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Economic rent
Economic
rent
in selected metals and minerals
Incidence
Helen Hughes and Shamsher Singh
The magnitude of the ‘economic rent’ and its distribution among producing countries, mineral exploitation companies and consumers has become a dominant issue in national and international policy formulation, but the difficulties in measuring the rent add to the problems of determining its equitable distribution. This paper examines the nature of the rent and estimates its incidence in bauxite, copper, iron ore, phosphate rock, tin and petroleum. Rents were found to be low for bauxite and iron ore. Bauxite, phosphates and petroleum producers have increased their share of the rent, though this trend now seems to be reversing for bauxite and phosphates. Only in tin, and to a lesser extent petroleum, have the exporting countries captured significant shares in total rent. Otherwise, the rent is largely concentrated at the processing stage, which suggests that processing plant would have to shift to the producing countries if they are to claim a larger share.
The Industrial Revolution greatly increased demand for minerals with a consequent growth in the scale of production and international trade. The industrializing countries, in addition to greatly increasing mining exploitation at home, began to seek minerals abroad, notably in the areas of new settlement and in colonial countries. Growing economies of scale led to vertical and horizontal consolidation and integration. By the end of World War I the mineral industry was highly monopolistic. The distribution of the benefits of mineral exploitation began to be questioned in countries where mining companies were almost universally foreign vwned and produced largely for the parent, industrialized country, market. The ensuing history of sporadic conflict is well known. A landmark for mineral-owning countries came in 1938 when Mexico nationalized its petroleum industry. After World War II the pace of disturbance and accommodation accelerated. The ‘rules of the game’ of mineral exploitation began to change rapidly.’ The quadrupling of crude oil prices from January 1974 and the short-lived boom of 1973-1974 and subsequent bust of metal and other mineral prices resulted in a remarkable surge of interest in the economics of exhaustible natural
The
authors
Washington,
are with DC 20433,
The World
Bank,
1818
H Street,
NW,
USA.
The authors are grateful to Messrs Choe, Hashimoto, Pollak, Yang and Mrs Chhabra for their valuable inputs and to Miss Beacham for her invaluable administrative assistance.
0301-4207/78/0402-0135
$03.00
resources. The magnitude of the ‘economic rent’ and its distribution between the host country and a foreign company, or between exporting and importing countries, has become a dominant issue for national and international policy formulation. These issues are particularly important for poorer nations, who are heavily dependent on mineral/metal exports for their foreign exchange earnings. Developing countries account for a considerable, though by no means dominant, proportion of the world’s mineral output, but the bulk of consumption is in high-income industrialized countries, many of which are heavily dependent on mineral imports. These countries also are the home of the major corporations with mineral exploitation expertise. The corporations have a high degree of horizontal and vertical integration, and they are also involved in mineral processing. While a better understanding of the economic rents inherent in mineral exploitation and processing is essential for formulation of future policies, the difficulties of measuring them add to the problems of determining their equitable distribution among mineral-rich countries, mineral exploitation companies and mineral consumers. This paper examines the nature of the rent and estimates, albeit on the basis of ex-post and fragmented empirical evidence, its incidence. The concept of economic
rent
The definition
rent dates back to Ricardo,
0 1978 IPC Business Press
of economic
who
135
Economic rent: Incidence in selected metals and minerals considered land as a ‘free gift of nature’ and all its earnings as a surplus or rent. Classical economists defined rent as payments to factors of production over and above the minimum necessary to induce them to work. Whether the rent is actually paid to the owner of the scarce resource is immaterial. Contemporary discussion of economic rent has departed almost entirely from the sense in which the term was used by classical economics. Technological innovations have made the supply of land more elastic by combining it with capital, while quasi-rents have become increasingly important returns to other factors of production, and rents arising from market imperfections have grown.2 In the broader sense, economic rent may be composed of several elements - rent to land (resource rent), rent to short-run fixity of factors of production (quasi-rent), rent to market power (monopoly rent), rent to entrepreneurial ability, rent to technology, and so forth. In practice it is rarely possible to separate and much less to appropriate separately the various elements of the economic rent generated from, say, the pithead to processing and fabricating for final use as finished metal or mineral product. Yet in the exploitation of minerals the Ricardian concept of rent remains relevant.+ Minerals cannot be exploited without technology and capital. Their elasticity of supply is also dependent on these inputs. However, there are substantial variations in the quality of mineral deposits. The corresponding costs of finding, mining and processing minerals of diverse quality vary considerably from deposit to deposit even if all other costs are equal. Mineral deposits thus have an economic rent element which is related principally to the quality of the mineral, the ease with which it may be mined, and its location. A high mineral content ore with few undesirable impurities would have a higher rent than a low content ore with high undesirable impurities. An open-cast mined mineral of a given quality would generally have a higher rent than an underground mined mineral of the same quality. Physical ore characteristics also affect smelting properties and hence the resource rent. Conceptually, the amount of economic rent accruing to a given deposit should amount to the difference between the cost of production for a given deposit and the cost of production for a marginal deposit, assuming all inputs and factor payments are priced so that their marginal cost equals marginal revenue. This is illustrated graphically in Figure 1. Under a perfectly competitive market, the equilibrium price P of a product will be determined by the intersection of the marginal cost curve MC and the demand curve D. Total output demanded will amount to OQ. Efficient operation at Q* will be enjoying a resource rent BC as compared to the marginal deposit at Q. The total economic rent accruing to all firms will be APE. Other rents accruing to firms are also explained by Figure 1. In this case economic rent will equal
.-z
a’
P
A 0 Figure
1. Perfect competition
market.
patterns of horizontal (as in petroleum) and vertical (as in bauxite) integration. This means that transfer pricing between the various stages of mining and processing does not take place at arm’s length, and competitive market prices at any particular stage of production are very difficult, if not impossible, to determine. In mining and mineral processing output prices have to be thought of not as being independently determined, but as a mobile network linked by vertical and horizontal integration. A vertically integrated producer can push prices up and down the chain to declare profits at various stages of the production process according to ownership, taxation and other conditions. These conditions give rise to monopolistic rents which can be captured by a monopoly (or oligopoly) engaged in mineral exploitation or in mineral processing. The monopolistic (and monopsonistic) rent that can accrue to mineral operations are shown in Figure 2.
F
pm :
P
a’
K
APE. However, mineral markets are typically imperfect with a strong tendency towards oligopoly. There exist complex
A
+
‘Mines, as well as land, generally pay a rent to their owner; and this rent, as well as rent of land, is the effect and never the cause of the high value of their produce’. D. Ricardo. The Principals of Political Economy and Taxation, London. 1948, p 46.
136
0
Qm
Q output
Figure
2. Monopolistic
market.
