South Africa risks missing out on gold price surge due to structural challenges in mining sector

Gold prices have surged by more than 30% in 2024, repeatedly hitting record highs as global economic uncertainty drives demand for the precious metal. 

Despite the boom, South Africa’s mining sector is struggling to fully capitalise on the gains due to deep-rooted structural challenges, including unreliable power supply and rising operational costs. 

According to Bianca Botes, director at Citadel Global, even though the price of gold has been increasing since 2018, 2024 had seen record highs.

“Year-on-year gold prices have surged 33% to top record highs repeatedly throughout 2024,” Botes told the Mail & Guardian. 

“The demand for gold is significant in what it tells us about the global economic landscape, as well as the central banks’ demand for it,” she said. 

Gold is considered a safe-haven asset that retains its value over time, and investors and central banks around the world turn to it in times of economic uncertainty, leading to higher prices. 

“A culmination of events has seen the gold price rally this year, ranging from haven-seeking on the back of geopolitical tensions and economic uncertainties to the anticipation of rate cuts by the Fed [US Federal Reserve], and other central banks, to central banks bolstering their gold reserves.” 

According to FNB, the recent surge in the price has also increased the demand for Krugerrands. 

In a statement released in June, the bank said it had helped facilitate the delivery of over 2 200 gold Krugerrand coins on its trading platforms over the last year, as more consumers sought to diversify their investment portfolios. 

“Krugerrands are highly liquid in the South African market, making them a preferred choice among seasoned investors and collectors alike, and are considered legal tender in South Africa, but their real value lies in their gold content,” the head of Share Investing at FNB Wealth and Investment, Sebastian Pillay, said. 

South Africa ranks 12th for gold production according to the World Gold Council. 

Botes said the country has a lot to gain from the price surge in terms of trade but she added that full capitalisation on the benefits was being “hamstrung by structural issues in the mining sector”. 

The Minerals Council of South Africa has said that, while gold production in South Africa is slowing, it is benefitting from the current surge. 

“The rising gold prices have enabled South African gold producers to maintain production

levels by sustaining marginal deposits for longer. Given this, South African gold production marginally increased by 0.2% to around 96.6 tonnes in 2023,” the council’s head of communications, Allan Seccombe, told the M&G.

He said gold production in the country had been falling by 5.8% annually since 1994. 

South Africa went from producing 580 tonnes of gold a year in 1994 to less than 97 tonnes in 2023. 

The unreliable electricity supply, illegal mining, theft and other crime and heightened input costs were significant constraints on production. 

“The effects of electricity supply constraints are seen in gold export and local sale volumes, which decreased by 1.9% and 17.1%, respectively, as smelters were unable to keep up with the refining of gold ore for the local and export market.

“Despite the drop in volumes, and given the strong gold price, total gold sales in rand terms increased by 18.8% year-on-year in 2023 with sales up 49.3% compared to pre-pandemic levels,” Seccombe added. 

Seccombe said electricity prices for large industrial users and manufacturers, which included mining companies, had increased more than sixfold since 2007, which added to cost pressures at marginal gold mines and shortened their lifespans.  

Low employment in the gold mining sector was also affecting output, he said, adding that jobs in the sector had plunged from 392 000 in 1994 to fewer than 94 000 in 2023.

“Mines have become deeper and working areas are further away from shafts, meaning

employee travel times to and from the stope is longer, resulting in less time drilling and

clearing blasted rock. This feeds into declining production.” 

The Witwatersrand Basin in Johannesburg is the largest gold resource in the country, and there are 44 active gold mines in Gauteng alone, according to the City of Johannesburg, but the prospects for more mines are few. 

“There are no new gold mines in South Africa, with companies focusing on existing operations to extend lives of mines by going deeper or tapping into resources further from the shaft infrastructure,” said Seccombe. 

If the country improved its terms of trade, it could benefit from better export earnings which would result in higher profits for mining companies, which in turn could assist in job creation and economic growth, said Botes.