INTERIM REPORT

DEMANDING THE IMPOSSIBLE? PLATINUM MINING PROFITS AND WAGE DEMANDS IN

CONTEXTAndrew Bowman and Gilad Isaacs1

MAY 2014

Abstract

This is an interim public interest report on platinum mining financials with three aims. First, it seeks to set the current industrial conflict in the sector in a longer-term context of value produced by the three largest platinum miners, Anglo American Platinum, Impala Platinum and Lonmin, and its subsequent distribution. In doing so, it poses questions over whether the mining workforce and South African society have benefited enough (and could benefit more) from the country’s mineral wealth. Second, it seeks to set the cost of current wage demands made by the Association of Mineworkers and Construction Union (AMCU) in this context. Strike action by AMCU in the platinum sector has continued for over four months, but public debate on the strike has been narrowed by the foregrounding of certain sets of financial data to the exclusion of others. This paper was written with the intention of broadening the debate. Third, it suggests that the strike highlights longer-term policy issues which require urgent attention.

1 The authors are contactable on: Andrew Bowman (CRESC, University of Manchester, visiting researcher, Political Studies, WITS): andrew.bowman@manchester.ac.uk and Gilad Isaacs (PhD candidate, SOAS, University of London and part-time researcher, CSID, WITS): gilad.isaacs@gmail.com or 082 786 2473.

Acknowledgements:

Thanks to Paul Jourdan for advice and insights, Dick Forslund for wage data and advice, Sukhdev Johal for advice on accounts, Gavin Capps for feedback, advice and a contribution and Nicolas Pons-Vignon who was part of the conceptualisation of the report. All mistakes are the sole responsibility of the authors.

EXECUTIVE SUMMARY

1. This is an interim public interest report on platinum mining financials with three aims. First, it seeks to set the current industrial conflict in the sector in a longer-term context of value produced by the three largest platinum miners, Anglo American Platinum, Impala Platinum and Lonmin, and its subsequent distribution. In doing so, it poses questions over whether the mining workforce and South African society have benefited enough (and could benefit more) from the country’s mineral wealth. Second, it seeks to set the cost of current wage demands made by the Association of Mineworkers and Construction Union (AMCU) in this context. Strike action by AMCU in the platinum sector has continued for over four months, but public debate on the strike has been narrowed by the foregrounding of certain sets of financial data to the exclusion of others. This paper was written with the intention of broadening the debate. Third, it suggests that the strike highlights longer-term policy issues which require urgent attention.

2. The mining companies have portrayed themselves as cash-strapped and struggling, with their shareholders suffering low returns and their wage bill spiralling out of control. This is not false, but it is selective because it applies only when viewing company data through a narrow timeframe focusing on the last few years, during which companies have been hit by the global recession and lengthy work stoppages. If one takes a longer-term view, the picture is much more complicated because the mining companies were highly profitable during the global commodities boom of 2000-2008. Operating profit margins were 37%, 44%, and 41% for Amplats, Implats and Lonmin respectively, compared with a JSE top 40 average of 16%. The annual return on investment (free cash flow / capital expenditure) averaged 76%, 129% and 76% for Amplats, Implats and Lonmin respectively, whereas, according to the recent Strategic Intervention in the Mining Sector report commissioned by the ANC in 2012, 15% should be considered a maximum rate of return for mining in South Africa, after which mining returns should be heavily taxed.

3. During the 2000-2008 boom period, shareholders benefited from dividend payouts, share buybacks and capital returns totalling just under R165bn in constant prices.2 But despite the high profitability of the sector and rising wages, labour’s share of the economic value produced was low. Between 2000 and 2008 labour at the three large platinum producers only received 29% of value added produced, considerably lower than the average for the South African economy as a whole over this period (50%) and below the OECD average of 52%. At the same time, 61% of value produced went to profit, with just under half of this (28% of total value added) distributed to shareholders. These disparities are less extreme when viewed over the full period of 2000-2013 as the global crisis and recession (amongst other factors) hit platinum prices and profits. However, during this longer period the average returns are still impressive, distribution

2 All monetary figures quoted in this report have been adjusted to constant 2013 prices using South Africa’s Domestic Producer Prices index - Mining and quarrying activities, sourced from the OECD.

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to labour comparatively low and distribution to shareholders high. Unfortunately a long term perspective on returns is not compatible with contemporary corporate culture, which is locked into narrow short-termism in pursuit of shareholder value, and this is part of the problem.

4. The second part of the report analyses wage demands made by AMCU and wage offers made by the three major platinum mining companies. The wage offer made by the companies far more modest than claimed: while certain aspects of the pay package, for certain grades of workers, would increase significantly, The average percentage increase in TCTC (for A, B and C level workers combined) is estimated at 8.6% per year for Amplats, 8.9% per year for Implats and 7.7% for Lonmin. Considering that consumer price inflation is around 6%, and that inflation in the prices of goods consumed by the working poor can be considerably higher, the proposed increase is unimpressive in light of the poverty which afflicts communities on the platinum belt. It would leave workers well below the basic wage of R12,500 demanded by AMCU.

5. In order to meet the R12,500 wage demand made by AMCU in the four year period demanded by the trade union, increases of either a nominal amount of R1,800 per year or percentage increases of between 21% to 26% per year, on basic wages are needed. However, when all three wage bands are considered the yearly percentage increases in the overall cost to company range between 13% and 15%.

6. The report asks the question of how significant these wage demands are in light of past profits achieved by the mining companies. It provides a counterfactual calculation, which shows, using profits achieved over the previous fourteen years (which saw both a boom and bust) that the additional yearly burden of paying AMCU’s wage demands (as compared to wages rising at the rate of inflation) comes to just 18%-20% of Amplats’ average annual distribution to shareholders, 19%-22% of Implats’ and 46%-55% of Lonmin. There is a considerable difference, therefore, of what the wage increase means for Amplats and Implats compared with Lonmin. The fact that Lonmin would be harder pressed to meet the demand is observable in a number of places throughout the report.

7. In principle, if and when a rebound in the sector occurs, distributions to shareholders could be decreased in order to cover wage increases. The reality of the situation is not so simple though, because dividends vary according to profitability, while wages are a recurring cost. Furthermore, uncertainty over the platinum price, global demand conditions, ore grades and cost of production cast doubt on whether the boom of 2000-2008 can be repeated. Other avenues for sharing the benefits derived from commodity booms and creating greater stability in the sector may need to be explored.

8. One such mechanism is a Resource Rent Tax (RTT) which would be activated during commodity booms. This means that profits earned above a fair rate of return on investment3 (15% has been proposed as a rough threshold providing a more than fair margin above the risk free rate) would be heavily taxed. This allows companies to

3 In this case calculated as free cash flow over annual capital expenditure.

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comfortably remain profitable while a greater share of the benefit of the country’s mineral wealth is directed towards South Africa’s developmental challenges.

9. This said, a RRT does not directly deal with distributional issues (between capital and labour) nor directly ameliorate the often dire living conditions faced by miners, and therefore would not on its own bring stability to the sector. A living wage, something that the structure of the South African labour market has prohibited, is a social necessity. It is crucial that policy and wage interventions are coordinated in order to achieve workable and lasting solutions.

10. Other policy issues are also considered in the report. A higher wage structure is could drive companies to attempt to mechanise some of their operations. This is far from a straightforward process as Lonmin’s failed prior attempts at mechanisation illustrates. Notwithstanding this caution, some level of mechanisation is a possible outcome of growing labour costs. Mechanisation is not necessarily bad for South Africa, but it would have to be managed. What is needed is coherent industrial policy that harnesses South African mining for broad-based job-creating growth in manufacturing. This can be done via forward linkages, like downstream mineral beneficiation, backward linkages, crucially building a capital goods sector to supply mines, knowledge linkages, for example investing in R&D, and spatial linkages, such as using mining infrastructure for the benefit of those nearby. In this way the mining sector can generate an industrial structure that can create jobs. Without an industrial policy in this area – and specifically one imposing local content requirements – mechanisation would likely proceed through imports from foreign manufacturers.

11. What the strike throws into sharp relief is the need for both improved wages and conditions and a managed, orderly restructuring of the sector. An unmanaged transition to higher wage structures runs the risks of increasing foreign capital imports, and even chaotic sell-offs of marginal mines. Such a disorderly restructuring could mirror that of the gold industry in the 1990s, which led to a precipitous decline in investment, gold extracted and employment on the mines which has not abated despite a booming gold price from 2005 onwards.

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1 INTRODUCTION

On Thursday 23rd January 2014 around 70,000 workers at South Africa’s three largest platinum miners – Anglo American Platinum, Impala Platinum and Lonmin – began strike action for higher wages. At the time of writing the strike is on-going, with the Association of Mineworkers and Construction Union (AMCU) – a recent challenger to the established National Union of Mineworkers (NUM) – and the mining companies at loggerheads. Workers’ demands have centred on achieving a R12,500 per-month ($1170) entry-level basic wage – more than double current levels. 4 The strike is now entering its fourth month. While, at the time of writing, the mining companies have failed to convince their employees to return to work, they can take some consolation from their success in shaping public discourse through a highly effective PR campaign. From the Presidency to the Congress of South African Trade Unions (COSATU) to the newspaper editorial columns, the Association of Mineworkers and Construction Union’s (AMCU) actions have been written off as greedy, irresponsible and above all unrealistic.