RESOURCES
POLICY
June
1978
Economic rent: Incidence in selected metals and minerals Let us suppose that OQ was being produced at equilibrium price P under perfect competition before the enterprise proceeded to restrict output. The quantity produced, OQm, will be determined by the marginal revenue curve MR. OFGQm OAGQm =AFG = AKG + KFG = AKG = KPmJG = resource rent + monopoly =
Total
revenue
Total
cost of production
=
Total profit
rent
Thus, the economic rent will be reduced from APE under perfect competition to AKG. But KPHG, part of the economic rent foregone, is recovered by the monopoly. Net additional rent earned by the monopoly
Differential rent of producer of product 2 at Q* has risen by BoBI. Overall loss of consumer surplus = PlP$J’E’ = PZPTLEZ -lT$yqL. Consider a situation where monopolistic rent is not captured by the mineral exporting country. The product is processed in an industrial mineral importing country’s few large firms. Suppose the product under consideration is Poorite and it is processed into Richamina. Poorite and Richamina are competitively priced to begin with, but at some stage the Richamina producers enter into a tacit collusion and resort to monopoly pricing. Suppose for simplicity that processing costs are zero and input-output coefficient is unity.
= PPdH-GHE.
In real life, virtually all products have substitutes in most end-uses. Let us examine the incidence of rent in a two product market (Figure 3).
Product
F
D
for PR under perfect CCxnpetition
D
for RM m both cases
P,
I ? &
p
5
A
0
Figure 0
0;
0
Q'
3. Markets
of related
products
(substitutes).
Suppose product 1 dominates the market and has a substitute, product 2, which is produced at a much higher price (on a comparable efficiency basis). Suppose the producers of product 1 exercise their market power and raise the price significantly from P’ to PA. This would reduce demand from Q’ to Q,!,,and product 1 will gain a significant monopoly rent. A part of the market share of product 1 will be captured by product 2; its demand curve will shift to the right. Its output will expand from Q$ to Qf and its price will rise from PA to PI. For product
1:
Economic rent under competition Economic rent under monopoly Monopoly rent Gain in rent
= A’P’E’ =A’K’G’ = K’P’mJ’G’ = p’&!J’H1 - G’HIE’
For product 2: Economic rent before shift Economic rent after shift Gain in rent
RESOURCES
POLICY
producer’s
monopoly.
~G:Q,
output Figure
4. Richamina
z A 2p2Ez 0 0 = A 2p2E2 I I = p2p2E2E2 0 I I 0
June 1978
As shown in Figure 4, Poorite (PR) and Richamina (RM) have identical marginal cost curves under perfect competition as well as under Richamina monopoly. They have identical demand curves D under perfect competition but under Richamina monopoly, the demand curve Di for Poorite shifts to the left. Under perfect competition: Economic Economic
rent for Poorite rent for Richamina
=APE =APE
(In practice these rents may not be equal. It appears because the same figure is used for both products).. As the Richamina
producers
exercise monopoly
Economic rent for Poorite Economic rent for Richamina Monopoly profit for Richamina Rent loss for Poorite
= = = =
so here
power:
APrG APrG PrPdG PrPHG + GHE
PrPHG is the loss of rent taken away by the Richamina producers and GHE is the loss from reduced demand for Poorite resulting from the price increase by Richamina producers. Such a state will occur whenever natural resources are being exploited under a competitive situation or so priced under a vertically integrated operation and
137
Economic rent: Incidence in selected metals and minerals processed products are being marketed under monopolistic conditions. The situation where the Poorite producers are extracting a monopoly rent is akin to the situation illustrated in Figure 2. If both sides have a monopoly, this would be a duopoly case with the appropriation of the ‘hidden rent’ depending on their respective bargaining powers.
Practical problems Although theoretically easy to explain, in practice it is almost impossible to determine, let alone capture in entirety, the rent due to the owners of a natural resource. There are usually substantial leaks to suppliers of inputs, factors employed and to consumers of the mineral product. The problem of ascertaining the arm’s length competitive market prices makes it difficult to measure rents as an addition to such prices. In the same vein, the monopolistic rents may not be captured by the owners of the natural resource and instead may be appropriated by the corporations themselves or by the consumers in the corporations’ home countries. A large transnational mining corporation may have nonmarket access to material inputs through subsidiaries or associated companies. It may wish to price these above arm’s length prices in a given country to build up its equity vis-ci-vis local partners or for taxation purposes. Alternatively, if it faces a relatively favourable tax situation in the country in which mining takes place (and assuming national tax regulations and international tax agreements make it worthwhile), it may underprice material inputs to lower its overall tax liability. The pricing of services is particularly complex. Mining projects are often situated in undeveloped areas, lacking infrastructure facilities. These may be supplied by the government, by the mining company, or by both. The attribution of the costs of such projects is usually difficult. An appropriate market price of capital is also difficult to determine. Equity and loan capital is usually part of a package with management, technology and access to markets. Wages and salaries introduce further distortions. Moreover, all these distortions vary from operation to operation and from country to country. The Organization of Petroleum Exporting Countries (OPEC) has demonstrated that with inelastic supply and demand, it is possible not only to shift the economic rents from mineral corporations and consumers to the producing countries, but also to increase the monopolistic rents and then appropriate a substantial proportion of them for the mineral-owning nations. In bauxite and phosphate rock there has also been a significant shift in economic rents as well as appropriation of an increased share of higher monopolistic rents in favour of producing countries. But such action has not yet been possible for other metals and minerals, partly because the producing exporting countries have not been able to agree on a market sharing arrangement involving production controls, and partly because the financially weak sellers have little room to manoeuvre and diversify without massive international assistance. For mineral exporting countries, and particularly for the developing countries among them for which rents can be critical developmental inputs, an important economic issue is
138
to determine the magnitude of the ‘hidden rent’ to which they may be entitled as owners of the exhaustible natural resource. If a better understanding of the magnitude of this rent is not developed and measures are not taken to allocate the rent of its source, this would tend to encourage formation of monopolies.
Estimation of rent We now estimate, on an ex-post basis, the economic rent extracted in bauxite, copper, iron ore, phosphate rock, tin and petroleum in 1972-76. We also examine the distribution of the rent between the exporting and importing countries. For bauxite, copper, phosphate rock, tin and petroleum, a broad definition of economic rent is used by examining all costs to get the product to the final consumer (method 1). Let P be the price paid by the final consumers for the product and C the costs incurred in the throughput of a product from a given deposit to the final user. The economic rent for a particular deposit, ER, can be defined as ER=P-C This definition recognizes the imperfections in the mineral market, in the factors of production, and in the market for finished products. It takes into account the rents arising from market imperfections - monopolistic or oligopolistic rents, quasi-rents to owners of technology and capital, and even windfall gains or losses during market adjustment process. In practice, the economic rent was estimated by decomposing the price paid by the final consumer. The rent accruing to the exporting country is taken as the sum of the royalties, taxes and duties being levied or the difference between fob prices and production costs. For the importing country, economic rent is defined as the difference between the wholesale price and processing and marketing costs (including normal profits or markups) plus import price, or as the sum of import duties, levies and other internal taxes. For iron ore, economic rent accruing to a given mineral was defined as the difference between the sum of mining cost (including inland transportation) and ocean transportation cost of a given ore, and refining costs in producing a unit amount of metal and the corresponding cost sum of a marginal ore (method II). For an ore not being processed in the exporting country, economic rent can be defined as: ERg = (ym(CPm+ CTm)-&CPg
+ CTg)
% where ERg = economic rent (per unit of a given ore) accruing to a given ore, CP = production cost, including inland transportation cost (per unit weight of ore), CT = ocean transportation cost (per unit weight of ore), (Y = ore requirements to produce a unit of metal, and g = a give ore, whereas m = a marginal ore or its nearest substitute which can be produced and transported with the minimum cost. The economic rent thus defined is market-specific as well as mine-specific. Therefore, strictly speaking, rent can be measured only on a mine-by-mine basis and market-bymarket basis. However, the need for its measurement on a world scale necessitated aggregation.
