Gold and Diamonds

Gold and Diamonds

South Africa's modern history has often been dated from the first commercial mining of diamonds and gold in the 1870s and the 1880s, when the region became a magnet for European investment. Mining in the region predated European arrivals by several centuries, however, as the new government recalled in its minerals policy statements in 1994 and 1995. Iron mining and smelting sites in the northeast were used as much as 1,700 years ago; copper was mined south of the Limpopo River more than 1,000 years ago; and historians describe early mining activities in the Witwatersrand (literally, "Ridge of White Waters" in Afrikaans, commonly shortened to Rand) area, which attracted miners from elsewhere in Africa as early as the thirteenth century.

Soon after the European rush for gold and diamonds in the late nineteenth century, mining operations expanded to include more than two dozen other minerals. By the mid-twentieth century, South Africa was the world's largest producer or second largest producer of gold, diamonds, platinum, chromium, manganese, and vanadium; and it ranked high among producers of coal, iron ore, uranium, copper, silver, fluorspar, asbestos, and limestone (see table 12, Appendix).

Clusters of minerals occur in five major mineral complexes--the Bushveld, Transvaal, Witwatersrand, Northern Cape, and Western Cape complexes (see fig. 15). Whereas most mines were originally funded and managed from European centers, by the 1970s most were managed by South Africa's large diversified corporations, which controlled assets around the world.

Despite its importance in export revenues, the mining industry contributes only about 9.6 percent of GDP in the mid-1990s, down from an average of nearly 15 percent during the 1980s. The mining sector had been gradually surpassed by manufacturing and financial services both in terms of national output and labor force participation. The mines still account for a greater share of export revenues than any other single economic activity in the 1990s.

The mineowners' association, the South African Chamber of Mines, was formed in 1889 to represent the industry in dealings with the government. In the 1990s, the Chamber of Mines includes six major mining finance houses, with thirty-six gold mines, twenty-two coal mines, and sixteen diamond, platinum, antimony, asbestos, manganese, lead, and copper mines. Together they account for 85 percent of South Africa's mineral output. The Chamber of Mines negotiates labor concerns on behalf of mineowners, administers training programs for mineworkers, trains mineworkers in rescue and safety procedures, oversees pension and benefit funds, coordinates research programs, and refines and processes some minerals before sale.

Gold, first mined by Europeans in 1886 near Johannesburg, soon became the most important sector in the mining industry. South Africa has almost one-half of the world's known gold reserves, located primarily in the Rand in what was once a prehistoric lake. Gold is also mined in the Free State. Industry analysts estimated in the early 1990s that South Africa had produced more than 43,000 tons of gold in the past century, and that at least that amount remained in reserves.

Gold occurs in seams embedded in rock strata, sometimes more than a mile below the surface. Deep shafts must be sunk, large amounts of rock must be blasted and brought to the surface, and the rock must be crushed and chemically separated from the gold. Some gold mines then pump processed mine tailings underground to serve as backfill. Mining and processing are costly, especially in deposits where the gold seam is extremely thin compared with the surrounding rock. For example, in the early 1990s industry analysts estimated that only 5.6 grams of gold were extracted from each ton of ore excavated. Nevertheless, the industry has consistently earned high profits and has accounted for one-third to one-half of the world's gold production in the 1980s and 1990s. The country's fifty-seven operating gold mines produce between 600 and 620 tons of gold per year, representing almost 30 percent of the world production. Gold production in 1994 and 1995 fell below 600 tons for the first time since the 1960s.

Gold mining companies traditionally kept expenses to a minimum by paying low wages. Gold mines became known for their often exploitative labor policies, including the use of migrant workers on limited contracts, strict worker control in company compounds, and difficult working conditions. Labor costs were especially important in determining profits, because the price of gold was set at US$35 per ounce through the 1960s. After the price of gold was allowed to float in 1968, it gradually rose in response to market demand, and companies could afford to produce less and still earn even greater profits. They then began to expand operations into so-called low-grade-ore mines. The volume of South African gold production fell, and gold prices skyrocketed to an all-time high of US$613 per ounce in 1980.

