Steel-hardening agent manganese has always been one of the world’s unsung mined commodities. Hollywood stars do not queue to wear the metal. No fortunes have been made through buccaneering futures trades in manganese. Currently, it’s even less in demand. The depressed international market makes the ‘dull’ metal even less attractive.
That said, manganese is far more important to industrial civilisation than gold or diamonds. It is the ingredient that turns pig iron into steel, and steel is used in just about everything.
The metal might be boring but it isn’t likely to become unimportant in our lifetimes. However, it’s not necessarily something you may want to own right now – which could prove to be an issue for South African interests that have placed a big bet on the sector in recent years.
In May last year, when the world’s biggest mining company, BHP Billiton, spun off a number of its smaller subsidiaries to form South32, it achieved two things. First – by placing all of its African assets in the new entity – BHP insulated its main operations from the country risk associated with certain African jurisdictions.
Second, it jettisoned what was then the world’s worst-performing mined commodity – 2015 was a disastrous year for the international manganese market.
The manganese price is regarded by some economists as the most acute barometer of industrial activity among all commodities. Demand for manganese is directly affected by the volumes of steel being absorbed by manufacturing, especially in China. More importantly, its price is determined purely by supply and demand.
Unlike other benchmark minerals, such as copper and iron ore, manganese is not exchange-traded and therefore not subject to variations caused by speculation and confidence levels.
Manganese’s other applications, in aluminium alloys (especially those used for corrosion-resistant beverage cans), pigments, battery cathodes and rust-proofing, have an insignificant affect on its price. According to the US Geological Survey, these applications make up only 17% of the total market.
Right now the manganese barometer shows just how weak the world economy is. Europe and the US are flat and Chinese growth has wobbled badly in the start of 2016. In November 2015, China’s official Purchasing Manager’s Index – a direct measure of the health of the manufacturing sector – fell to its lowest level since August 2012. Not unexpectedly, this means that the manganese price is at rock bottom. The metal is currently trading at US$1.48/kg, down from more than double that number (US$3.5/kg) in December 2011, and a far cry from the US$5 it reached during the heady boom times prior to 2008.
Falling Chinese steel production is of special concern to South African manganese miners who have opened new mines and ramped up production over the last three years in the expectation of selling into what seemed like an unlimited Chinese market. China is running out of high-grade manganese resources and the South Africans – many of them emerging black business figures – anticipated filling the gap.
The volume of mining production in South Africa climbed 400 tons in 2014. The gigantic potential in the country’s sector is illustrated by the fact that the increase alone is greater than total production in the world’s eighth-largest manganese producer (Kazakhstan).
One of the assets BHP has bundled into South32 – named as such for the line of latitude connecting its two main offices in Johannesburg and Perth, Australia – were the two manganese mines situated near the evocatively (and accurately) named Hotazel, in South Africa’s Northern Cape Province. These are held through the South African company Samancor. In combination with another former BHP manganese asset – GEMCO, located in Australia’s Northern Territory – this makes South32 the world’s largest manganese miner.
The ore body on which South32’s mines are located is the largest manganese deposit in the world. In fact, the 35 km by 15 km Kalahari manganese field contains about 77% of all known land-based reserves of the metal. Moreover, it is among the purest ore known, with a concentration of between 38% and 50%.
However, it is not all easily accessible. Most of the manganese field lies at a depth of 1.7 km and it is only economical to mine to about 450m to 500m, with current technology.
It has been estimated that more than five times the total land-based quantity of manganese is to be found under the ocean, in the form of nodules lying on the surface of the abyssal plain at a depth of 4 000m to 6 000m.
During the 1970s, there was some development of technology designed to collect these nodules – which are basically pellets of up to 20 cm in diameter – but it has never been commercialised. All cost-effective manganese mining is thus land-based.
South Africa is the world’s largest producer of manganese, supplying just more than one-quarter of world output (4.7 million tons/annum). China and Australia are neck-and-neck in second and third place, with another African producer – Gabon – in fourth.
Gabon has already fallen victim to the more adverse project economics facing the manganese sector. The country, better known as one of the most established African oil producers, has been the site of a very large manganese mine at Moanda in the south-east for some 50 years. That mine still exists, operated by French company Comilog but the attempt to develop a second manganese ore body has been more troubled.
BHP – owner of the concession – aborted all its Gabon projects in 2012. The falling global demand for steel was one of the reasons cited, although the company has been referring to its iron ore project at Belinga in the north of Gabon.
The other reasons – less publicly referred to by the Anglo-Australian super-miner – are probably even more ominous.
First was regulatory uncertainty. The Gabonese government had announced a review in what seemed to observers to be an attempt to increase its benefit received from all mining activities.
Second was the infrastructure issue. As with iron ore, manganese exports from inland mines require extensive and costly rail and harbour facilities. By 2012 it no longer made economic sense for BHP to finance these.
Variations of these issues are on the minds of manganese miners in South Africa today. Many of the regulatory uncertainties in that country are related to BEE.
It is understood that the South African government wishes to see higher levels of ownership in mining by indigenous black companies but the regulation of the issue is currently unresolved.
With manganese, however, some of the largest owners are black South Africans. Alongside South32, the operators are Assmang, which is ultimately owned by one of South Africa’s richest men – African Rainbow Minerals’ executive chairman Patrice Motsepe. There is also the new Tshipi Borwa manganese mine, on-stream since the beginning of 2014, and claimed to be the fifth biggest in the world. Piggybacking on the established Hotazel infrastructure, it has featured substantial indigenous black ownership from the outset.
However, both Assmang and South32 illustrate the great infrastructure problem facing the industry in South Africa – energy costs. The price of electricity from the sole supplier, parastatal Eskom, has quadrupled over the last eight years as more than a decade of under-investment came home to roost.
This is not much of an issue for miners that prefer to extract the ore from the ground and export it unprocessed.
However, it poses a much greater problem for those who choose to purify the ore before exporting or selling into South Africa’s dwindling steel-making market.
Both South32 – through Samancor (in which Anglo American also has a share) – and Assmang have previously added value in this way. These operations are threatened by the higher energy price. There are other BEE operators in the area, including Chancellor House – the company owned by South Africa’s ruling party, the African National Congress.
The extensive BEE holdings in the manganese industry may be the reason why spare rail capacity is so plentiful. Rail parastatal Transnet has increased capacity to over 7 million tons to service an industry that mined only 4.7 million tons in 2014. Plans exist to ramp that up to a figure of 16 million tons.
This is a large gamble on an industry under pressure. So too are the BEE investments but of course the nature of the beast is such that supply and demand will, in time, come into alignment again.
The large stockpiles of manganese that are keeping the price down will be depleted. Some observers suggest the downturn will last another three years but when the market turns, South Africa will have the infrastructure to ride the wave. And the new owners will ride it too.