RESOURCES
POLICY
June 1978
Economic rent: Incidence in selected metals and minerals
Table 1. Incidence
of economic
rent as percentage
of final price
Copper
Exporting 1972 1973 1974 1975 1976 Importing 1972 1973 1974 1975 1976 Total 1972 1973 1974 1975 1976
country
3 7 7 7
3
5 -7 1
3 7
*
8
11 *
8
l
* *
10 14
Phosphate rock
10 9 9
4 3 33 28 13
10
23 24 9 30 37 27 27 42 58 50
2 4
country
-5
Iron ore
8 6 9 7
20 17 15 11 11
Tin
Petroleum Shell OPEC
16 19 47 46 43
9 11 34 33 32
13 2 4
48 48 35 43 36
55 56 39 41 41
20 23 34 22 28
64 66 82 89 79
65 67 73 74 73
18 18 21 20 24
2 5
* Negative.
One has to be cautious in drawing conclusions from such partial coverage - the sample covers only efficient producers. Also, a comparative analysis is made difficult by the fact that the quality of the data and the methodology used varies from product to product. Nonetheless, the results indicate that:
Results The economic rents estimated in the above manner, and shown in greater detail in the Appendix, are summarized in Table 1. These refer to a specific exporting and a specific importing country and not to total trade in a particular metal or mineral. Generally speaking, the developing countries chosen were the efficient producers - rents enjoyed by other producing countries would be significantly lower. There are wide fluctuations from year to year in the total rent and its distribution between the exporting developing and the importing developed countries. The percentage shares are shown in Table 2. The wide fluctuations are the direct result of the fluctuations in the market price of the final product. Except for petroleum, prices of metals and minerals are notoriously unstable.
Table 2. Distribution
of economic
rent between
Exporting
0
0
The total economic rent, as a percentage of the final price, is low for bauxite and iron ore. Bauxite, phosphate rock and petroleum producers have been able to increase their share in economic rent (an obvious result), but after an initial jump, the share of the bauxite and phosphate rock exporters in total rent has been eroding. Only in tin, and to a lesser extent petroleum, have the exporting countries been able to capture a large share of the total rent; tin and petroleum are not so abundant in
producers and consumers
Bauxite
1972 1973 1974 1975 1976 Importing
0
Copper
Iron ore
Phosphate rock
Tin
Petroleum Shell
OPEC
country 36 93 68 50
49 53 61 21 40
14 13 78 49 27
90 78 61 92 85
25 28 57 52 55
15 17 47 44 44
64 7 32 50
51 47 39 79 60
86 87 22 51 73
10 22 39 8 15
75 72 43 48 45
85 83 53 56 56
country
1972 1973 1974 1975 1976
RESOURCES
POLICY
June 1978
Economic rent: Incidence in selected metals and minerals nature, in relation to demand at current price. Unless the exporting countries are able to exploit their market power, the economic rent is largely captured at the processing stage. This suggests that fabricating industries would have to shift to the producing countries if they are to claim a larger share of the rent. Otherwise, even collusive action (phosphate rock, bauxite) is not likely to yield them substantive and lasting gains.
0
References Helen Hughes, ‘Economic rents, the distribution of gains from mineral exploitation, and mineral development policy’, World Development, Vol 3, Nos 11and 12, 1975, p 811. J.M. Currie, J.A. Murphy and A. Schmitz, ‘The concept of economic surplus and its use in economic analysis’, Economic Journa/, December 1971.
Appendix Estimation of rent in individual minerals and metals Bauxite To estimate the rent element in aluminium and its distribution between bauxite exporting and aluminium producing countries, Jamaica and the USA were chosen as the corresponding countries. Jamaica is one of the major bauxite producing and exporting countries in the world (in 1976, its share amounted to 14.3% in world production and 19.2% in world exports). About 85% of Jamaica’s bauxite exports go to the USA. Despite a lower aluminium content, Jamaica’s bauxite enjoys a substantial advantage over other countries in the US market because of low mining and ocean
Table
A. B. C. D. E. F.
G. H. I. J.
Source:
140
3. Estimates
of rent elements
for aluminium,
Jamaica
Mining, inland transportation costs Export price, fob Kingston Economic rent to Jamaica (6 - A) Ocean freight, insurance, and costs (Jamaica-USA) Production costs in USA, excluding costs of bauxite Production costs in USA, including costs of bauxite lB + D + E) Aluminium price Economic rent to USA (G - F) Total economic rent (C + HI Percentage share of Jamaica in total economic rent (C + I x 100)
Line G-99.5%
of ingot, New York, Metals
freight costs. The USA is the largest aluminium producing country (29% in 1976) and so is the largest bauxite consumer in the world. About 50% of US bauxite imports come from Jamaica. Jamaica, a pioneering member of the International Bauxite Association, has implemented a production levy on bauxite exports since 1974.t The rent elements accruing to Jamaica are considered among the largest of the bauxite producing countries. Bauxite is first processed into alumina, and then into aluminium. No substitute for bauxite is commercially available at bauxite’s current price level, although vast sources of alumina bearing clays (alunite, dawsonite) could become potentially economic at much higher prices. The substitution by other metals such as copper and steel for aluminium could be significant in determining rent elements in the aluminium price. However, this was not taken into consideration, partly because aluminium production could be increased sipniticantly within the likely range of future market prices, and aluminium maintains considerable advantages over other metals in its traditional uses. Trade can take place in primary, intermediate and final forms - bauxite, alumina and aluminium. Jamaica exported about 35% of its output in the form of alumina in 1976 (aluminium was zero). Rent elements are affected by the degree of domestic processing which, however, was not taken into account in computing the rent. The results for Jamaican-US trade are shown in Table 3. t
The production levy was first implemented in 1974, and is tied to the aluminium price. The current levy rate is on average about 7.5% of aluminium ingot price.
- US case
(US $/tonne)
1972
1973
25 41
28 41
16
1975
1976
34 87
38 98
39 106
13
53
60
67
11
13
13
11
11
502
535
648
740
792
554 582
589 551
748 752
849 877
909 977
4 57
28 88
68 135
93
68
50
28 44
1974
-38 -25
36
Week,
(various issues). Others-World
Bank estimates.
