SA’s gold miners, bosses on path to mutual destruction

Photo © Sasha Lezhnev/ENOUGH Project
Gold powder being weighed and tested

South Africa’s gold mining industry is in a perilous condition. In the second quarter of this year alone, the gold price plummeted $220 (R2 153) an ounce, partly in the wake of US economic recovery, which has reduced the demand for gold as a secure store of value.

Add to this soaring infrastructure costs and declining labour productivity, not to mention decreasing ore quality that is increasingly difficult to access, and it is no surprise that the Chamber of Mines opened wage negotiations with an offer of a 4 percent increase to the National Union of Mineworkers (NUM). The NUM responded by rejecting the offer as “insulting”. But unionists must surely also understand that their double-digit demands (in the region of 60 percent for entry-level workers) are untenable.

Competition between the NUM and the Association for Mineworkers and Construction Union (Amcu) has exacerbated the probability of serious unrest over this negotiation season.

The NUM has lost over 80 000 members to Amcu, largely as a reflection of shaft-level workers feeling alienated by union bosses. On the platinum belt, Amcu is now the dominant union. In gold, the writing is on the wall for the NUM with the Driefontein mine last week announcing a switch in recognition of official union.

Evidence is emerging that the growing heterogeneity of workers’ interests opened a chasm between union elites and workers that Amcu could exploit. In an effort to retain low-skilled workers, the NUM has had to resort to outrageous tactics to appear credible to its rank-and-file members.

It is relatively easy for Amcu to play tit-for-tat in response (as they did by demanding a 100 percent increase for entry-level underground workers).

The desperation with which both are fighting for official recognition can be understood as a chain-store paradox game. In this game, the upstart union (Amcu) must decide whether to enter the market, and the incumbent (NUM) must decide whether to fight or accept Amcu.

According to the logic of a one-shot game, the monopoly paradoxically allows the competitor to enter, as the cost of fighting is higher than the stream of future benefits available from maintaining monopoly.

However, if the incumbent is sufficiently secure in its monopoly position across a number of different market sectors, it has a higher-powered incentive to fight (as its expected stream of future benefits is sufficiently large to warrant the cost of fighting).

Indeed, the NUM has good reason to feel secure – it is Cosatu’s most powerful member, with direct access to the ruling coalition (hence the ANC’s recent rejection of amendments to democratise wage bargaining arrangements in the Labour Relations Act). It also has access to violence, and reports have emerged of assassinations of Amcu organisers.

The fight for ascendancy is now both literal and figurative.

The upshot of this fight between the incumbent and the new entrant is the creation of a “prisoners’ dilemma” between mining firms and the officially recognised union on any given mine – both the firm and the union can foresee that their dominant strategy will lead to a mutually destructive outcome, yet they are rationally compelled to follow it: Gold mining firms simply cannot afford double-digit wage increases, and unions simply cannot accept anything less (for fear of losing credibility among the workers they cannot afford to lose).

Without incentive-compatible intervention, the industry will collapse and job losses will follow. In the context of a 10-to-one dependency ratio on mining jobs, the socioeconomic consequences will be dire.

Rewind 20 years, though, and we find that we have been here before. In a 1995 paper entitled The Crisis in South African Gold Mining, professor Nicoli Nattrass found that “rising costs, falling ore grades and a stagnant gold price are steadily eroding the economic viability of gold mining in South Africa”.

Most interesting, however, is not the deja vu of a declining industry, but the examination of a profit-sharing arrangement between the NUM and the industry.

Nattrass writes: “In December 1992, the NUM signed a new agreement with the Chamber of Mines which included wage increases of between 5 percent and 6 percent and an agreement on a profit-sharing scheme at certain gold mines… According to the NUM, the agreement was in response to the ‘extraordinarily difficult circumstances of the gold industry at present and the efforts of the NUM to preserve jobs and protect standards’.”

The commitment to keep wage increases in line with profitability on the part of the union helped limit job losses.

The NUM rejected the arrangement in 1994 and in subsequent negotiations as, apparently, many workers were unhappy with the process of profit sharing, and union elites were concerned about the divisive effects of having the more profitable mines paying workers relatively higher wages.

Without such a focal point, firms and unions in the gold sector are on a mutually destructive path. Some kind of smoothing effect could be employed to overcome union concerns mentioned above.

Either way, the industry is at that critical juncture that requires an innovative institutional mechanism to release the prisoners from their dilemma.