Mining output edged up modestly in the year to July, while gold production fell sharply, suggesting that South Africa is still not reaping the full rewards of a boom in prices for gold and other key commodities.

Gold production fell 5.2% compared with July last year and declined .2% from its levels in June, figures from Statistics SA showed yesterday.

Economists said it was clear that the mining sector, which has contracted for two quarters in a row, was still struggling after a spate of wage strikes over the past two months and infrastructure constraints, which hampered expansion.

"We are not producing to our potential, which is insanity in this cycle of rising commodity prices," said Nedbank economist Nicky Weimar.

"The fall in gold output isn't a surprise given the structural decline in that industry, but we are not taking full advantage of this…price rally," she said.

Gold was still trading near a 16-month peak of $707.10 scaled on Friday after weak U.S. jobs data sparked fresh concerns over the strength of the U.S. economy.

Analysts predict further gains in the precious metal ahead of the Diwali festival season which starts in November in India, the world's main gold consumer. South Africa is still the world's leading producer, but by a narrowing margin as other countries such as the U.S., China and Australia boost output.

Platinum is far more important for the economy, as South Africa produces nearly 78% of the metal for the world. Platinum prices hovered off a five-week peak of $1,300 per ounce yesterday as markets digested news that the country's main mining union was considering a further strike to demand higher safety standards at mines.

"For the mining industry to reap the full benefit from rising prices, it is important that some of the problems holding back production, including wages and transport problems, be resolved quickly," said Efficient Research economist Fanie Joubert.

The Stats SA figures showed mining output for the three months ended July rose .3% compared with the same period last year. But production fell 1% versus the previous quarter, after seasonal adjustments.

The importance of mining in South Africa's economy has declined over the past few years, and the industry now accounts for less than 6% of gross domestic product - a fraction the size of finance, manufacturing and retail trade, which are the three biggest sectors.

But it is still one of the largest employers in South Africa - providing 5% of the jobs in the formal non-farming sector of the economy. Mineral sales also comprise almost 30% of South Africa's export revenue, with platinum the leader, followed by coal and then gold.

In value terms, mineral sales for the second quarter of this year rose 3.4% compared with the previous quarter, seasonally adjusted. Compared with the same quarter last year, they leapt 28.5% - mainly reflecting higher prices.

By Arrangement with www.resourceinvestor.com

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