RESOURCES
POLICY
June 1978
Economic rent: Incidence in selerted metals and minerals Table
A. 0. C. D. E. F. G. H. I. J. K. L. M. N.
a
4.
rent estimates
for copper.
Chile to Japan
Production costs a fob price h (E - D) Economic rent to Chile (B - A) Ocean freight and insurance costs cif price Wholesale distribution costs c Japanese market price Economic rent to Japan (G - F - E) Total economic rent (C + H) Share of Chile in total rent Share of Japan in total rent Total rent as % of price Chile’s rent as % of price Japan’s rent as % of price
Includes operating
b Actual c
Economic
Sources:
1972
1973
1974
1975
44.0 48.5 4.5 1 .o
73.0 64.8 - 8.2 1 .o
94.0 90.6 - 3.4 2.0
56.0 55.8 - 0.2 3.0 58.8 3.0
49.5 2.7
65.8 4.0
92.6 4.8
54.0 1.8
80.6 10.8
97.9 0.5
6.3 71.4 28.6 11.7 8.3 3.3
_ -
_ -
13.4
0.5
-
60.3 1.5 _
profits of companies.
unit values of export per pound for Chile in 1972-I
Assumed
(USC/lb)
975
were 41 c, 63~. 82~ and 5 1 c per pound respectively.
as 5%of the Japanese market price. A and D from Codelco (for five largest mining companies in Chile). E from Japan, Ministry of Finance, Japan Exports and Imports, Vol I, various issues. G from Japan, Committee of the Outlook of Non-Ferrous Metals Industry, 1976.
The rent elements in aluminium price accruing to Jamaica increased substantially in 1974, when the production levy was first implemented. Rent elements accruing to the USA, which are the sum of various rents such as the economic rent, monopolistic rents, labour rent and windfall gains or losses, have fluctuated considerably. The lower (even negative) rent elements for the USA in 1973 and 1974 could be attributable to delayed increase in the price of aluminium and increases in power prices respectively.
Copper World copper production is distributed among the developed, developing and the centrally planned countries (CPEs) in the ratio 2:2:1. The CPEs are more or less selfsufficient in copper. Consumption in the developing countries is relatively small (6% of world consumption in 1973-75). They produce mainly for export to the developed countries, where over 50% of their production is refined. Principal exporters of copper are Chile (19%), Zambia (16%), Zaire (1 I%), and Canada (15%). Copper is by far the most important metal exported by the developing countries and the rent involved and its distribution has a major significance. Estimation of the rent was attempted by decomposing the Japanese price with Chile as a supplier, but serious difficulties were encountered in estimating the economic rent. For example, the cost of production for copper in Chile reported by Codelco, including reported profits, was consistently higher than the fob price for every year (Table 4). An attempt was made to analyse the pricing in trade between Germany and Chile, but the results seemed even less meaningful than in the case of Japan and Chile. In view of
RESOURCES
POLICY
June 1978
the suspect nature of the available data, an enquiry economic rent for copper had to be deferred.
into
Iron ore World production of iron ore in 1976 was shared between the developed, developing countries and the CPEs in the ration 40:25:35. However, the developing countries’ share in world exports was much higher (44%) and nearly equalled the developed countries’ share (46%). Australia, Brazil, Canada, the USSR, Liberia, India, Sweden and Venezuela are the main exporters. The developed countries accounted for 85% of world imports. The largest iron ore importers are Japan (36%), the EEC countries (34%) and the USA (12%). Major trade flows of iron ore are from Australia and Brazil to Japan and the EEC, and from Africa to the EEC. African iron ore producers are considered to have a comparative advantage over Latin American and Australian producers in the EEC markets, because of favourable geographical location. Thus the EEC as an importer and Africa as an (efficient) exporter with Australia as a marginal supplier were analysed. The methodology used in measuring economic rent accruing to iron ore was described earlier (method II). The investigation was limited to the iron ore stage and rents accruing at the iron and steel stage were not examined. The results are shown in Table 5.
Phosphate
rock
Phosphate rock is an essential raw material for phosphate fertilizers (superphosphates, diammonium phosphates, etc) for which no substitute now exists. It is produced mostly from open-cast mines of sedimentary deposits. The major
141
Economic rent: Incidence in selected metals and minerals
Table
5.
Rent
accruing
to iron ore imported
from
Africa
and Australia
(in EEC
1972 Africa
A.
ProductIon
cats
and inland
markers)
1974
1973
1975
1976
Australia
Africa
Australia
Africa
Australia
Africa
Australia
Africa
Australia
9.6
1 I .7
11.4
13.6
14.0
15.8
15.8
16.7
16.0
17.0
3.0
5.0
6.0
9.0
6.0
9.0
4.0
7.0
4.0
7.0
12.6
16.7
17.4
22.6
20.0
24.8
19.8
23.7
20 .o
24 .O
1.6
15
1.6
1.5
1.6
1.5
27.8
33.9
transportat~~
costs of iron ore B.
(US $/ton gross weight) Ocean transportation costs (US $/ton gross weight
C.
Total
costs (US $/ton
iron ore) D.
gross weaght of
IA + BJ
Iron ore requirements Fe content
E.
of !ron ore)
Total
per ton of
costs per ton of Fe content
(US$) F.
Rent
per ton of Fe content
Rent
per ton
H.
Rent Rent
per ton
J.
1F
Estimated EEC
by consuming
L.
Total
rent
Total
rent galned
N.
Total
(US $1
of iron ore
countries
25.1
37.2
31.7
35.6
32.0
36.0
(million
4.9
0
6.1
0
5.2
0
3.9
0
4.0
0
3.1
0
3.8
0
3.3
0
2.4
0
2.5
0
1.5
0
2.0
0
2.0
0
0.5
0
1 .o
0
I .6
0
1.8
0
1.3
0
I .9
0
I .5
0
Africa
of
15.7
16.7
21.2
22.6
23.3
24.8
22.3
23.7
10
38
11
30
9
22.5
24.9
(C f Gl and
29
8
34
90 44
0
129
0
125
0
72
0
68
0
76
0
I5
31
9
0
78
0
0
31
0
0
47
0
tons in gross weight)
US $)
(G x K)
by producing
countries
US 8) (H x K)
rent galned by consuming ~I lmillion US $1 (I x KJ
countries
46
0
producing and exporting countries are the USA, the USSR, and Morocco, followed by Algeria, Jordan, Senegal, Tunisia, and Togo. Western Europe and Japan are the major importers. Morocco is the largest and also the least-cost producer among the developing countries. The distribution of the economic rent for phosphate rock is presently largely between the rock-exporting countries’ governments and the fertilizer industry of the consuming countries. The rent was estimated by decomposing the price and the total cost. Table 6 shows a breakdown of the price paid by farmers in France for phosphate fertilizers made from phosphate rock imported from Morocco. We take up this case because France is the largest importer of Morocco’s phosphate rock and is also representative of the other Western European countries. Wide fluctuations in the total rent and its distribution between Morocco and France during the 1970-76 period reflect the boom in phosphate rock prices in 1974-75 and the subsequent collapse starting from the last quarter of 1975. Before the price rise in 1974, Morocco’s share in the total rent had been only 152.5%. The estimates of the shares in Table 6 for the following years are distorted because of the time lags involved. The rock export prices shown in Table 6 are the prices realized in that year. However, it takes some time until the exported rock reaches the farmers in the form of phosphate fertilizers and becomes reflected in the prices to the farmer. Information on this is not available. The estimate of Morocco’s share for 1974, therefore, is clearly an overestimate and that for 1976, an underestimate. Nevertheless, a clear indication emerges from Table 6 that Morocco was able to increase substantially its share of the
142
32.0
(US $)
gross weight)
of iron ore from (thousand
M.