Debates on the platinum strike have played out through a foregrounding of certain sets of financial data and the exclusion of others. Central to this process has been the industry-sponsored website, platinumwagenegotiations.co.za. Among its salvo of digestible factoids, it addresses the issue of sector profitability with a two-year snapshot covering 2012 and 2013 (Figure 1).

Figure 1: Snapshot of Platinum Sector Profitability

Source: Platinum Producers. “Comparative Wages: Mining Industry vs. Non-Mining Industries.” Platinum Wage Talks, 2014.

4 The total employment package is made up of the basic wage (approximately 60%), a living out allowance (approximately 20%), and pension, medical, holiday pay and other allowances (approximately 20%).

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In this context of cash losses throughout the sector, higher wages – a cash cost – are easily framed as demanding the impossible. Meanwhile, the meagre sliver of dividends paid out to investors serves to illustrate the parsimony and self-sacrifice of the owners of capital relative to the large and expanding cost of wages and salaries.

The purpose of this report is not to assess the feasibility of AMCU’s demand for a R12,500 starting salary. This requires complex modelling of future global demand trends and operating costs on the mines, which this report does not contain but which are available from other researchers and are discussed below.i

Rather, the paper seeks to broaden the terms of the debate by setting the issues of wages and profitability in a deeper historical context, highlighting in particular the scale of the returns which accrued to shareholders through the boom years of 2000-2008. It should be noted that the platinum companies did not create the conditions for these extraordinary profits, they were derived from surging global demand for commodities which resulted in a form of rent based on the scarcity of platinum – of which South Africa has approximately 80% of the world’s reserves.5 The paper firstly suggests that the intensity of the workers’ grievances needs to be understood against a backdrop of super-profits from which labour – and indeed the South African public more broadly – gained too little. The irresponsible greed, of which impoverished mine workers on the platinum belt are now accused, was arguably exhibited in the lavish distributions to shareholders during this period. Secondly, the paper signals the need to explore more ambitious, far-reaching policy solutions to the problems of South Africa’s minerals sector which the platinum strike has brought into sharp relief:

i. Ensuring a greater proportion of resource rents accrue to South Africa and its developmental challenges during boom periods through taxes on profits achieved above certain thresholds (e.g. a Resource Rent Tax, RTT).

ii. Ensuring a greater degree of resilience during bust periods through greater state involvement in platinum marketing, because with 80% of the world’s reserves South Africa should not be a price taker.

iii. Ensuring that the transition to higher wage levels and potentially lower labour intensity (through mechanisation) in the platinum sector is orderly and achieves maximum benefit for South Africa.

The final point, we feel, is of particular importance. The platinum sector’s ability to draw cheap labour from impoverished communities for dangerous and unpleasant work appears to be at breaking point. The transition heralds opportunities as well as threats. Mechanisation is far from the

5 Economic rents refer to “excess returns” over and above “normal” returns which would be generated in competitive markets. “Resources rents” are such excess returns which accrue purely because your product is a finite natural resource. “Scarcity rents” occur when excess returns are made because the product / commodity demanded is in scarce supply (as is often the case during commodity booms).

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certainty some commentators seem to suggest because geological conditions present major technological obstacles in many areas. As is discussed later in the report, Lonmin’s attempt to mechanise large parts of its operations during the 2000s boom were subsequently abandoned. Insofar as mechanisation is feasible it will displace labour, but it could also create new, higher-skilled jobs in the supply chain if accompanied by suitable industrial policy. An unmanaged transition to higher wage structures could involve foreign imports of equipment and a chaotic sell-off of marginal mines. Such a disorderly restructuring could mirror the chaotic restructuring of the gold industry in the 1990s that led to a precipitous decline in investment, gold extracted and employment on the mines which has not abated despite a booming gold price from 2005 onwards. ii

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2 QUALIFICATIONS: THE SCOPE OF THE REPORT

Scope: What this report does not do is provide a definitive answer for the question of whether or not AMCU’s wage demands are affordable. The purpose of the report is to provide some missing historical context to the on-going public debate on the platinum sector.

Supply, demand and the future of the market: Whether particular wages are affordable or not depends on the prices of platinum-group metals (PGMs), which are influenced by complex global factors. The crucial demand factors are the state of the global economy (in particular major buyers in the European automobile industry), the price of substitutes (in particular, palladium), and the development of new usages. On the supply side, in addition to wage levels one must consider ore grades and the (in)accessibility of reserves, the costs of mechanisation, and increasing retrievals of platinum through recycling.

As mentioned above, this report does not attempt to provide new evidence on future demand for platinum. This is an arena of considerable debate. On the one hand, the platinum producers and the Chamber of Mines’ Chief Operating Office, Roger Baxter, paint a bleak picture. They have referenced poor growth in the United States and Europe, a slowdown in the Chinese economy, increased platinum recycling, the substitution of platinum for other metals and sluggish growth in the jewelry sector all contributing to low global demand. On the other hand, the highly respected Johnson Matthey Platinum 2013 Interim Review predicted that gross demand for platinum would hit a ‘record high’ within the year, spurred by ‘a strong recovery in sales to industrial users and unprecedented offtake by investors’ with ‘little overall growth in recycling’. Amplats CEO, Chris Griffith, told an investor conference call in February 2014: ‘We see industrial growth driving short and medium-term deficits in platinum that should drive price recovery as the supply remains constrained.’ The Johnson Matthey report explains that industrial demand and investment ‘will more than compensate for a slight fall in purchases by the jewellery and autocatalyst sectors’. Lonmin’s Chairman Roger Phillimore concurs, expressing that ‘Lonmin has confidence in the future demand for PGMs and our expectation is for prices to firm in the future’. All these sources acknowledge that there is a significant deficit expected between platinum available (supply) and demand in the near future.

While uncertainty remains, these expectations of an upswing in the industry in years to come reinforce a fundamental point of this paper that the industry must be assessed on a longer term basis.

Data: The company accounts data is available through annual reports and financial databases. However, the current wage levels of the various classes of miners and the numbers of miners in each class is not. The platinum producers should be far more forthcoming with this data, sharing it with both the wage negotiators and the public. Similarly, they should provide details on both their projected returns and their calculations as to the impact of wage demands. This would allow an informed debate to take place in which the affordability of the demands could be analysed. The wage data used in this report is taken from wage-offer disclosures, data given to AMCU by the mining houses (and passed on to the authors) and a number of other official sources; this is discussed in section four.

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Time Period: The time period over which the analysis is conducted matters a great deal (as shown in section three). This is because platinum prices and demand are cyclical and influenced by a range of shifting global-economic, geophysical and technological factors. If we were to take the last financial year (or even the last three or four) financial years as indicative of platinum mining profitability then the wage demands appear unaffordable as the companies in question have for the most part either been loss making or close to it. However, this period is one of lowered global demand, strikes and lower commodity prices. If we consider both the upswing (1999/00 to 2007/08) and the downswing (2008/09 onwards) then the picture is quite different. The report seeks to set the current discussions of mining company profits within this context. 2000 was made the start year because this was the earliest date from which all of the three largest platinum miners made accounts available for download on their websites.

Aggregation: The figures provided here relating to value added produced and its subsequent distribution are assembled from group-level financial data provided in company accounts. Aggregation obscures much of the detail relating to costs and profitability within the mining companies, which varies on a mine by mine basis. We acknowledge that our aggregations of the three companies obscures important differences between them: Lonmin has faced more acute financial difficulties in recent years, while Implats has substantial operations outside of South Africa. The aggregates are intended to provide a broad rather than definitive view on the largest companies in the sector, and provide an entry point to a discussion.

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3 COMPANY ACCOUNTS

As of 2013 platinum mining was the single largest mining sector in South Africa accounting for 31% of total mining market capitalisation. According to PWC, Anglo American Platinum (Amplats) and Impala Platinum were the second and third largest mining houses listed in the country. Lonmin is the ninth largest mining house in the country by market capitalisation, but its primary listing is in the UK.iii According to figures in their respective 2013 company accounts, Amplats employed just under 50,000 people, Implats around 43,000 people, and Lonmin just over 27,000.

The three major platinum mining houses have argued forcefully that they are struggling to achieve profitability. The media briefing they released on 19 February 2014, which has set the terms of public debate, contained the graph shown in Figure 1. In this graph they show a cash loss for the sector of over R4bn for 2012/13 and meagre dividends of just over R100m. As with most figures provided by the website, the composition of these figures is not clear. In any case, this is only a snapshot of an exceptional period of strikes and lowered demand from the Eurozone crisis. Omitted from this picture is the glut achieved over the preceding decade.

