, while purchased transport services connect production to domestic and export markets.

Higher fuel and freight prices increase on-site as well as mine-to-market expenses especially in the case of bulk commodities that make use of road haulage.

The impact on profit margins depends partly on commodity prices. When export prices are strong, mining companies can absorb some of the higher transport costs without a major reduction in profitability. When commodity prices are weak, however, companies have less revenue available to cover these costs, so profit margins narrow more sharply.

This pressure is difficult to pass on to customers because most mining products are sold at prices determined in international markets.

Minerals Council South Africa’s economics department stated in its release to Mining Weekly on Tuesday, October 27, that it expected cost-push pressures, mainly dominated by higher fuel prices, to elevate the headline consumer price index to a level beyond the upper band of the South African Reserve Bank’s inflation-targeting framework.

Goods inflation rose to 4.1% from 3.3%. The easing of services inflation to 4.9% from 5.1% was indicative of near-term cost pressure being increasingly concentrated on goods and operational inputs for now.

While the South African Reserve Bank and National Treasury expected inflation to moderate over the medium term, the current policy and prime lending rates were nevertheless keeping financing conditions restrictive, the Minerals Council report stated.

Housing and utilities prices increased by 5.2% y-o-y, contributing a further 1.3% to transport’s 1.5%. Water supply and related services rose 7.4%, while electricity, gas, and other fuels rose 7.9%. Electricity and water are essential for ventilation, pumping, hoisting, cooling, processing, dust suppression and mine-water treatment, with tariff increases raising the minimum cost of maintaining production.

“Deep-level, energy-intensive and water-intensive activities are most exposed. Additionally, utility-cost increases can compress margins and affect output, employment, and remaining economic life, with the effect felt especially by junior and emerging miners and by mines in industries experiencing sustained production declines, for example, diamond mines.

“This pressure also affects capital allocation. Higher tariffs strengthen the case for renewable energy, water recycling, and efficiency technologies, but upfront capital costs can force constrained companies to choose.

“Further, rising essential costs reduce real purchasing power and can influence wage expectations and demand for support. Pressure is strongest when essential prices rise faster than wages, increasing calls for transport, housing and other assistance.

“Insurance and financial services prices increased by 5.4% y-o-y, contributing 0.6% to headline inflation. These services are especially relevant to mining because of the sector’s capital intensity, long investment horizons and complex operational risks.

“These services protect people, assets, production and environmental liabilities and fund working capital and projects. Higher premiums and financing costs increase current expenditure and reduce investment affordability, especially when infrastructure damage, theft, illegal mining, or production interruptions tighten cover and security requirements,” the Minerals Council report pointed out.