(million
I .5
of iron ore
price cif in the EEC markets
imports
Austraha
of
by producingcountries
iron ore (US $/ton K.
I .6
-D)
in gross weight
per ton in gross weight
gained
20.2
(US $,
I” gross weight
iron ore (US $) gained
I .5
(C + D)
G.
I.
I .6
(tons gross weight)
61
0
49
0
57
total rent by raising the export price. It shows an increase to about 50% in 1975, which we may consider as an average for the 1974-76 period.
Tin The bulk of world tin output comes from developing countries. Six countries - Malaysia, Bolivia, Indonesia, Thailand, Nigeria and Zaire - produce 70% of world tin output. Developing countries account for almost 80% of world exports. Malaysia is by far the largest exporter. In 1976 it accounted for 62% of total world tin exports. Consumption of tin is concentrated in developed countries, which as a group absorb about 75% of world production. Centrally planned economies account for about 20%, and the remainder is consumed in developing countries. The USA is the single most important tin consuming country with a share of about 25% of total world consumption. Malaysia and the USA, the largest exporter and the largest importer, were chosen to estimate the resource rent. This was done through decomposition of price as shown in Table 7. Mining costs shown are weighed average costs and include inland transportation and capital costs. Import duties and taxes are not imposed by the consuming developed countries. The Malaysian government taxed tin at a lower flat rate from 1960 to 1974, which resulted in a tax on metal of about 16% at a price of US%8 025/tonne. In 1974 a progressive surcharge related to market prices was enacted, which resulted in an additional tax of 8% at a price of $8025. Thus, export taxes and royalties vary according to market price.
RESOURCES
POLICY
June 1978
Economic rent: Incidence in selected metals and minerals
Table
6. Economic
B. C.
E.
F.
G. H. I. J. K.
.%urce:
Table
I. J. K. L. M. N.
a
phosphate
rock, Morocco
(6 -A) Ocean freight, insurance, and costs Production costs in France, excluding costs of phosphate rock Production costs in France, including costs of phosphate rock (6 + D + E) Wholesale and retail distribution costs Price paid by French farmers Economic rent to France (H-G-F) Total economic rent (C + I) Percentage share of Morocco in total economic rent (C/J x 100)
D.
E. F. G. H.
estimates for
Mining, beneficiation, inland transportation costs Export price, fas Casablanca Economic rent to Morocco
A.
A. B. C. D.
rent
Line H-based Others-World
7. Economic
on 18% P2 05 superphosphate Bank estimates.
rent estimates
for tin, Malaysia
POLICY
1976
26
31
38
43
44
34 8
40 9
160 122
197 154
106 62
15
24
29
19
15
76
84
91
100
105
125
148
280
316
226
40
48
59
67
68
214 49
258 62
373 34
544 161
465 171
57 14
71 13
156 78
315 49
233 27
in Foreign Agricultural
Service, USDA,
7 June 1977.
to USA (US $/tonne)
1971
1972
1973
1974
1975
1976
2 611 3 272 661 60
2 782 3 497 715 65
3 445 4 338 893 75
5 068 6 895 1 827 85
5 207 6 728 1 521 100
5331 7 309 1 978 115
3 332 255 3 688 101
3 562 270 3913 81
4413 350 5 018 255
6 980 610 8 737 1 147
6 828 525 7491 138
7 424 585 8 373 364
762
796
1 148
2 974
1 659
2 342
86.7
89.8
77.8
61.4
91.7
84.5
13.3
10.2
22.2
38.6
8.3
15.5
20.7 17.9 2.7
20.3 18.3 2.1
22.9
34.1 20.9 13.1
22.1 20.3 1.8
28.0 23.6 4.3
17.8 5.1
costs and capital costs.
b Assumed as 7% of the wholesale price. Sources: A and C from International Tin Council and World D from US Maritime Commission G from American Metal Market.
RESOURCES
1975
1974
1973
(H+C) Share of Malaysia in total rent Share of USA in total rent Total rent as % of price Malaysia’s rent as % of price US rent as % of price
inland transportation
(US $/tonne)
1972
prices reported
Production costs a Export price, fob (A + C) Economic rent to Malaysia Ocean freight and insurance cost Imported cif price (B + D) Wholesale cost& Wholesale price (USA) Economic rent to USA (G - E - F) Total economic rent
Includes
to France
June 1978
Bank.
143
Economic rent: Incidence in selected metals and minerals
Table 8. Economic
rent of petroleum,
Saudi Arabia to Western Europe
1972
1973
1974
1975
1976
A. B.
Export price of the marker crude (US $/bbl) Economic rent to Saudi Arabia (revenue of the government) (US $/bbl)
I .90 1.60
2.70 2.30
9.78 9.10
IO.72 10.10
11.51 10.90
C.
Company margins and various cost elements (US $/bbl)
6.00
6.80
7.30
8.20
9.30
D.
Economic rent to Western Europe (taxes by consuming country government) (US $/bbl)
9.40
11.40
10.30
12.70
13.90
E.
Weighted average price to consumers in Western Europe (US $/bbl)
17.00
20.50
26.70
31 .oo*
34.10
1 I .oo
13.70 67 17 83
19.40 73 47 53
22.80 74 44 56
24.80 73 44 56
F. . . Toral Share Share
Total rent (B + D) (US $/bbl) ^, ~ . rent as x ot price of exporting country (%) of consuming country (%)
Source:
65 I5 85
1972-l 975 -Ali M. Jaidah, Secretary 1976 and *-World Bank estimates.
General of OPEC, ‘Pricing of Oil, the Basic Facts’.