As can be seen in Figure 2a the platinum price began a steady rise from 2002 onwards, but fell precipitously (in 2008) following the global financial crisis and ensuing recession.

Figure 2a: Platinum Price (1992-2013) US$ per ounce

Source: Kitco

The rising price of platinum – and the other PGMs – during this period made the platinum producers highly profitable. Abnormally high profits earned in the natural resources sector during boom

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periods come by virtue of control over a scarce resource – more akin to a rental income than an income achieved through conventional competitive enterprise.

The platinum price has subsequently returned to around pre crisis-levels, and as mentioned above, many industry analysts, and indeed the Amplats CEO, have said they expect price rises in the medium to long-term. However, the profits of the three major platinum producers have continued to fall, as displayed in Figure 2b. Blame has been pinned on increased costs of production, and in particular labour costs, which have continued to rise throughout the crisis.

Figure 2b: Revenue and Operating Profits for Three Major Platinum Producers6

Source: Company Accounts

The high levels of profit achieved during the boom are recorded in a number of indicators, the first of which being the three major companies’ operating profit margin (the surplus produced after the costs of purchases and labour used in production), which as Figure 3a shows were over double the

6 All monetary values stated in the report have been adjusted to constant 2013 prices using South Africa’s Domestic Producer Prices index - Mining and quarrying activities, sourced from the OECD.

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Johannesburg Stock Exchange Top 40 (an index of South Africa’s 40 largest companies by market capitalisation) average of 16%, and triple the median of 13%.

Figure 3a: Operating Profit Margins (%), Platinum vs. JSE 40 (2000-2013)

20002001

20022003

20042005

20062007

20082009

20102011

20122013

-20.00

-10.00

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

AMPLATS IMPALA LONMINJSE 40 Ave JSE 40 Med

%

Source: Thomson Reuters Worldscope

Figure 3b shows return on investment.7 In this case, research commissioned for the ANC’s 2012 SIMS report concluded that a 15% threshold should be applied to the sector as a maximum rate of return reasonable rate of return (assuming a risk free rate8 of around 8%) above which government should apply additional taxes (discussed in section six). As Figure 3b illustrates, the three major platinum mining companies achieved well in excess of this for most of the years since 2000.

Figure 3b: Return on Investment (%) (2000-2013)

7 Calculated in this instance as the free cash flow produced by a company in relation to the cash cost of capital spending, in line with the method used in the SIMS report and other international efforts to calibrate resource rent taxes.8 The risk free rate is calculated using the Treasury Long Bond rate.

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20002001

20022003

20042005

20062007

20082009

20102011

20122013

-150%-100%

-50%0%

50%100%150%200%250%300%350%

Amplats ImplatsLonmin SIMS Approx Recommend

%

Source: Company Accounts

The averages for both the operating profit margins and return on capital are given in Table 1. The returns made by the platinum companies are astounding. Note that even if one takes the period as a whole the platinum producers significantly outperform the market.

Table 1: Average Operating Profit Margins and Return on Capital (%) for Three Major Producers for Three Time Periods

Source: Company Accounts

The other lens through which to view the mining companies’ fortunes, and the one which forms of the centre of the analysis in this report, is the relative distribution of value-added produced. Value added can be defined simply as the monetary value left with the producer of a good or service after the cost of external purchases used in the production process. There are three broad competing claims on this value: from labour, in the form of wages; from the state, in the form of taxation or royalties; and from the owners of capital, in the form of profits to be retained or distributed as

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dividends. The relative bargaining power of these three constituencies determines relative shares of the value produced. 9

When we consider relative shares of value-added in the platinum sector, it is clear that platinum companies and their shareholders did extremely well over the last fourteen years, particularly in the boom period, in securing the bulk of the value added produced for profits. Labour received a comparatively small share of the benefits.10 These profits can be broken down to show how they were distributed among external stakeholders – that is, to the government through taxation and shareholders through dividends and share buy-backs.

Figure 4 displays the aggregates from across the three companies across three time periods: the 2000-2008 boom years, the 2009-2013 crisis years, and the entire period of 2000-2013. The distinction between the different periods is stark. During the boom, labour took just under a third of the value produced by the three platinum miners, with an equivalent amount taken by shareholders in dividends, share buybacks and capital returns. This contrasts with the crisis period, during which labour’s share shot to 50% and higher as profits fell.

Figure 4: Relative Share of Value Added between Profits and Labour (%) (Aggregate for Amplats, Implats and Lonmin)

9 Value added has been calculated using accounts published in the annual reports of Anglo American Platinum, Impala Platinum and Lonmin. The calculation for value added is total labour costs (including pensions, medical costs and other employee benefits as well as wages), plus profit before tax, plus depreciation and net interest costs/gain to display the share accounted for by financing activities and capital costs.10 Note that labour (as a share of value added) includes all wages. This means that it also includes professional staff (like engineers), managers and executives, for Lonmin, 2013, these categories accounted for 12.5% of the wage bill (although less than 2% of the workforce). This excludes non-wage remuneration like share options. It is therefore safe to assume that at least 10% of the wage bill is for higher-level employees.

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Source: Company Accounts

A year by year and company by company table of value added distribution is available in the appendix (Table A1), which shows some differentiation between the companies (Lonmin in particular has a generally higher labour share both before and after the crisis), but with broadly similar trends.

The first noteworthy point is that despite wage increases, workers’ took a remarkably low share of value added during the boom as low as around 20% in several years across the three companies. While platinum companies can boast of high wage-levels relative to the dismally low average of sectors such as retail and agriculture, relative distributions of value within the company matter, and on this measure worker exploitation in the platinum sector contrasts with the economy average. The OECD reports that the average labour share of gross value-added for South African non-financial firms was 50% during both periods (this is slightly lower than the average of thirty-four OECD countries reported on, which stands as 52%). iv This means that the share of value-added going to South African platinum miners was just over half that of other sectors in the South African economy.v

At the same time 60% of value produced went to profit, and just under half of this (accounting for 28% of total value added) was distributed to shareholders. Startlingly, in the case of Implats more was distributed to shareholders in dividends and share buybacks over this period than was given to the entire workforce: R47,698 million to shareholders and R43,456 million (in 2013 prices) to workers. The situation is similar at Amplats, where labour received R91,353, compared to

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R91,129million distributed to shareholders, with Lonmin at R25,691million to shareholders and R34,406million to labour.

The comparison between dividends distributed as a share of value added by the three companies and the weighted average for South African non-financial corporations is given in Figure 5a. It is clear that for the boom years (with the partial exception of Lonmin) these payouts were significantly above the average for the wider economy.

Figure5a: Dividends Distributed as a Percentage of Gross Value Added11

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

120.00%

Average (NFCs) AmplatsImplats Lonmin

Source: Company Accounts and SARB Macroeconomic Timeseries

Figure 5b shows dividends as a percentage of earnings per share, comparing the Amplats, Implats and Lonmin with the average and median of the JSE Top-40. This percentage figure essentially shows how much of their net earnings companies decide to pay out, and how much they decide to retain. Again, the platinum companies appear relatively generous, frequently well above the mean and the median for the JSE.

Figure5b: Dividends Distributed as a Percentage of Annual Earnings

11 The South African Reserve Bank’s GVA does not include taxes therefore taxes have been removed from the companies’ GVA before calculating this figure.

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20002001

20022003

20042005

20062007

20082009

20102011

20122013

0.00

20.00

40.00

60.00

80.00

100.00

120.00

AMPLATS IMPALA LONMINJSE 40 Ave JSE 40 Med

%

Source: Thomson Reuters

Besides dividends, another aspect of shareholder returns which needs to be considered is capital gains. The share price for the three companies is show in Figure 5c together with the JSE Top 40 average, demonstrating the enormous outperformance of the platinum miners relative to the index. One other mechanism which executives used to boost stock prices and pass cash back to shareholders is share buybacks, with Implats and Lonmin each spending R2,397millions and R3,099million (in 2013 rands) respectively.

Figure 5c: Share Price of Amplats, Lonmin and Impala compared to JSE top 40 (Weekly, rebased 2000 = 100)

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01/07/2000 6/22/2001 12/06/2002 5/21/2004 11/04/2005 4/20/2007 10/03/2008 3/19/2010 09/02/2011 2/15/20130

200

400

600

800

1000

1200

1400

JSEAL40 AMS-JO LON-JO IMP-JO

Source: Reuters Datastream

What is the relevance of this data? The surpluses of the boom have gone and cannot be clawed back, and it remains unclear whether the conditions of 2000-2008 can be repeated. This distributional history nonetheless matters in two key ways.