During the 1980s, the dollar price of gold fluctuated widely, but because of devaluations of the rand, the rand price of gold generally advanced. When gold prices fell in 1989, the industry found that many of the low-grade-ore mines were no longer profitable. As the average value of the rand increased against the dollar, overall industry profits declined, and nearly half of the gold mines in operation were running at a loss. At least 40,000 gold mine workers were laid off in 1990, according to government estimates, and layoffs continued through 1993.

During 1994 all major gold mining houses except Johannesburg Consolidated Investments (JCI) were reporting lower profits as output fell in response to labor unrest and other factors. Randgold closed its Durban gold mine in mid-1994, owing primarily to poor grades of available ore, and other mines were threatening to close within the next few years unless profits improved.

In 1994 JCI began to "unbundle" its corporate structure by dividing into three separate companies. Anglo American, JCI's largest shareholder (with 48 percent), retained its platinum and some diamond interests in one company, Anglo American Platinum. JCI's gold mining and other industrial interests were separated into two companies, JCI Limited and Johnnies Industrial Corporation. Shares for these companies are being offered to the public, primarily as a vehicle for black investment and broadening participation in this sector of the economy.

Diamonds and Platinum

South Africa's diamond mining industry dates back to 1867, when diamonds were discovered near Kimberley, now in the Northern Cape. The Kimberley diamond fields, and later discoveries in Gauteng, the Free State, and along the Atlantic coast, emerged as major sources of gem-quality diamonds, securing South Africa's position as the world's leading producer in the mid-twentieth century. (Rough diamonds were produced in larger quantities in Australia, Zaire, Botswana, and Russia.) Through 1991 most of South Africa's diamonds were mined at only five locations, but a sixth mine, Venetia--in the Northern Cape--opened in 1992 and was expected to become a major diamond producer later in the decade.

The De Beers Consolidated Mines Company controlled most diamond mining in South Africa and influenced international trade through a diamond-producers' alliance, or cartel--the Central Selling Organisation. The cartel enabled diamond producers to control the number of gems put on the market and thereby to maintain high prices for gem-quality diamonds. The cartel was able to react to marketing efforts outside its control by temporarily flooding the market, and thereby driving down the price paid for an outsider's product.

Diamond prices fluctuated in the early 1980s, but the industry continued to expand even in the face of international recession and the discovery of the diamond-like cubic zirconia. Dollar prices for diamonds improved in 1985 but dropped again in 1987, requiring De Beers to support the market by withholding diamonds from dealers. Thus, annual production of more than 10 million carats in 1985 and in 1986 dropped to 9.1 million in the late 1980s. Gem and industrial diamond output in 1994 was 10.8 million carats, or roughly 11 percent of world production.

In 1990 the Soviet Union signed and openly acknowledged a contract to sell its diamonds (estimated at a value of about R13 billion over a five-year period) exclusively through De Beers. The action marked the first time in nearly thirty years that the Soviet Union had openly associated itself in commodity dealings with South Africa. Later that year, De Beers announced a loan of R2.63 million to the Soviet Union, against the security of an equivalent amount in diamonds.

Platinum group metals (platinum, palladium, ruthenium, rhodium, iridium, and osmium), which occur together in ore seams and are mined in one operation, were discovered in South Africa in 1924. Most of the estimated 59,000 tons of reserves are in the Bushveld complex of minerals; some concentrations are also found in the Transvaal and the Witwatersrand complexes. Platinum is used in automobile catalytic converters to reduce fuel emissions, as a catalyst in industrial processes, and in making jewelry.

South Africa is the world's leading producer of platinum. Its output of about ninety tons in 1993 accounted for almost 49 percent of world production. South Africa's platinum mines have profited, in particular, from the sale of rhodium, which sold for almost US$6,000 an ounce in the early 1990s, but world market prices fell after that.