Petroleum World energy production and consumption is dominated by crude oil. In 1975, crude oil represented 55% of world energy production, followed by natural gas and coal, both with about 18% contribution. The world market is dominated by OPEC countries who together exported $117 billion worth of crude oil in 1976. Substitutes for petroleum are coal, natural gas, hydra/nuclear electricity, and a number of non-commerical and non-conventional energy sources. Several factors make it difficult to evaluate economic rent of petroleum on the basis of its least-cost substitutes:
Table 9. Economic
Including
oil industry integrated
of the economic
rent in Table 8 consist only of
1972
1973
1974
1975
1976
4.10
4.65
4.15
5.60
5.70
1.80
2.60
10.55
11.10
11.80
5.40 11.30 7.20 64 25 75
6.60 13.85 9.20 67 28 72
7.85 22.55 18.40 82 57 43
10.40 27.10 21.50 79 52 48
9.70b 27.20 21.50 79 55 45
margin on a replacement
b Apparent decline due to currency conversion 1973-l 976 -Shell Briefing Service. Source: 1972 -World Bank estimates.
144
The estimates
rent of petroleum
Cost of oil industry operations (lJS$/bbl? Rent to exporting country (US $/bbl) Rent to consuming country (US $/bbl) Average consumer price (US $/bbl) Total rent (US $/bbl) Rent as % of price Share of exporting country (%I Share of consuming country (%I
a
The substitution possibility is limited to a certain subset of the petroleum end-use sectors. A number of non-economic considerations environmental, political, etc - add to the costs of substitution. Over an extended period, the costs of the alternative sources, as compared with petroleum, are certain to increase, and the long-run marginal costs from these sources are yet unclear.
cost basis.
factors.
RESOURCES
POLICY
June 1978
Economic rent: Incidence in selected metals and minerals those parts that the producing and consuming country governments take in the form of taxes and duties. The estimates would, therefore, understate the total economic rent to the extent of the rent elements contained in the company margins and various cost categories. Data for decomposition of this category are not available. Estimates of the economic rent are shown in Tables 8 and 9 and Figure 5. Before the exploitation of monopoly rent through exercise of market power in 1974, the oil exporting countries received a comparatively small share of total rent. The total rent has also increased since then. But the details differ according to the source used. OPEC data (Table 8) show that in the trade between Saudi Arabia and Western Europe during 1972 and 1973, exporting countries received only 15.17% of the rent. Shell data (Table 9) place the exporting countries’ share at 25.28% (the countries involved are not specified and the data may not be comparable). Another important difference is that OPEC data show that Saudi Arabia still receives a smaller proportion of the total rent, whereas Shell now places importing countries’ share at a lower level.
q q q
32
0 ,”
24
??
16
Cost and morgm of 011Industry operations Consumer government Exporting
government
8
0
32
;
24
,” * -
16
8 Figure 5. Consumer price breakdown Sources:top-Shell: bottom-OPEC.
RESOURCES
POLICY
for petrol.
June 1978
n
i 1972
1973
1974
1975
I976
145
rent
in selected metals and minerals
Incidence
Helen Hughes and Shamsher Singh
The magnitude of the ‘economic rent’ and its distribution among producing countries, mineral exploitation companies and consumers has become a dominant issue in national and international policy formulation, but the difficulties in measuring the rent add to the problems of determining its equitable distribution. This paper examines the nature of the rent and estimates its incidence in bauxite, copper, iron ore, phosphate rock, tin and petroleum. Rents were found to be low for bauxite and iron ore. Bauxite, phosphates and petroleum producers have increased their share of the rent, though this trend now seems to be reversing for bauxite and phosphates. Only in tin, and to a lesser extent petroleum, have the exporting countries captured significant shares in total rent. Otherwise, the rent is largely concentrated at the processing stage, which suggests that processing plant would have to shift to the producing countries if they are to claim a larger share.
The Industrial Revolution greatly increased demand for minerals with a consequent growth in the scale of production and international trade. The industrializing countries, in addition to greatly increasing mining exploitation at home, began to seek minerals abroad, notably in the areas of new settlement and in colonial countries. Growing economies of scale led to vertical and horizontal consolidation and integration. By the end of World War I the mineral industry was highly monopolistic. The distribution of the benefits of mineral exploitation began to be questioned in countries where mining companies were almost universally foreign vwned and produced largely for the parent, industrialized country, market. The ensuing history of sporadic conflict is well known. A landmark for mineral-owning countries came in 1938 when Mexico nationalized its petroleum industry. After World War II the pace of disturbance and accommodation accelerated. The ‘rules of the game’ of mineral exploitation began to change rapidly.’ The quadrupling of crude oil prices from January 1974 and the short-lived boom of 1973-1974 and subsequent bust of metal and other mineral prices resulted in a remarkable surge of interest in the economics of exhaustible natural
The
authors
Washington,
are with DC 20433,
The World
Bank,
1818
H Street,
NW,
USA.
The authors are grateful to Messrs Choe, Hashimoto, Pollak, Yang and Mrs Chhabra for their valuable inputs and to Miss Beacham for her invaluable administrative assistance.
0301-4207/78/0402-0135
$03.00
resources. The magnitude of the ‘economic rent’ and its distribution between the host country and a foreign company, or between exporting and importing countries, has become a dominant issue for national and international policy formulation. These issues are particularly important for poorer nations, who are heavily dependent on mineral/metal exports for their foreign exchange earnings. Developing countries account for a considerable, though by no means dominant, proportion of the world’s mineral output, but the bulk of consumption is in high-income industrialized countries, many of which are heavily dependent on mineral imports. These countries also are the home of the major corporations with mineral exploitation expertise. The corporations have a high degree of horizontal and vertical integration, and they are also involved in mineral processing. While a better understanding of the economic rents inherent in mineral exploitation and processing is essential for formulation of future policies, the difficulties of measuring them add to the problems of determining their equitable distribution among mineral-rich countries, mineral exploitation companies and mineral consumers. This paper examines the nature of the rent and estimates, albeit on the basis of ex-post and fragmented empirical evidence, its incidence. The concept of economic
rent
The definition
rent dates back to Ricardo,
0 1978 IPC Business Press
of economic
who
135
Economic rent: Incidence in selected metals and minerals considered land as a ‘free gift of nature’ and all its earnings as a surplus or rent. Classical economists defined rent as payments to factors of production over and above the minimum necessary to induce them to work. Whether the rent is actually paid to the owner of the scarce resource is immaterial. Contemporary discussion of economic rent has departed almost entirely from the sense in which the term was used by classical economics. Technological innovations have made the supply of land more elastic by combining it with capital, while quasi-rents have become increasingly important returns to other factors of production, and rents arising from market imperfections have grown.2 In the broader sense, economic rent may be composed of several elements - rent to land (resource rent), rent to short-run fixity of factors of production (quasi-rent), rent to market power (monopoly rent), rent to entrepreneurial ability, rent to technology, and so forth. In practice it is rarely possible to separate and much less to appropriate separately the various elements of the economic rent generated from, say, the pithead to processing and fabricating for final use as finished metal or mineral product. Yet in the exploitation of minerals the Ricardian concept of rent remains relevant.+ Minerals cannot be exploited without technology and capital. Their elasticity of supply is also dependent on these inputs. However, there are substantial variations in the quality of mineral deposits. The corresponding costs of finding, mining and processing minerals of diverse quality vary considerably from deposit to deposit even if all other costs are equal. Mineral deposits thus have an economic rent element which is related principally to the quality of the mineral, the ease with which it may be mined, and its location. A high mineral content ore with few undesirable impurities would have a higher rent than a low content ore with high undesirable impurities. An open-cast mined mineral of a given quality would generally have a higher rent than an underground mined mineral of the same quality. Physical ore characteristics also affect smelting properties and hence the resource rent. Conceptually, the amount of economic rent accruing to a given deposit should amount to the difference between the cost of production for a given deposit and the cost of production for a marginal deposit, assuming all inputs and factor payments are priced so that their marginal cost equals marginal revenue. This is illustrated graphically in Figure 1. Under a perfectly competitive market, the equilibrium price P of a product will be determined by the intersection of the marginal cost curve MC and the demand curve D. Total output demanded will amount to OQ. Efficient operation at Q* will be enjoying a resource rent BC as compared to the marginal deposit at Q. The total economic rent accruing to all firms will be APE. Other rents accruing to firms are also explained by Figure 1. In this case economic rent will equal
.-z
a’
P
A 0 Figure
1. Perfect competition
market.