1) It sheds light on one of the main underlying economic causes of worker discontent and the rise of AMCU. Combined with continued poor living conditions on the platinum belt, anger over low wages and large pay differentials between workers and management has acted as a catalyst for increased labour militancy. While the companies can rightly argue that wages increased over this period, as this analysis shows, as a share of the value produced, gains for labour look much less impressive. These distributional issues have combined with rising costs of living and pressures on the social reproduction of labour. Wages for lower-level workers have remained low relative to these rising costs– as briefly discussed below in the section on the living wage. The difficulty from the perspective of the workers is that demands are being pressed during a slump in demand for platinum and company profitability, rather than during the boom years when demands could have been accommodated more easily. This highlights the roots of discontent with the role of the NUM, the dominant union in the platinum sector during this period. It adopted what could politely be described as a compliant approach to relations with management, leading workers to migrate to AMCU which promised to better pursue their demands.

2) The second point relates to the gains accruing to South Africa. The portion of value added paid out to shareholders was high during the boom period. Given the international character of shareholdings in these large mining houses a substantial portion of these dividends were paid to non-residents and hence left South Africa.12

12 In the process of the restructuring of the South African economy in the 1990s South African firms were allowed to list on overseas stock exchanges. Amplats, Implats and Lonmin are all solely or jointly listed on the London Stock Exchange (LSE). This, and the internationalisation of their parent companies (for example Anglo

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Populating the list of the top 50 shareholders for Lonmin, for example, are foreign state funds including the Government of Norway, the State of California, the Merseyside Pension Fund and numerous overseas financial institutions including Credit Suisse, Blackrock, Barclays and JP Morgan. When considering domestic investors we must note that the most unequal distribution of wealth in South Africa is financial wealth (holding of shares and other financial products); whereas the Gini coefficient for income is 0.699, it is 0.951 for financial assets.13vi Prioritising distributions to shareholders thus greatly exacerbates local inequality. High returns, in theory, reward high-risks and innovative companies which create new goods or services which nobody else supplies. But commodity-producing companies (like the platinum mines) do not create such booms. It is not due to some special effort, skill or technological innovation on their part, it is predominately because demand for that scarce commodity increases on the back of global economic factors and they are positioned to extract the rents through a potent combination of cheap migrant labour and virtual monopoly over the mineral resource. The platinum strikes should give pause for reflection on the means South Africa has at its disposal to ensure that a greater share of value in periods of high profitability goes toward ameliorating South Africa’s onerous developmental challenges rather than filling the pockets of foreign shareholders and the wealthy minority domestically.

These developments should be understood, in part, as a manifestation of domestic and global “financialisation”, one facet of which is companies’ tendency to prioritise short-term shareholder value maximisation. This can be seen in the massive sums distributed as dividends or used for share buybacks. Related to this is the trend for a substantial portion of executive remuneration to take place through share options, or bonuses based on share performance, which means that executives have a direct stake in short-term shareholder value maximisation. The financialisation of the South African economy is a key contributing factor towards its general malaise.vii

American) or the presence of foreign stockholders means that a large volume of dividends and equity gains accrue to shareholders outside of South Africa. These funds are generally not reinvested in the South African economy. 13 The Gini coefficient is a standarised global measure of inequality ranging from 0 to 1, with 0 the most equal and 1 being the most unequal.

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4 A FULLER PICTURE

At this point we pause to note that there are a number of avenues for future research that should be pursued to supplement the data in this report.

Some account of government and union policy towards (different kinds of) mining and manufacturing in the commodity boom years would provide greater context to the overall analysis.

The analysis of the platinum producers (section three) should ideally include a focus on trends affecting their physical operations, most importantly changes in ore-grades, and cost structures. Future research should also include a product market analysis, including projections of future demand from key industries and new sources of supply for PGMs. This would enable an analysis of why profitability has failed to recover from the strike despite a partial rebound in PGM prices.

Another avenue of research is the pressures towards shareholder value maximisation that have been brought to bear on mining management, and the impact of other facets of financialisation on the platinum industry. Most notably this would include the growth of Electronic Trade Funds (ETFs), essentially the purchase and holding of PGMs for speculative purposes (this has shot up, particularly after the launch by ABSA of a rand traded EFT, to 9% of global platinum demand in 2013).viii

It would also be worthwhile to model the fiscal implications of the Resource Rent Tax discussed below and situate wage demands within this context. How the various interventions would impact profit smoothing and sharing alternatives, including for differently placed companies, could also be modelled.

The analysis of labour should ideally include an analysis of labour productivity, taking into account changes outside the control of labour (for example degraded ore grades), and trends in the relative labour intensity of mining. It should also ideally compare labour costs and labour productivity in platinum mining with mining and industrial sectors.

5 LABOUR

As noted in section two, comprehensive data on wages is difficult to come by. This section relies on data provided to AMCU at the start of the wage negotiations and provided to the authors by the

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Alternative Information Development Centre (AIDC),14 the Lonmin 2013 EEA4 form submitted to the Department of Labour also obtained from AIDC, the Lonmin 2012 wage settlement agreement, ix the companies’ various 2013 Social Development Reports, the various wage offers made by the companies and information readily available in the press. Various extrapolations have been made using this data. The figures may not be exact, but given the available data they are a reasonable estimate of the costs involved. Further, the percentage increases will be more accurate even if the gross amounts are slightly off. The data, calculations and methodologies used are available upon request.15

We should begin by noting that the wage offers made by the mining houses are less generous then they would have the public believe. Using What the offer means for you in real money pamphletsx and the public pronouncement on what the offer means for average wages in different wage bands16xi we calculate the average percentage increases for workers in the various wage bands. The platinum producers have not made sufficient data available to enable this analysis with great accuracy. They have only made explicit what the offer means for the lowest paid. Even then aspects of the offer are not clear, for example, they have suggested but not guaranteed the backdated increase, and have differentiated in how much would be received by striking and non-striking workers. They have also not indicated whether the backdating would apply to other wage bands. The latter has both a material impact not only the cost that would be incurred by the backdating but also by determining what the package as of June 2014 would be, upon which further increases would be made. Our findings in this regard are therefore highly provisional. We took the most generous possible interpretations of these offers and discovered that the impact on the total cost to the company (as a consequence of their offer) were rather modest.

The percentage increases to the basic wage are high (7.5% to 11.2%) but increases to the total package are more modest (6.2% to 10.1%). Within the total package, increases to the lowest pay-grades are more generous (8.2% to 10.1%) than to those in higher grades (6.2% to 7.5%).17 A strong case can be made for increasing the sums given to the lowest paid by a higher percentage. However, when you aggregate the increases, over A, B and C level wage bands (with A being the lowest wage-band of the striking workers and C being the highest) and take into account the number of workers in each category, then one can see that the impact on the total wage bill appears less dramatic.

14 Thanks to Dick Forslund at AIDC for the data and assistance.15 We imagine that the platinum producers may contest our figures. If this is the case then we challenge them to make public the necessary data to improve the accuracy of our calculations.16 Company announcement 24 April 2014: “The settlement offer tabled by the producers on Thursday, 17 April 2014, would see the minimum cash remuneration (comprising basic wages and holiday, living-out and other allowances) for entry level underground employees rising to R12,500 per month (R150,000 per annum) by July 2017. For Lonmin employees this reflects an increase in cash remuneration for the highest-paid employees of 7.5% and an increase for the lowest earners of 9.5%. For Amplats and Implats employees, this is an increase in cash remuneration of 7.5% for the highest-paid employees and an increase of 10% for the lowest earners. This revised offer is one of the highest increases anywhere in the sector and the country.” 17 There are two anomalously high increases of 15% and 17% to both basic wages and total package for the lowest paid for the last two years by Amplats.

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Table 2: Percentage Increases to Total Wage Bill given the Increases to Individual Wage Bands in the Platinum Producers 17 April Wage Offer18

Source: Calculated using Company Data (provided to AMCU and passed onto authors)

Table 2 shows that the average percentage increase in TCTC (for A, B and C level workers combined) is estimated at 8.6% per year for Amplats, 8.9% per year for Implats and 7.7% for Lonmin. Considering that inflation is expected to average around 6% this is not considerably more than if increases were benchmarked to inflation.19 Recall, this is the most favourable interpretation of the offers, it is likely that the actual impact on the wage bill is, on average, half a percentage point lower for the producers. One should also note that miners in order to maintain their standard of living require above inflation increases as inflation in the price of goods consumed by the working poor is frequently higher than the total rate of inflation.xii

In this light we draw two important conclusions. First, the percentage increases on the total package offered (except to the very worst paid) are modest and only likely to provide a slim real-terms wage increase for the striking miners. The nominal average basic wage for A-level employees by July 2017 (R9,544, R9,260 and R8,916 at the three companies) remains well below the R12,500 demanded by

18 Lonmin’s current wages are higher and so the percentage increases for Lonmin are lower than for Amplats and Implats. Amplats, despite having the lowest basic entry-level wage, has far fewer A-Level workers (who would receive the highest increases) and so their overall percentage increases are lower than Implats. The “Total” column is the percentage difference between the 2017/18 wage and the current wage. The difference between the cumulative increases and the compounded inflationary increases are heightened because the offer involves five iterations of wage increases (because it includes a backdated increase) whereas the inflation-based comparison only includes four iterations (one for each year). It is not clear that the backdated increase would apply to all workers. By including it here for all wage bands we present the most generous interpretation of the producers’ offer.19 Comparisons with inflationary increases are made throughout this and the next section. While inflation is expected to rise to as high as 6.5% in the short term it is expected to then drop to just under 6%, for this reason a constant inflation rate of 6% has been used unless otherwise stated.

