South Africa: Minerals and Energy Newsletter "THE

UNCLAS SECTION 01 OF 04 PRETORIA 001510

SIPDIS

STATE PLEASE PASS USAID
STATE PLEASE PASS USGS

E.O. 12958: N/A
TAGS: EPET ENRG EINV EIND ETRD ECON SF
SUBJECT: South Africa: Minerals and Energy Newsletter "THE
ASSAY" - Issue 3, March 2005

REF: A) PRETORIA 3049, B) PRETORIA 2998

This cable is not for Internet distribution.


1. (U) Introduction: In January 2004, the Economic Section
of Embassy/Pretoria produced the first issue of a new monthly
newsletter called "The Assay". The purpose of this monthly
newsletter is to highlight minerals and energy developments
in South Africa. This includes trade and investment as well
as supply. South Africa hosts world-class deposits of gold,
diamonds, platinum group metals, chromium, zinc, titanium,
vanadium, iron, manganese, antimony, vermiculite, zircon,
alumino-silicates, fluorspar and phosphate rock, and is a
major exporter of steam coal. South Africa is also a leading
producer and exporter of ferroalloys of chromium, vanadium,
and manganese. The information contained in the newsletters
is based on public sources and does not reflect the views of
the United States Government. End introduction.

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Key
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2. (U) Key to some of the terminology and abbreviations used
is given to facilitate understanding.

BEE (Black Economic Empowerment) - the scheme whereby the
South African Government promotes black participation in
business.

- t = tons,
- t/d = tons per day,
- c/l = cents per liter,
- t/m = tons per month,
- t/y = tons per year,
- oz = troy ounces (31.1 grams),
- cmg = centimeter grams,
- mcf = million cubic feet,
- tcf = trillion cubic feet,
- R = SA currency (rand),
- MW = megawatts,
- kt = thousand tons,
- bbl/d = barrels per day,
- MW = megawatts,
- PGM = platinum group metals.

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HOT ISSUES
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Mineworker Layoffs - Unions Call Strikes
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3. (U) "As many as 20,000 people could lose their jobs in the
next two months -- this is an employment state of emergency,"
said Solidarity trade union General Secretary, Flip Buys.
The union is negotiating with a number of companies to
prevent laying off some 18,300 workers in the mining,
chemicals, and metal industries, which the companies blame on
a strong rand. Solidarity has appointed a commission of
inquiry to look into ways of lessening the impact on
thousands of workers. Most of the layoffs will hit the
mining industry. Estimated layoffs by company are as
follows: Harmony 4,900; DRDGold 6,500; De Beers 1,270; and
Kumba 400. Since employment in the mining industry peaked in
the 1980's at about 750,000 -- 530,000 employed by the gold
mines -- worker numbers have fallen precipitously. Today,
the mining industry employs about 450,000 workers, 190,000 by
the gold mines. Since the 1980s, gold production has fallen
from over 800 tons per year to the current 370 tons.


4. (U) The National Union of Mineworkers (NUM) called on
100,000 of its members to strike against Gold Fields,
DRDGold, and Harmony. The loss of jobs is the primary issue,
but other issues include accusations of racism, poor working
conditions, pay differentials, and increased housing
allowances for workers who opt to stay in private lodgings
instead of single-sex hostels at the mine site. Last week, a
district court ruled that the strike against Gold Fields was
illegal and ordered workers to return to work. However, some
21,000 Harmony mineworkers in the Free State remained on
strike, only returning to work on April 6 after reaching a
preliminary compromise with Harmony. Industry insiders
believe that the strike actions represent the "first shots
across the bow" for forthcoming industry wage negotiations
that begin in June. Additionally, the NUM have accused
DRDGold of poor management of and unsafe working conditions
in their mines, and have asked the Minister of Minerals and
Energy to revoke the company's mining licenses.

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MINERALS
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South African Mineral Production - 2004
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5. (U) Mining production rose by 12.4% year-on-year (y/y) in
January after an 8.2% y/y increase in December. This brought
the increase since October to 15.4%. In the three months to
end January, production rose by 7.1% (annualized 31.6%) on
the prior three-month period. This was due to an 8.3% rise
in non-gold production due to increases in coal and platinum
group metal (PGM) production - in December, the production
value of both PGMs ($500 million) and coal ($440 million),
exceeded that of gold ($400 million). Gold mining production
rose by 1.2% over the same period. In 2004, mineral sales
rose by 6.8% to R125.5 billion, or by 25.2% in U.S. dollar
terms to $19.5 billion, and reflect very strong demand in the
international commodity markets. The table below shows the
impact of fluctuating currency values, with 2002 being a
record for rand earnings and 2004 for dollar earnings.
Record rand sales occurred in 2002 due to an extremely weak
rand.