patterns of horizontal (as in petroleum) and vertical (as in bauxite) integration. This means that transfer pricing between the various stages of mining and processing does not take place at arm’s length, and competitive market prices at any particular stage of production are very difficult, if not impossible, to determine. In mining and mineral processing output prices have to be thought of not as being independently determined, but as a mobile network linked by vertical and horizontal integration. A vertically integrated producer can push prices up and down the chain to declare profits at various stages of the production process according to ownership, taxation and other conditions. These conditions give rise to monopolistic rents which can be captured by a monopoly (or oligopoly) engaged in mineral exploitation or in mineral processing. The monopolistic (and monopsonistic) rent that can accrue to mineral operations are shown in Figure 2.
F
pm :
P
a’
K
APE. However, mineral markets are typically imperfect with a strong tendency towards oligopoly. There exist complex
A
+
‘Mines, as well as land, generally pay a rent to their owner; and this rent, as well as rent of land, is the effect and never the cause of the high value of their produce’. D. Ricardo. The Principals of Political Economy and Taxation, London. 1948, p 46.
136
0
Qm
Q output
Figure
2. Monopolistic
market.
RESOURCES
POLICY
June
1978
Economic rent: Incidence in selected metals and minerals Let us suppose that OQ was being produced at equilibrium price P under perfect competition before the enterprise proceeded to restrict output. The quantity produced, OQm, will be determined by the marginal revenue curve MR. OFGQm OAGQm =AFG = AKG + KFG = AKG = KPmJG = resource rent + monopoly =
Total
revenue
Total
cost of production
=
Total profit
rent
Thus, the economic rent will be reduced from APE under perfect competition to AKG. But KPHG, part of the economic rent foregone, is recovered by the monopoly. Net additional rent earned by the monopoly
Differential rent of producer of product 2 at Q* has risen by BoBI. Overall loss of consumer surplus = PlP$J’E’ = PZPTLEZ -lT$yqL. Consider a situation where monopolistic rent is not captured by the mineral exporting country. The product is processed in an industrial mineral importing country’s few large firms. Suppose the product under consideration is Poorite and it is processed into Richamina. Poorite and Richamina are competitively priced to begin with, but at some stage the Richamina producers enter into a tacit collusion and resort to monopoly pricing. Suppose for simplicity that processing costs are zero and input-output coefficient is unity.
= PPdH-GHE.
In real life, virtually all products have substitutes in most end-uses. Let us examine the incidence of rent in a two product market (Figure 3).
Product
F
D
for PR under perfect CCxnpetition
D
for RM m both cases
P,
I ? &
p
5
A
0
Figure 0
0;
0
Q'
3. Markets
of related
products
(substitutes).
Suppose product 1 dominates the market and has a substitute, product 2, which is produced at a much higher price (on a comparable efficiency basis). Suppose the producers of product 1 exercise their market power and raise the price significantly from P’ to PA. This would reduce demand from Q’ to Q,!,,and product 1 will gain a significant monopoly rent. A part of the market share of product 1 will be captured by product 2; its demand curve will shift to the right. Its output will expand from Q$ to Qf and its price will rise from PA to PI. For product
1:
Economic rent under competition Economic rent under monopoly Monopoly rent Gain in rent
= A’P’E’ =A’K’G’ = K’P’mJ’G’ = p’&!J’H1 - G’HIE’
For product 2: Economic rent before shift Economic rent after shift Gain in rent
RESOURCES
POLICY
producer’s
monopoly.
~G:Q,
output Figure
4. Richamina
z A 2p2Ez 0 0 = A 2p2E2 I I = p2p2E2E2 0 I I 0
June 1978
As shown in Figure 4, Poorite (PR) and Richamina (RM) have identical marginal cost curves under perfect competition as well as under Richamina monopoly. They have identical demand curves D under perfect competition but under Richamina monopoly, the demand curve Di for Poorite shifts to the left. Under perfect competition: Economic Economic
rent for Poorite rent for Richamina
=APE =APE
(In practice these rents may not be equal. It appears because the same figure is used for both products).. As the Richamina
producers
exercise monopoly
Economic rent for Poorite Economic rent for Richamina Monopoly profit for Richamina Rent loss for Poorite
= = = =
so here
power:
APrG APrG PrPdG PrPHG + GHE
PrPHG is the loss of rent taken away by the Richamina producers and GHE is the loss from reduced demand for Poorite resulting from the price increase by Richamina producers. Such a state will occur whenever natural resources are being exploited under a competitive situation or so priced under a vertically integrated operation and
137
Economic rent: Incidence in selected metals and minerals processed products are being marketed under monopolistic conditions. The situation where the Poorite producers are extracting a monopoly rent is akin to the situation illustrated in Figure 2. If both sides have a monopoly, this would be a duopoly case with the appropriation of the ‘hidden rent’ depending on their respective bargaining powers.