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AMCU (see Table A4 in appendix).20 Second, once account is taken of all three categories of workers the impact on the total cost to the company of the offered increases is not drastic.

The same calculations are provided (in Tables A5 through A7 in the appendix) for the demands that AMCU is making. These can be assessed with greater accuracy as we know the basic salaries and the demands made.

Recall that AMCU’s current position in the negotiations is to demand an increase that will bring the basic wage of the lowest paid workers to R12,500 by July 2016. There are two ways that the basic wage can be increased to R12,500.

The first is by increasing the amount by a constant nominal amount each year. The authors have been informed that this is what AMCU is currently pressing for. The amount demanded is a R1,800 increase to the basic wage each year for four years for all workers in wage bands A and B, and increases to the basic wage of C level workers by 8.5%, 8%, 7.5% and a still to be negotiated fourth percentage increase, over the four years (we assume the fourth year to be 7.5%). Other aspects of their package will increase at the rate of inflation (6%). The implication of this approach is that the increase – as a percentage – will be higher in earlier years and then decrease as the years go by because the wages are lower in the earlier years and thus R1,800 represents a higher percentage increase.

The second is by increasing the basic wage, not by the same nominal amount each year, but by a fixed percentage in order to reach the R12,500 target. To achieve this, percentage increases to the basic wage for the lowest paid will need to be between 21% and 26%, and in the total package between 16% and 17.5% (see Table A5 in the appendix). What this means in nominal terms for the miners is given in Table A7 in the appendix.

Irrespective of the method used, the percentage increases to the basic wage are not representative of the percentage increases to the package as a whole because other aspects of the package (excluding the holiday allowance / 13th cheque and Lonmin’s attendance allowance) increase only at the rate of inflation (6%). In addition, the increases on the higher paid are more modest and this means that the total percentage increase on the cost to company (for the three bands) is lower than for the lowest paid viewed in isolation. The percentage increases for each band is given in Table A5

20 The overall percentage increase in the total cost to company (TCTC) between the current TCTC and that for 2017/18 is also given in Table 4. This assumes that all levels receive increases for four years on top of the backdated increase (that is, five iterations of increases Y0 – Y4). Also shown is what the percentage increase in TCTC (in nominal terms) would be if wages were increased simply in line with inflation at 6% or 7% a year. This is lower also because it does not assume a backdated increase and therefore is calculated over four, not five, time periods.

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in the appendix. The percentage increases on the total wage bill (for all three bands combined) is given in Table 3 below.

Table 3: Percentage Increases to Total Wage Bill given the Increases to Individual Wage Bands based on AMCU Wage Demands

Source: Calculated using Company Data (provided to AMCU and passed onto authors)

We see in Table 3 that the demands amount to an increase in the wage bill (of these three bands taken together) of between 13% and 15%. There is no doubt that the AMCU demands amount to a significantly higher percentage increase than the companies’ offer. However, it is also clear that these are far lower than the mining companies are making them out to be. The mining houses claim that “this revised demand translates into an average annual increase of between 30% and 40% year-on-year and remains unaffordable,” is patently false.xiii

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6 AFFORDABILITY

This section poses a counterfactual and uses the previous fourteen years – making use of historical company financial data presented in section three – as a yardstick to judge affordability.

However, it should be noted that the question of affordability is not only a technical one but also a political one. Judging by media reports (from insiders in the negotiation process) there have been a number of instances where the political arithmetic has been more important than the numerical arithmetic. Economic analysts at AIDC have reported that the Chief Financial Officer at Amplats stated (on 22 April 2014) that a total increase of the wage bill for A, B and C level workers of R1billion is affordable. AIDC projects that increases based on AMCU’s demand to be in the region of R1.3billion and suggests that negotiations taking place in good faith could close the gap.xiv John Capel, executive director of the Bench Marks Foundation, reported that negotiations in the middle of May were making progress until the intervention of a senior Chamber of Mines official, after which the mood changed and negotiations stalled.xv It would not be surprising if representatives of the broader mining industry were concerned that if the platinum miners won, similar demands would be made in other sub-sectors (particularly given the way that the R12,500 wage-demand generalised into gold, chrome and coal during the 2012 strike wave) and that additional pressure was thus being placed on the platinum producers to hold the line against significant wage increases.

6.1 ADDITIONAL COSTS VS. PREVIOUS PROFITABILITY

As has been repeatedly stressed projecting affordability is a fraught process (see section two). Here we use a backward looking approach for an indicative answer. Our procedure is as follows:

1. We pose a hypothetical using the distribution of value added over the last fourteen years as a point of comparison. This is strictly for the purposes of a counterfactual analysis because, for a number of reasons, costs and revenue in the future could be substantially different.

2. Obviously the mines would need to pay wages irrespective of the current demands. What we calculate is the extra amount that would need to be paid over and above what would be paid if costs rose in line with inflation.

3. Our data from the past fourteen years has all been adjusted so that the amount given is the equivalent to what it would be worth in 2013 (our base year). We do the same for our projected increases, converting the increased wage bill into 2013 rands.21

21 When one wants to compare actual rand amounts (called “nominal” amounts), and not percentages, then it is necessary to account for inflation (or else a nominal amount ten years ago might appear much smaller than one this year even though when it is appropriately inflated it is larger). This is done by inflating or deflating all amounts against a base year. Here the base year is 2013. When looking backwards it is easy to do this using consumer price index (CPI) data. When one tries to project forward it is necessary to deflate the nominal amounts projected to your base year; this has been done assuming a stable inflation rate of 6%.

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This is shown in Table 9 where we compare the increased wage bill with what it would be if wages simply rose in line with inflation. We show what the total difference is over the four years in question, and what the average difference per year is, for AMCU’s current demand. The crucial column is that labelled “difference” which is the contribution to the wage bill in excess of inflationary increases.

Table 4: Total Cost to Company of Increases for Next 4 Years (Millions of 2013 Rands) based on AMCU Demands

Source: Calculated using Company Data (provided to AMCU and passed onto authors)

Interestingly, there is a difference of approximately R600million between the two approaches (laid out in section four). This is because the percentage increases more closely target the specific figure of R12,500 and can be adjusted more easily for each company.

We now continue the analysis by:

4. Using our data from the last fourteen years we calculate the average distribution of value added per year. The distribution of value added is divided between: profit (that can be invested), labour costs, dividend payouts, depreciation/interest and taxation/royalties. If labour costs are increased then it must come at the expense of other revenue, that is the amount which can be distributed as dividends, used for share buy backs, paid as taxation or kept as retained earnings.

5. We then compare the “extra” cost incurred by the wage increases against the distribution of value added.

This comparison is shown in Table 5. We also represent this extra cost as a percentage of funds distributed to shareholders over an average four-year period.22 The extra costs might not all 22 We note that wage increases made over these four years would have a lasting impact on the long-term wage bill for the producers because further inflationary increases in the following years would be made off a higher base than if the demanded increases had not been instituted now. Following the same logic described

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manifest as reduced dividends but this is the simplest way to give an indication of what sort of sacrifices would need to be made in order to manage the increased cost (this is discussed further in the next sub-section). In this hypothetical example, we see that the wage demand is equivalent to 18% or 20% of average dividends paid by Amplats over a four year period, 19% or 22% for Implats and 46% or 55% for Lonmin.23

This is shown graphically in Figure 6 – for the higher of the wage cost estimates – where the thinner slices (4%, 7% and 10% for Amplats, Implats and Lonmin respectively) are the share of value added that (in this hypothetical) would need to be assigned to wages in order meet AMCU’s demands. The original share accruing to shareholders are these thin slices, now assigned to the wages, and the new, somewhat reduced, dividend shares (19% for Amplats and Implats and 9% for Lonmin).

Table 5: “Extra” Funds (over and above normal inflationary increases) that Companies Would Need to Find to Fund Wage Increases Compared to Selected Expenditure Items over a Four-Year Period (Millions of 2013 Rands)24

Source: Calculated using Company Data (provided to AMCU and passed onto authors)

here, we could compare the distribution of surpluses over the last fourteen years to an estimated wage bill for the next fourteen years (assuming the demanded increases are instituted for the first four years and inflationary increases for the years after that) and then compare this with inflationary increases over the next fourteen years to calculate the “excess” wage cost. However, it is unlikely that no above inflation wage increases would take place for fourteen years and so this counterfactual scenario is difficult to analyse. This said, we did compute the four-year scenario and the conclusions based on our findings were not materially altered.23 The difference is greatest for Lonmin because their basic wage is on average higher and the constant increases of R1,800 do not take account of this. 24 Recall, as explained above, the dividend amounts used in these calculations are a four year share of what was paid (in 2013 rands) over the fourteen years in our sample.