Value of Mineral Sales

Year Rand US$ Exchange Rate
(billion) (billion) Rand:US$1
2000 98.4 14.2 6.94
2001 118.9 13.8 8.60
2002 137.6 13.1 10.52
2003 117.9 15.6 7.56
2004 125.5 19.5 6.45

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IRON ORE
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Rail Expansion for Iron Ore Export
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6. (U) On March 7, Kumba Resources and Transnet (the state-
owned transportation and logistics conglomerate) announced a
$1.3 billion investment plan to boost South Africa's iron ore
exports. Kumba Resources is to invest $500 million in the
Sishen (iron ore mine) Expansion Project to increase
production from 28 mt/y to 38 mt/y by 2009. Construction is
scheduled to begin mid-2005 and first production in 2007. In
the meantime, Transnet has agreed to invest $800 million to
expand capacity on the Sishen-Saldanha rail link and to
upgrade port facilities at Saldanha Bay. Kumba and Transnet
also recently agreed on a new contract for the transportation
and handling of iron ore. The contract incorporates a rand-
based tariff in place of a pricing mechanism linked to the
$U.S. price of iron ore.


7. (U) Assmang [the joint-venture between African Rainbow
Minerals (ARM) and Ore and Metal Company (ASSORE)] and
Spoornet (the rail operating arm of Transnet) announced that
Assmang's iron ore export allocation would also increase
substantially by 2009/10. Assmang currently exports about 6
mt/y via the Orex rail line to Saldanha Bay. The company is
conducting a feasibility study on establishing a new $170
million mine (called BKM) just south of Kumba's Sishen mine
that will substantially replace production from Assmang's
aging Beeshoek mine near Postmasburg. BKM is scheduled to
export about 10 mt/y by 2010, rising to 15 mt/y by 2015.
Transnet plans to increase the capacity of the Orex line from
the current 29mt/y to about 41mt/y by 2010. It is also
conducting a feasibility study on a further expansion to meet
export needs.

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STEEL
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ISCOR R.I.P.
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8. (U) Ispat Iscor officially changed its name to Mittal
Steel South Africa in March. Davinder Chugh, Mittal's CE,
said the group's two name changes over the past seven months
-- first from Iscor to Ispat Iscor and then to Mittal Steel
SA -- had cost the group about $70,000, a negligible amount
compared to the benefits of associating the enterprise with
the second largest steel company in the world. Mittal sold
70 million tons of steel last year. Recently, Mittal
obtained approval from U.S. regulators to acquire
International Steel Group (ISG). If shareholders approve the
deal on April 12, Mittal Steel will become the world's leader
in steel production and shipments, outstripping European
giant Arcelor. The group will also boast the largest market
capitalization of any steel company in the world, at $18.5
billion.

Local Steel Prices
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9. (U) On February 8, the South African Government revoked
antidumping duties on steel imports from Russia and Ukraine -
- currently 81.7% and 94.8%, respectively. The move was in
line with government policy to promote greater competition
for local production and reduce domestic steel prices. The
International Trade Administration Commission (ITAC)
dismissed Mittal Steel's warning that "uncompetitive steel
trading" would result if the government revoked the duties.
While ITAC admitted in preliminary findings that the expiry
of the antidumping duties would likely lead to a resumption
of dumping from Russia and Ukraine, it ultimately concluded
that such dumping would not materially injure domestic steel
makers. The measure is the latest SAG effort to pressure
Mittal into lowering domestic steel prices to give South
African manufacturers a competitive edge. The government is
also investigating removing its general 5% tariff on steel
imports.

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OIL AND GAS
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Deep Water Exploration
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10. (U) To date, oil and gas exploration on land and in
coastal waters has only yielded a few pockets of natural gas
and oil, insufficient to support a significant oil and gas
industry in South Africa. Chief Executive of South Africa's
Petroleum Agency of South Africa (PASA),Jack Holliday,
reports that exploration is now moving to deeper waters
(circa 2000 meters),where seismic data points to more
favorable geological structures. All offshore exploration to
date has been at water depths ranging from 100 to 800 meters.
The proposed two deep-water wells are critical to
understanding what might be housed in the exploration area,
which lies about 100 miles off the west coast of South
Africa.