Ferrous and Nonferrous Metals

South Africa has the world's largest known deposits of chromium, manganese, and vanadium, as well as significant deposits of iron ore, antimony, copper, nickel, lead, titanium, fluorspar, zinc, and zirconium. Most of these metals are exported unprocessed, with the exception of iron ore, which is also used in the local steel industry.

South Africa's chromium deposits contain about 72 percent of the world's reserves, most of it in the Bushveld complex of minerals. In 1993 its mines produced 2.8 million tons of chromium, or about 32 percent of world output--down from 4 million tons in 1989; production recovered, to roughly 3.6 million tons in 1994. Used primarily to produce stainless steel, chromium was one of South Africa's export successes in the 1980s; prices reached US$0.70 per pound but dropped sharply when producers tried to undercut each other in 1990. The government used various incentives, including export subsidies and power rebates to those who produced alloys for export, to encourage production. About one-third of chromium produced in 1993 was exported, much of it to the United States and Japan.

South Africa contains the largest known deposits of manganese ore in the world. Its reserves of at least 12.5 billion tons, mostly in the Northern Cape mineral complex, constitute 75 percent of the world total. Manganese is essential in the manufacture of iron and steel, and more than 90 percent of South Africa's manganese is used for this purpose. During the late 1980s, production fluctuated slightly, but it remained between 3 and 4 million tons per year, while prices generally rose, nearly doubling in 1989. By the end of 1991, however, South African producers were forced to reduce prices in response to a weak international market. In 1994 more than 2.8 million tons of manganese ore were produced, roughly 17 percent of world output.

South Africa produced between 25,000 tons and 30,000 tons of vanadium a year in the early 1990s, almost 45 percent of the world's supply. Its estimated 5.4 million tons constitute one-third of world reserves. The world's largest producer is a South African firm, Highveld Steel and Vanadium. The year 1989 set a record in terms of both production and exports for South Africa, but when world steel production declined, demand for vanadium dropped and prices plummeted, forcing one vanadium producer in South Africa to close down. Prices again surged in early 1995, and Highveld Steel and Vanadium expected earnings to more than double in 1995, compared with 1994. Vanadium is used in manufacturing steel, to provide tensile and torsional strength and resistance to abrasion.

South Africa is the largest producer of iron ore on the continent, with reserves estimated at more than 9.4 billion tons. Iron is mined in the Northern Cape, the Bushveld, and the Transvaal complexes, and in KwaZulu-Natal. More than 29.3 million tons of iron ore, roughly 3 percent of world output, were produced in 1993. Almost half of that amount was used in the steel industry. A record 19.6 million tons were exported in 1994, much of it to Japan.

Although small by world standards, South Africa's steel manufacturing industry is the largest on the continent (see Heavy Industry, this ch.). Steel production increased dramatically in the 1970s following the development of port facilities at Saldanha Bay and the associated rail line connecting it to the high-grade Sishen ore deposits in the Northern Cape. Projections for the use of steel in local construction were increasing as the government began to implement its Reconstruction and Development Programme in 1994. Government plans to implement stricter automobile emission standards promised another boost to the steel manufacturers, who produce stainless steel for use in catalytic converters.

South Africa has only about 2 percent of the world's known copper reserves, with the largest deposits in the Transvaal complex in the northeast. Copper is also mined in the Northern Cape and the Western Cape. Mining costs are high, because of the high concentration of other minerals in copper ore. At the country's largest copper mine, at Phalaborwa, production decreased in early 1993, in part because of flooding that brought work in the mine to a standstill. Later that year, the mine owners received government permission to institute a seven-day workweek, and the mine increased its work force to extend operations. Nationwide copper production, nonetheless, fell from more than 176,000 tons in 1992 to about 165,000 tons in 1994, and copper exports decreased steadily, to roughly 82,000 tons in 1994.