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Figure 6: Share of Dividends (as share of value added) That Would Need to be Transferred to Wages to Meet AMCU Wage Demands

Source: Company Accounts and Company Data (provided to AMCU and passed onto authors)

Another way of posing the counterfactual is to ask what funds would the platinum producers have at their disposal if they had not engaged in share buybacks and had paid dividends in line with the weighted average for NFCs in the economy as a whole (show in Figure 5a).25 The wage increase could then be compared to these “excess” funds. The results are show in Figure 7. The pie as a whole represents the total spent on dividends in excess of NFCs weighted average plus share buybacks. The smaller slice is the wage increase, and the larger slice the funds that, even given wage increases, could still have been distributed to shareholders in excess of the NFCs weighted average.

25 In this working the share buybacks only make a material impact in the case of Lonmin whose dividends in excess of the NFCs weighted average would not have been sufficient to cover wage increase.

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Figure 7: “Extra” Funds for Wage Increases as a Share of Dividends Above the NFCs Weighted Average plus Funds used for Share Buybacks (Millions of 2013 Rands)

Source: Company Accounts and SARB Macroeconomic Timeseries

Given this, our counterfactual suggests that, for Amplats and Implats, distributions to shareholders were high enough that sufficient latitude existed in the last fourteen years to meet the kind of wage demands made by AMCU, while still making well above average distributions to shareholders. In Lonmin’s case the hypothetical shows that more than 50% of funds distributed to shareholders would need to have been redirected to wages and this would place Lonmin below the national average.

However, there are some considerations which make the picture less clear-cut.26

6.2 COMPLICATING FACTORS

26 We were concerned that by only looking at 4 years we may be distorting the long-term impact of these increases – as any inflationary increases which follow these increases would be taking place off a higher base. We therefore took the 4 year wage increases and extended the analysis by another 10 years (with inflationary increases for those 10 years) so that we had a projection of 14 years which we could compare against the last fourteen years. The results were not radically different.

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The analysis is suggestive rather than conclusive. The problem is that it compares the next fourteen years with the last fourteen years. For the reasons already discussed it is difficult to know if returns will be comparable. As we noted, in section two, there is debate over the future of global platinum demand. While in the public domain the platinum producers speak of multiple headwinds, elsewhere analysts and the producers themselves acknowledge that demand is strong.

It is also difficult to contrast wage increases against dividends. The basic argument is that if you pay shareholders a little less you can pay workers a lot more. However, dividends in riskier sectors like mining are volatile and paid out as and when companies achieve higher cash flow. Wages on the other hand are a recurring cash cost. If wages are high when cash flows are low, then meeting them requires the company to take on additional debt, raise additional funds from shareholders or cut back on capital expenditure. To varying degrees, Lonmin being the most extreme example, all three platinum companies have done this to cope with the downturn. With returns to higher cash flows in the near future uncertain, raising additional debt becomes punitively expensive, and will also create the risk of breaking covenants on existing debt. Likewise, raising additional equity to maintain compliance with debt covenants – as Lonmin did in 2012 with its $800m rights issue – becomes challenging.

Shareholders, who have come to operate with increasingly short-term perspectives, will be reluctant to fund losses for sustained periods of time. Regardless of expanding operations, a high level of recurring capital expenditure is required simply to maintain existing mines – cutbacks on capital expenditure of the kind currently being made to absorb the impact of the strike push costs higher further down the line. The ultimate response to higher wages in this context, according to mining companies and industry analysts, will be to either mothball or sell off mines with higher operating costs and capital expenditure requirements.

Current corporate logic, exacerbated by shareholder value prioritisation, does not permit the holding of large sums in cash or liquid assets over extended periods. However, it would be possible for corporations to put a share of excess profits during booms into safe liquid assets that could be drawn on in the future, or be compelled by law to do so.27 This requires taking a long-term view of wage expenditure.

27 The specifics of this proposal would need to be carefully modeled.

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7 BROADER CONSIDERATIONS

The on-going strike and the historical disparities between mining income and worker compensation, raises deeper questions about the distribution of benefits from the country’s mineral resources. How do we responsibly leverage the mineral wealth of the country for the benefit of all? What will the likely consequences of significant wage increases be (if they are won) and how do we ameliorated any negative consequences? These are not simple questions to answer. Here we point to a few key issues. These comments are made in light of the fact that a restructuring of the platinum industry, towards a higher labour cost structure, seems likely. We argue in section eight that this restructuring needs to be carefully managed. The issues raised in this section underpin that argument.

7.1 A LIVING WAGE

Workers are without question entitled to a “living wage”; a wage which allows them to afford the basics for quality of life, adequate safe shelter, food, utilities, transport, health care, some recreation, education for themselves and their children, childcare and saving for retirement, as well as a wage which allows them to be free of onerous debt; this should enable them to live with dignity. Exactly what this wage amounts to is disputed, and we cannot pass judgment here on whether the demands made above meet these standards. However, if workers have determined from their own experience that this is what constituents a living wage, and if the demand is affordable to the mining houses, then the demand must be taken seriously. In addition the demands must be contextualised within patterns of inequality, both globally and locally.

First, the share of economic value produced that has accrued to labour globally has been radically suppressed over the last four decades, as has been extensively popularised in recent years. As Oxfam reported on the eve of the World Economic Forum in January, the richest 85 people in the world now control as much wealth as the poorest 3.5 billion, that’s half of the world’s population.

Second, the organisation of the South Africa economy continues to be premised on a highly racialised low-wage structure inherited from apartheid. Poor public education, low skills level, a wilful neglect of industrial policy which would assist South African manufacturers to move into higher skilled value-added production and persistently low wages all perpetuate this. Despite the vilification of the trade unions by business and those on the political right wing, MIT professor, Abhijit Banerjee, demonstrates that all Cosatu has achieved is to keep “the wages of the unionised unskilled from falling as fast as they otherwise would have”. In reality, the de facto deregulation of the South African labour market proceeds apace. University of Cape Town economics professor Haroon Bhorat found that 45% of workers covered by bargaining-council agreements earn wages below the legislated minimum, with the average shortfall being 36% of the minimum wage.xvi

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This low wage structure has been accompanied by a historic disregard for workplace health and safety concerns. Nowhere is this more urgent an issue than in mining where on-the-job deaths remain a yearly occurrence and injury rates are high. Despite the professed efforts made in this regard by the mining houses, and a genuine improved in this regard thanks to the mines inspectorate, a tightening up on health and safety regulations and significantly improved enforcement and monitoring would be welcome. Ultimately, a more mechanised industry with a concomitant increase in jobs in related sectors (see below) has the potential to make the greatest impact on mitigating the dangers that miners face.

Third, as Gavin Capps (a senior researcher at SWOP) notes, the living costs of the workers have steeply risen. Capps explains that this can be in part attributed to the partial breakdown and reconfiguration of the migrant labour system. In its classic form, the ultra-low wages of migrants were subsided by access to rural resources (and household labour) in their home bases, and a compound system that covered all lodging and food costs at the mines (albeit of the lowest and most dehumanising quality). However, the capacity of the rural areas to furnish an adequate subsistence has been in long-term decline (although investments in cattle and other livestock are still proving a significant fall-back for workers in the current strike), and in recent years the compound system has virtually ended, with a majority of workers taking ‘living out allowances’ to subsidise their meagre wages, and making second homes in the burgeoning shacklands around the shaft-heads. At the same time, all basic costs of living – food, water, electricity – have risen sharply, and even more so for the poor whose core costs of living have risen at rates in excess of inflation. But perhaps most significant is that South Africa’s deepening crisis of structural unemployment – itself a consequence of financialisation (discussed above) – means that mineworkers have to support many more people than even a decade ago. According to the South African Institute of International Affairs, the dependency ratio for mining jobs is now 10:1, and anecdotal evidence suggests that for many workers it is higher. The cumulative effect has been to generate profound crises of social reproduction, both across the platinum belt and within the labour-sending areas, forcing mineworkers into a vicious spiral of debt as they try to make it from one payday to the next. This is the reality that lies behind the demand for a living wage of R12,500.xvii28

Given this, the strike could be understood as an attempt (willingly or not) to transform the low-wage structure of the economy.

Cash wages are not the only way that a decent life can be secured. The state has a key role to play in providing social services and enhancing the “social wage” (for example via access to safe, affordable transport). General job-creating economic growth will also have a positive effect on miners, not least of all via decreasing the number of dependents that each miner must support – particularly in the

28 This paragraph, part of which appeared in the referenced Sunday Times (25 May 2014) article, is a contribution to this paper by Gavin Capps. Thanks to Gavin for this.

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impoverished regions in the Eastern Cape from which many of the migrant labourers are drawn – and providing the state with a greater tax base through which to provide improved social services.

7.2 SHARING THE PROFITS

In this light the questions arise as to what share of the mining profits should accrue to the state, through what mechanisms and for what purpose.

