Rising, volatile fuel prices, driven by geopolitical tensions in West Asia, still weigh heavily on South Africa's mining sector.
Drone view of oil tanker Helga berthed at one of Iraq's southern offshore oil terminals near Basra as it prepares to load crude oil, becoming the second vessel to arrive since the closure of the Strait of Hormuz. Image credit: Reuters/Mohammed Aty/File Photo
Despite a temporary easing in fuel and crude oil prices, the Minerals Council South Africa’s (MCSA) Mining Composite Input (MCI) Cost Index slowed to 3.8% year-on-year (y-o-y), down from 4.8% in June.
“While mining input cost inflation has continued to moderate, the outlook remains uncertain,” says MCSA senior economist André Lourens.
“Recent increases in global oil prices, ongoing geopolitical tensions, and the persistence of higher administered costs suggest that cost pressures could remain elevated in the coming months,” continues Lourens.
“As a result, the pace of further moderation will depend largely on developments in global energy markets and the extent to which domestic cost increases continue to filter through to mining operations,” he adds.
Volatile energy
Input cost pressures continued to be influenced by disruptions to global energy markets arising from the conflict between Israel, the United States and Iran.
On an annual basis, coke and refined petroleum products remained the largest contributors to cost inflation, despite a monthly decline, followed by other chemicals and artificial fibres.
July also marked the annual wage adjustment cycle, with labour costs increasing by 5.9% y-o-y.
Labour costs typically rank among the largest contributors to mining input cost inflation; the current global cost environment meant labour ranked only among the top 10 cost drivers.
Coke and refined petroleum products remained the largest contributors to mining input cost inflation in July, as in June.
Prices increased by 24.4% y-o-y, although this represented a moderation from previous months as crude oil and fuel prices continued to ease.
Bad combo
Looking ahead, fuel prices remain elevated and volatile — a bad combination for the mining sector’s long-term performance.
August saw petrol prices rise while diesel prices fell, but September brought broad-based increases in both.
This largely reflected renewed concerns over geopolitical tensions in West Asia, which pushed global oil prices higher.
The conflict in the region has also continued to influence chemical input costs.
Chemicals and artificial fibres recorded inflation of 21.2% y-o-y, reflecting higher feedstock costs and disruptions to petroleum-based supply chains.
Products ranging from fertilisers and industrial chemicals to plastics have been affected by uncertainty surrounding oil flows through the Strait of Hormuz, one of the world’s most important energy trade routes.
Additional pressure has come from renewed hostilities involving the United States, economic sanctions on Iran, and heightened naval activity in the region.
Although the average crude oil price eased marginally to around $84 per barrel in July, from $84.5 in June, renewed tensions pushed prices to about $88 per barrel in August.
Domestic pressures
In July, water supply costs were the biggest driver of mining input cost inflation, rising 7.8% as municipal water tariff adjustments took effect.
Labour costs were the second-largest driver, rising by 5.9%, reflecting the annual wage adjustment cycle that typically takes place in July.
Electricity costs ranked as the third-largest contributor.
This was expected, as July was the first full calendar month under winter electricity tariffs, which remain in effect until mid-September.
Electricity costs increased by 5.5% m-o-m, following a substantial 27.8% m-o-m increase in June.
Electricity and labour remain among the largest components of overall mining input costs.
Over the past year, the sharp increase in coke and refined petroleum products, together with their indirect impact on chemical input costs, has been the dominant source of inflationary pressure facing the mining sector.
As a result, energy-related costs have exerted significant pressure on operating margins and profitability despite more moderate increases in other major cost categories.
In July, the combined impact of the global energy shock and domestic administered cost increases continued to show through.
Commodities reliant on petroleum products, as well as those exposed to rising electricity and water tariffs, recorded some of the strongest cost increases during the month.
Across mining subsectors, input cost inflation remained elevated, with other mining and quarrying up 4.3% y-o-y, followed by gold mining at 4.3% y-o-y and PGM mining at 4.2% y-o-y.