Energy Resources

Fortunately for South Africa, it is well endowed with coal and uranium for energy production, because the country apparently has no significant petroleum reserves and was officially cut off from oil imports from 1979 to 1993. Oil accounted for about 20 percent of primary energy until the early 1970s, and the government had stockpiled an estimated 18 million tons of imported oil by 1979. Although unreported oil shipments continued during the sanctions era, many industries switched to the use of coal to power generators.

Imported crude oil is processed at four refineries--two in Durban, one near Cape Town, and one in Sasolburg, southwest of Johannesburg--with a combined distillation capacity of about 401,000 barrels per day, or 21.5 million tons per year. In 1994 the government invited international investment in oil and gas exploration for the first time since the 1960s. Minister of Mines and Energy Roelof "Pik" Botha announced the plan, saying that the government needed domestic energy sources for reconstruction and development. The state-owned Southern Oil Exploration Corporation (Soekor) also needed the investment capital to develop nine recently discovered small oilfields off the western Cape coast, and several other small wells near Mossel Bay.

South Africa's coal reserves, most located in the Witwatersrand and in northern KwaZulu-Natal, were estimated to be between 60 billion and 100 billion tons, enough to maintain early-1990s levels of domestic use and exports through much of the twenty-first century, according to industry analysts. The coal occurs in seams, often less than one hundred meters below the surface, and hence it is relatively easy and inexpensive to mine. Most coal used locally is burned in generators at electricity plants; it is also used for coking in the steel industry.

During the 1980s, Eskom, the government's electric power utility, was the coal industry's major customer. Eskom purchased about two-thirds of coal output, which fluctuated between 159 million and 176 million tons from 1984 to 1989. In the early 1990s, the coal industry produced more than 180 million tons of coal each year, of which at least 47 million tons were exported. The industry employed more than 76,000 people. Eskom helped to finance coal mining operations and guaranteed coal prices to ensure the mining companies' return on investment.

International sanctions in the 1980s affected the coal industry in two ways. United States and European importers reduced their demand for South African coal exports, and South African homes and industries increased their use of coal in place of oil and other imported fuels. But in 1991 and 1992, as most sanctions were being lifted, the South African coal industry found itself facing stiff competition from emerging low-cost producers, such as Indonesia, Colombia, and Venezuela.

South Africa is ranked fifth in world uranium reserves in the 1990s with recoverable reserves estimated at nearly 180,000 tons. Uranium is produced as a by-product of gold in some mines of the Witwatersrand, and as a by-product of copper in the Phalaborwa mines of the far northeast of the country. Since 1968 all uranium produced in South Africa has been processed and marketed by the Nuclear Fuels Corporation of South Africa, a private company owned by the gold mines that produce uranium. Output declined in the late 1980s, as operating costs increased and uranium prices hit a thirteen-year low. Uranium output averaged nearly 2,000 tons a year in the early 1990s. Exports of uranium declined from roughly 1.3 percent of total export revenues in the 1980s to roughly 0.2 percent in the early 1990s.

South Africa produced substantial, but undisclosed, amounts of highly enriched uranium (HEU) in its nuclear weapons program, until that program was dismantled in the early 1990s. In 1994 the government, although a signatory to the Nuclear Nonproliferation Treaty (NPT), maintained stockpiles of HEU to produce industrial and medical isotopes, or to downgrade for use in power reactors.

The government has sponsored extensive research and development in the production of synthetic fuels, and South Africa became a pioneer in extracting oil and gas from coal in the 1960s and the 1970s. The South African Coal, Oil, and Gas Corporation (SASOL) established three facilities between 1950 and 1982 and is considering building a fourth plant in the late 1990s. After 1979, when SASOL shares were offered to the public, most of the corporation was run as a private company, with government assistance in constructing new facilities. Officials did not release production figures to the public, but the SASOL plants were believed to be supplying about 40 percent of South Africa's liquid fuel needs in the early 1990s. The corporation received tariff protection when the price of oil dropped below US$23 per barrel and paid into a fuel equalization fund when prices exceeded US$28.70 per barrel. In addition to liquid fuels, the company produces chemicals, fertilizers, and explosives.

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