The Mineral and Petroleum Resources Development Act, No 28 of 2002 (MPRDA) essentially nationalised the mineral resources of the country and permitted the state to license mining concessions for which mining houses would pay royalties and have to meet a range of other conditions designed to transform the sector . This system, replete with irregularities in its initial implementation, has not provided the basis upon which the state has benefitted from the commodities boom nor harnessed the potential of the mining sector to spur general economic growth and job-creating industrialisation. Not least because all sectors of mining capital – white established and black entrants – united to drive the proposed levels of the new state royalty down to the lowest percentage possible.29

There are a host of mechanisms through which states claim a share of the profits from mining. These can broadly be divided into: direct participation in mining via state owned mineral corporations; equity stakes in existing private mining houses, joint ventures with mining capital or nationalisation; and an array of taxes, rents or royalties. It must be emphasised that almost all resource rich countries, including Australia, Canada, USA, Botswana, Brazil, Chile, China and many others, use some combination of these. It should also be noted that South Africa currently has a very lenient policy through which mining companies pay not-terribly-onerous royalties and standard corporate and dividend taxes.

While companies need to make a fair rate of return there is no reason why shareholders and executives should solely benefit from a commodities boom. At the same time, the direct employees of the mining houses should also not be the only section of ordinary South Africans that benefit as the mineral wealth of the country belongs to all.

The full gamut of fiscal interventions – including the most contentious issue of nationalisation – will not be discussed here.30 Rather, we explore two issues directly relating the platinum sector and the findings of this report.

29 Thanks to Gavin Capps for pointing out this final point. 30 But for a recent debate co-hosted by the South African Civil Society Information Service and the Friedrich Ebert Stiftung (FES) see: http://sacsis.org.za/site/article/1960 .

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First, a striking outcome of our financial analysis of the companies (section three) is the super profits that were made during the 2000-2008. In light of this the proposal of a resource rent tax (RTT) that has been advanced, and modelled, by ANC’s 2012 discussion document Strategic Intervention in the Mining Sector (SIMS)xviii is worth considering.

The proposal would reduce royalties and institute a “resource rent tax” (RRT). This tax follows the logic outlined above: that companies are entitled to a reasonable rate of return but that during a commodities boom the “super-profits” generated should be heavily taxed and accrue to a special state administered fund.31 SIMS estimates that a 15% rate of return on capital is a more than fair risk-adjusted rate of return for a South African mining company. Recall that in section three it was demonstrated that returns for the platinum sector during the boom were many times this.

This fiscal windfall could be used for a range of purposes. SIMS proposes that it is used for three primary purposes: a fiscal stabilisation fund that can be used to stabilise the economy during downturns or supplement the fiscus when mining tax revenues decline; a regional development fund; and a minerals development fund. The minerals development fund would focus on industrialisation linked to mining (see the next section) and education and skills development, particularly in mathematics, science and engineering, skills without which no country has successfully industrialised.

The RRT is well suited to the platinum sector because it does not apply a blanket tax rate irrespective of the profitability of a particular operation, like royalties do. This could encourage companies to continue to mine marginal shafts, and relieve pressure during downturns. This should be qualified by noting that mining houses could use increased taxation to justify wage repression. This illustrates the need for interventions to be coordinated. The specificities of implementing a RTT is not only a technical issue but a political one and should be treated as such.

Second, and not explored in depth in the SIMS document, is the potential for South Africa to leverage its position as the dominant global supplier of platinum in order for the South African government to market the PMGs, possibly through a “single-channel” PGM export mechanism.

31 A “rate of return” is the profit made on an investment over a particular period of time (typically a year). It is expressed as a percentage. So if a 10% rate of return is made then profit (over and above costs) on the sum invested is 10%. A “normal” rate of return in any sector can be considered to be the returns that the same resources (labour, entrepreneurial/management skills and capital) would receive elsewhere in the economy plus any adjustment (usually increase) for added risk in that particular sector. All companies need to earn a decent rate of return but there is no reason why some companies should be earning massively above the risk-adjustment ‘normal’ rate of return. Put another way, if platinum mining companies earned a normal, risk-adjustment rate of return (or a few percentage points above this) it would still be worthwhile for companies to operate in that sector and for investors to invest.

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Legislation is already in place which would facilitate this, although further specificities would need to be worked out.xix This would mean that the government could influence and stabilise the price of platinum. Stabilising the platinum price would make long-term planning considerably easier (although other variables, like global demand, would still fluctuate).

7.3 MECHANISATION

The mining houses have warned that increased wage costs will further spur the process of mechanisation. This is by no means a forgone conclusion, as the case of Lonmin demonstrates. During the boom years the company embarked on an ambitious and costly attempt to mechanise several of its shafts in an effort to insulate the company from the threat of wage inflation and safety-related expenses. However, following a failed takeover bid by Xstrata in September 2008, the company was restructured with the aim of boosting shareholder value. One of the first moves taken to this end by the incoming CEO Ian Farmer (replacing Brad Mills, who had led the mechanisation push) was, alongside closing loss-making operations, to scale back the mechanisation efforts in order to cut costs. Three new shafts at Marikana (Saffy, Hossy and K4) had been targeted for mechanisation, but all three were subsequently converted to hybrid systems (utilising labour) after difficulties in containing costs. The equipment, developed by the Swedish engineering company Sandvik, proved unsuited to the complex geology encountered, unreliable, expensive to maintain and source spare parts, and mismatched with the skill levels of the workforce.xx

In sum, the switch to greater mechanisation is not a straightforward issue of replacing one production input with another once costs align, as some media commentators frequently assert. While it is likely to be pursued successfully in some areas where geological conditions are favourable (e.g. Amplats operations on the Northern Limb), many key areas (particularly the UG2 reef) pose serious problems. Higher labour costs certainly make mechanisation more attractive, switching from one to the other involves a number of risks: will the company be able to secure a suitably skilled workforce? Will the equipment work as anticipated given the inherent uncertainty relating to the geology encountered and the varied and challenging geological conditions faced by platinum miners? Furthermore, while labour can be quickly retrenched during unexpected downturns or operating difficulties and mines mothballed until (an important strategy historically for South African platinum miners) investment in new equipment creates unavoidable costs.

This said, where geological conditions allow, some level of mechanisation seems inevitable. This is not necessarily bad for the South African economy or the South African labour force but this depends on how the process of mechanisation is handled. If the capital goods used in mining are manufactured locally then this has the potential to generate as many jobs as would be lost on the mines – and safer, higher skilled jobs at that, with higher multipliers and potential for R&D cross-over to other high value added manufacturing sub-sectors. At the moment the mining companies would, together with other large multinationals, import the majority of the specialised machinery

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needed. If the government supported the growth of a mining capital goods sector and if companies were obliged, through local content requirements, to invest in that sector and procure a certain portion of their capital goods locally then this could be an engine for economic growth.

This raises two issues, the need for a coherent industrial policy linked to mining, and the need for an orderly restructuring of the platinum industry. These are taken up in the next two subsections.

7.4 INDUSTRIAL POLICY

Mining offers a plethora of forward, backward, knowledge and spatial linkages with the rest of the economy and could be an engine for broad-based economic growth. This would take a shift in paradigm from government (particularly the most laissez-faire orientated departments like Treasury), significant political will and the voluntary or coerced involvement of capital (including but not limited to mining capital). Some cogent ideas are proposed in the SIMS report.

Forward linkages focus mainly on mineral beneficiation and ensuring mineral inputs move into the most job creating downstream sectors. At present nearly all of these are supplied at exploitative (monopoly) prices. Mining houses charge local manufactures the same price that the product would fetch abroad despite the fact that it does not need to be transported aboard nor have export and import taxes levied on it. Through a variety of mechanisms, chiefly export taxes but also via transport surcharges and other mechanisms, policy needs to ensure that local manufactures are receiving minerals at a cheaper price than companies abroad. This is called export parity pricing (EPP) or competitive pricing, as existing pricing (import parity pricing, IPP) is only possible due to local monopolies/oligopolies (in a competitive market suppliers would compete down to an EPP), and is permissible under World Trade Organisation (WTO) guidelines and practiced elsewhere. New product markets for our minerals (especially platinum) should also be sought or supported. Another intervention, proposed in SIMS, is mineral “beneficiation hubs”. Modelled after special economic zones (SEZs) mineral beneficiation industries located in these hubs would receive a range of incentives.

Backward linkages focus on the supplies that feed into mining and include capital goods, consumables and services. These industries are crucial because they can live on after the mineral deposit is depleted and expand into other product markets (called “lateral migration”). Local capital goods industries could also specialise in machinery appropriate to the geological, technological and labour specificities on South African mines (the Lonmin example above shows how this could be valuable). Unfortunately the industry (Chamber of Mines) closed down its significant R&D capacity (COMRO, which was the largest in the world at the time) at the advent of democracy. The South African mining capital goods manufacturers believe that the specific technical challenges posed by South African mining could be overcome with the allocation of sufficient R&D resources (funded by a

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RTT sovereign wealth fun).32 These industries tend to be skill and knowledge intensive, particularly engineering skills, and require significant investment in research and development (R&D). These industries can be grown through direct government investment, import taxes levied on current suppliers (within WTO limits), encouraging links between mining houses and these sectors and requirements for companies to make use of local content and local technological development.