11. (U) Two ventures have completed the first stage of data
collection and are preparing to each drill a hole at depths
of 1600 meters. One is a partnership between Forest Oil
(U.S.),and state-owned PetroSA (South African). They plan
to drill one hole this year, but it depends on the
availability of equipment. The other is a partnership
between BHP-Billiton (AUS) and Occidental. They hope to make
a decision soon to take advantage of a drill rig available in
September. PASA told us that the partnership between Pioneer
Oil (U.S.) and PetroSA (South African) also wanted to explore
for natural gas off the south coast. PetroSA urgently needs
a new source of natural gas as feedstock for its gas-to-
liquids plant at Mossel Bay. Current reserves will be
depleted within five years.

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PETROCHEMICALS
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SASOL: More than Pipes Under Pressure
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12. (U) In the aftermath of a series of fatal accidents at
different petrochemical plants, SASOL is drawing increasing
political criticism on the home front. Since July, SASOL has
incurred seven accidents at different chemical plants in
which 16 workers died and over two hundred were injured. The
spate of accidents calls into question the company's
maintenance and safety procedures, including its growing use
of outside contractors. Unions have accused SASOL management
of failing to take appropriate safety precautions, of failing
to maintain aging plant and equipment, of cutting corners by
outsourcing maintenance that should be performed by permanent
and well-trained employees, and of not adhering to the
government's BEE program. SASOL has been slow to respond to
these attacks, but has contracted industry giant DuPont to
audit its corporate wide safety management system,
maintenance procedures, and training programs.


13. (U) The public criticism surrounding safety issues is
additional to ANC-led government criticism of SASOL for
lacking patriotism and commitment to BEE. Last year,
President Mbeki publicly accused SASOL of disloyalty to the
country because, in its application for a secondary listing
on the NYSE, the company included possible costs or loss of
operating licenses associated with the government's
implementation of BEE. At the beginning of this year,
Director General of Minerals and Energy Sandile Nogxina
publicly criticized the company for not meeting BEE targets
and for not appointing a black to SASOL's Board (which it
subsequently has done) or as a replacement for retiring CE
Pieter Cox. In March, the CEO of the Public Investors
Commission, Brian Molefe, publicly criticized SASOL for not
having transformed its Board and senior management. Holding
about 14%, the Public Investment Commission is SASOL's
largest single shareholder. Moreover, the Competition
Tribunal recently entered the fray with a judgment against
SASOL for unlawful price discrimination. The aftermath of
all this negative publicity has left SASOL management reeling
in a public relations nightmare that is causing many South
Africans to question SASOL's corporate ethics, safety
management procedures, and reputation for corporate and
social responsibility.


14. (U) Chief Executive Pieter Cox has argued that SASOL does
back the government's economic and BEE policies, and points
to a number of empowerment deals in the making by its mining,
fertilizer, explosives, chemical, synfuels, and natural gas
businesses. SASOL, with a capitalization value of $16.5
billion, is the fourth largest company, accounting for 5% of
the capitalization of the JSE Securities Exchange.

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NUCLEAR
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South Africa-China Cooperation
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15. (U) On March 6, pebble-bed nuclear technology developer
PBMR Ltd and its Beijing-based counterpart, Chinergy, signed
a memorandum of understanding allowing for the sharing of
technical information on the development and construction of
reactor demonstration projects. Jaco Kriek, CEO of PBMR Ltd,
said that the parallel development of the two plants would
improve mutual understanding of pebble bed nuclear
technology. Frank Wu, CEO of Chinergy, noted that although
both technologies used the same pebble fuel concept as the
source of heat, Chinergy would utilize an indirect-cycle
steam turbine to convert heat into power while PBMR would
utilize a direct-cycle helium gas turbine system. Both South
Africa and China acquired pebble bed technology from Germany.
PBMR is a component of South Africa's Integrated Energy Plan,
and has recently received high-level political approval and
increased budget support.

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IN BRIEF
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Mintek CEO to Push Mineral Beneficiation
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17. (U) Dr. Paul Jourdan, the current CEO of Mintek (the
state-owned mineral processing research organization),will
leave Mintek to become Special Advisor on Beneficiation to
the Minister of Minerals and Energy when his contract expires
in August. Jourdan will be responsible for the design and
implementation of the government's ambitious policy of adding
value and jobs to the mining industry through further
processing/manufacturing of minerals before export.

FRAZER