Knowledge linkages are essential to make both mining and forward and backward linked industries function optimally. This involves investing in both developing and retaining technical skills as well as investing in the development of new technologies.

Spatial linkages refer to ways in which the people, infrastructure and the environment surrounding mining can be improved in tandem with the development of the mining sector. This can include sharing mining infrastructure (roads, water etc.) with surrounding communities or government and mining embarking on joint ventures in infrastructure provision and upgrading. Critically this would need to address the on going crisis in energy provision.

Finally, SIMS stresses the benefits of regional integration and how this offers larger markets and more integrated infrastructure, amongst other benefits.

Via all the avenues discussed above the mining sector, and platinum as a key part of this, offers an opportunity for broad-based job-creating industrialisation and growth. At this stage there appears little interest in such initiatives by the large mining houses, whose eyes roam globally, and a lack of political will in government. Without a coherent plan, and a will to implement it, upheavals in the mining sectors will most likely lead to job losses and perpetuate mediocre levels of growth.

32 Thanks to Paul Jordaan for this input.

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8 CONCLUSION: AN ORDERLY RESTRUCTURING

Increased pressure on labour costs always runs the risks of capital reconsidering its operations. In mining this can take the form of retrenchments, mechanisation and the closure of marginal shafts. It can lead to job losses.

This should not paralyse labour from demanding a fair slice of the pie; this is of course how capital wields the threat of such outcomes.

What it points to is the need for an orderly restructuring of the sector. This has four key facets. First, wage demands must both make a meaningful difference to workers lives. Second, resource rents must accrue to the state, without undermining wages, and be used judiciously with long-term growth in mind. Third, a plan must also be made for shafts closed by mining companies, this may involve them being taken over by a state owned mining company. Fourth, a coherent policy of industrialisation linked to mining must be implemented and this must aim to absorb any job losses incurred in the process of restructuring the sector, particularly the miners who can’t be reskilled for the higher skilled mechanised mining jobs and mining inputs jobs.

These are the bigger issues that the current upheaval in the platinum sector should be calling our attention to. Unfortunately we are stuck in a narrow debate. AMCU is limiting its attention to what is no doubt a morally justifiable demand, but one whose economic consequences are far from certain. The mining bosses are focusing our attention only on the most recent years in a bid to cry poverty and, without offering a shred of proof, telling us that AMCU’s demands are unaffordable. A far more long-sighted and nuanced conversation is needed.

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APPENDIX

Table A1: Distribution of Value-Added (%) for Three Major Platinum Producers (2000-2013)

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Source: Company Financials

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Table A2: Average Percentage Increases for Wage Bands from Platinum Producers 17 April Wage Offer

Source: Calculated using Company Data (provided to AMCU and passed on to authors)

Table A3: Percentage Increases to Total Wage Bill given the Increases to Individual Wage Bands in the Platinum Producers 17 April Wage Offer

Source: Calculated using Company Data (provided to AMCU and passed onto authors)

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Table A4: Nominal Average Basic and Total Wages for Wage Bands given the Platinum Producers 17 April Wage Offer

Source: Calculated using Company Data (provided to AMCU and passed onto authors)

Table A5: Average Percentage Increases for Wage Bands based on AMCU Wage Demands

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Source: Calculated using Company Data (provided to AMCU and passed onto authors)

Table A6: Percentage Increases to Total Wage Bill given the Increases to Individual Wage Bands based on AMCU Wage Demands

Source: Calculated using Company Data (provided to AMCU and passed onto authors)

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Table A7: Nominal Average Basic and Total Wages for Wage Bands based on AMCU Wage Demands

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Source: Calculated using Company Data (provided to AMCU and passed onto authors)

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i See for instance Johnson Matthey, Platinum 2013: Interim Review (Johnson Matthey PLC, 2013).ii For a discussion on the restructuring of the gold sector see for instance Martin Nicol and Jean Leger, “Reflections on South Africa’s Gold Mining Crisis: Challenges for Restructuring,” Transformation: Critical Perspectives on Southern Africa 75, no. 1 (2011): 173–84, doi:10.1353/trn.2011.0007.iii PwC, SA Mine: Highlighting Trends in the South African Mining Industry (PricewaterhouseCoopers, November 2013).iv OECD, “Statistics: OECD iLibrary: National Accounts,” accessed May 29, 2014, http://www.oecd-ilibrary.org/statistics.v OECD, “Share of Profit and Labour in Value Added,” in National Accounts at a Glance 2014 (OECD Publishing, 2014).vi Reza C. Daniels, Arden Finn, and Sibongile Musundwa, Wealth in the National Income Dynamics Study Wave 2, Working Paper (SALDRU, 2012), http://www.saldru.uct.ac.za/home/index.php?/component/option,com_docman/Itemid,32/.vii On financialisation in South Africa see Sam Ashman, Ben Fine, and Susan Newman, “The Crisis in South Africa: Neoliberalism, Financialization and Uneven and Combined Development,” Socialist Register 47, no. 47 (2011), http://socialistregister.com/index.php/srv/article/view/14326; Sam Ashman, Seeraj Mohamed, and Susan Newman, The Financialization of the South African Economy and Its Impact on Economic Growth and Employment, UNDESA Paper (UNDESA, 2013); Gilad Isaacs, “Contemporary Financialization: A Marxian Analysis,” Journal of Political Inquiry 4 (2011).viii Johnson Matthey, Platinum 2013: Interim Review.ix Lonmin Plc, “Lonmin Wage Agreement,” September 2012, http://www.lonminmarikanainfo.com/pdfs/downloads/wage_agreement_factsheet.pdf.x Platinum Producers, “Amplats - What the Offer Means to You in Real Money,” (Platinum Wage Talks, 17 April), http://www.platinumwagenegotiations.co.za/assets/downloads/faq/amplats-offer-in-real-money-15-05-14.pdf; Platinum Producers, “Implats - What the Offer Means to You in Real Money,” (Platinum Wage Talks, 17 April), http://www.platinumwagenegotiations.co.za/assets/downloads/faq/implats-latest-offer-in-real-money.pdf; Platinum Producers, “Lonmin - What the Offer Means to You in Real Money,” (Platinum Wage Talks, 17 April), http://www.platinumwagenegotiations.co.za/assets/downloads/faq/lonmin-offer-in-real-money.pdf?25042014.xi Platinum Producers, “Producers Table Settlement Offer to AMCU,” Platinum Wage Talks, (April 24, 2014), http://www.platinumwagenegotiations.co.za/assets/downloads/latest-news/2014/2014-04-24_-_producers_table_settlement_offer_ro_amcu_producers_take_settlement_offer_directly_to_employees.pdf.xii HSBC, Lonmin (LMI LN), Company Report, HSBC Global Research (HSBC, May 12, 2014).xiii Platinum Producers, “Producers’ Offer Remains on the Table,” Platinum Wage Talks, (March 4, 2014), http://www.platinumwagenegotiations.co.za/assets/downloads/latest-news/2014/2014-03-04-platinum-statement.pdf.xiv AIDC, “AIDC: Statement by the Alternative Information Development Centre, on the Platinum Strike 14 May – Wage Evasion and Profit Shifting (14/05/2014),” May 14, 2014, http://www.polity.org.za/article/aidc-statement-by-the-alternative-information-development-centre-on-the-platinum-strike-14-may-wage-evasion-and-profit-shifting-14052014-2014-05-14.xv John Capel, “Endgame of Mine Strike Is a Test of Democracy,” Business Report, May 15, 2014, http://www.iol.co.za/business/opinion/endgame-of-mine-strike-is-a-test-of-democracy-1.1688324#.U4spFC88JD4.xvi Doron Isaacs, “Cutting Labour Costs Not the Answer,” The M&G Online, June 8, 2012, http://mg.co.za/article/2012-06-07-cutting-labour-costs-not-the-answer/.xvii Gavin Capps, “Local Battle in Global Wealth War,” Sunday Times, May 25, 2014.xviii ANC, State Intervention in the Minerals Sector (SIMS) (African National Congress, March 2012).xix RSA, Precious Metals Act, 2005, para. 12; RSA, Exchange Control Regulations (as Amended 8 June 2012), Government Notice, 1961, https://www.resbank.co.za/RegulationAndSupervision/FinancialSurveillanceAndExchangeControl/Legislation/Documents/Exchange%20Control%20Regulations%2C%201961.pdf.xx Lonmin Plc, 2011 Annaul Report and Accounts: Building the Future, Annaul Report, (September 30, 2011), https://www.lonmin.com/Lonmin_Annual_Report_2011/Root/pdfs/Lonmin_AR2011.pdf.