Practical problems Although theoretically easy to explain, in practice it is almost impossible to determine, let alone capture in entirety, the rent due to the owners of a natural resource. There are usually substantial leaks to suppliers of inputs, factors employed and to consumers of the mineral product. The problem of ascertaining the arm’s length competitive market prices makes it difficult to measure rents as an addition to such prices. In the same vein, the monopolistic rents may not be captured by the owners of the natural resource and instead may be appropriated by the corporations themselves or by the consumers in the corporations’ home countries. A large transnational mining corporation may have nonmarket access to material inputs through subsidiaries or associated companies. It may wish to price these above arm’s length prices in a given country to build up its equity vis-ci-vis local partners or for taxation purposes. Alternatively, if it faces a relatively favourable tax situation in the country in which mining takes place (and assuming national tax regulations and international tax agreements make it worthwhile), it may underprice material inputs to lower its overall tax liability. The pricing of services is particularly complex. Mining projects are often situated in undeveloped areas, lacking infrastructure facilities. These may be supplied by the government, by the mining company, or by both. The attribution of the costs of such projects is usually difficult. An appropriate market price of capital is also difficult to determine. Equity and loan capital is usually part of a package with management, technology and access to markets. Wages and salaries introduce further distortions. Moreover, all these distortions vary from operation to operation and from country to country. The Organization of Petroleum Exporting Countries (OPEC) has demonstrated that with inelastic supply and demand, it is possible not only to shift the economic rents from mineral corporations and consumers to the producing countries, but also to increase the monopolistic rents and then appropriate a substantial proportion of them for the mineral-owning nations. In bauxite and phosphate rock there has also been a significant shift in economic rents as well as appropriation of an increased share of higher monopolistic rents in favour of producing countries. But such action has not yet been possible for other metals and minerals, partly because the producing exporting countries have not been able to agree on a market sharing arrangement involving production controls, and partly because the financially weak sellers have little room to manoeuvre and diversify without massive international assistance. For mineral exporting countries, and particularly for the developing countries among them for which rents can be critical developmental inputs, an important economic issue is
138
to determine the magnitude of the ‘hidden rent’ to which they may be entitled as owners of the exhaustible natural resource. If a better understanding of the magnitude of this rent is not developed and measures are not taken to allocate the rent of its source, this would tend to encourage formation of monopolies.
Estimation of rent We now estimate, on an ex-post basis, the economic rent extracted in bauxite, copper, iron ore, phosphate rock, tin and petroleum in 1972-76. We also examine the distribution of the rent between the exporting and importing countries. For bauxite, copper, phosphate rock, tin and petroleum, a broad definition of economic rent is used by examining all costs to get the product to the final consumer (method 1). Let P be the price paid by the final consumers for the product and C the costs incurred in the throughput of a product from a given deposit to the final user. The economic rent for a particular deposit, ER, can be defined as ER=P-C This definition recognizes the imperfections in the mineral market, in the factors of production, and in the market for finished products. It takes into account the rents arising from market imperfections - monopolistic or oligopolistic rents, quasi-rents to owners of technology and capital, and even windfall gains or losses during market adjustment process. In practice, the economic rent was estimated by decomposing the price paid by the final consumer. The rent accruing to the exporting country is taken as the sum of the royalties, taxes and duties being levied or the difference between fob prices and production costs. For the importing country, economic rent is defined as the difference between the wholesale price and processing and marketing costs (including normal profits or markups) plus import price, or as the sum of import duties, levies and other internal taxes. For iron ore, economic rent accruing to a given mineral was defined as the difference between the sum of mining cost (including inland transportation) and ocean transportation cost of a given ore, and refining costs in producing a unit amount of metal and the corresponding cost sum of a marginal ore (method II). For an ore not being processed in the exporting country, economic rent can be defined as: ERg = (ym(CPm+ CTm)-&CPg
+ CTg)
% where ERg = economic rent (per unit of a given ore) accruing to a given ore, CP = production cost, including inland transportation cost (per unit weight of ore), CT = ocean transportation cost (per unit weight of ore), (Y = ore requirements to produce a unit of metal, and g = a give ore, whereas m = a marginal ore or its nearest substitute which can be produced and transported with the minimum cost. The economic rent thus defined is market-specific as well as mine-specific. Therefore, strictly speaking, rent can be measured only on a mine-by-mine basis and market-bymarket basis. However, the need for its measurement on a world scale necessitated aggregation.
RESOURCES
POLICY
June 1978
Economic rent: Incidence in selected metals and minerals
Table 1. Incidence
of economic
rent as percentage
of final price
Copper
Exporting 1972 1973 1974 1975 1976 Importing 1972 1973 1974 1975 1976 Total 1972 1973 1974 1975 1976
country
3 7 7 7
3
5 -7 1
3 7
*
8
11 *
8
l
* *
10 14
Phosphate rock
10 9 9
4 3 33 28 13
10
23 24 9 30 37 27 27 42 58 50
2 4
country
-5
Iron ore
8 6 9 7
20 17 15 11 11
Tin
Petroleum Shell OPEC
16 19 47 46 43
9 11 34 33 32
13 2 4
48 48 35 43 36
55 56 39 41 41
20 23 34 22 28
64 66 82 89 79
65 67 73 74 73
18 18 21 20 24
2 5
* Negative.
One has to be cautious in drawing conclusions from such partial coverage - the sample covers only efficient producers. Also, a comparative analysis is made difficult by the fact that the quality of the data and the methodology used varies from product to product. Nonetheless, the results indicate that:
Results The economic rents estimated in the above manner, and shown in greater detail in the Appendix, are summarized in Table 1. These refer to a specific exporting and a specific importing country and not to total trade in a particular metal or mineral. Generally speaking, the developing countries chosen were the efficient producers - rents enjoyed by other producing countries would be significantly lower. There are wide fluctuations from year to year in the total rent and its distribution between the exporting developing and the importing developed countries. The percentage shares are shown in Table 2. The wide fluctuations are the direct result of the fluctuations in the market price of the final product. Except for petroleum, prices of metals and minerals are notoriously unstable.
Table 2. Distribution
of economic
rent between
Exporting
0
0
The total economic rent, as a percentage of the final price, is low for bauxite and iron ore. Bauxite, phosphate rock and petroleum producers have been able to increase their share in economic rent (an obvious result), but after an initial jump, the share of the bauxite and phosphate rock exporters in total rent has been eroding. Only in tin, and to a lesser extent petroleum, have the exporting countries been able to capture a large share of the total rent; tin and petroleum are not so abundant in
producers and consumers
Bauxite
1972 1973 1974 1975 1976 Importing
0
Copper
Iron ore
Phosphate rock
Tin
Petroleum Shell
OPEC
country 36 93 68 50
49 53 61 21 40
14 13 78 49 27
90 78 61 92 85
25 28 57 52 55
15 17 47 44 44
64 7 32 50
51 47 39 79 60
86 87 22 51 73
10 22 39 8 15
75 72 43 48 45
85 83 53 56 56
country
1972 1973 1974 1975 1976
RESOURCES
POLICY
June 1978
Economic rent: Incidence in selected metals and minerals nature, in relation to demand at current price. Unless the exporting countries are able to exploit their market power, the economic rent is largely captured at the processing stage. This suggests that fabricating industries would have to shift to the producing countries if they are to claim a larger share of the rent. Otherwise, even collusive action (phosphate rock, bauxite) is not likely to yield them substantive and lasting gains.
0
References Helen Hughes, ‘Economic rents, the distribution of gains from mineral exploitation, and mineral development policy’, World Development, Vol 3, Nos 11and 12, 1975, p 811. J.M. Currie, J.A. Murphy and A. Schmitz, ‘The concept of economic surplus and its use in economic analysis’, Economic Journa/, December 1971.
Appendix Estimation of rent in individual minerals and metals Bauxite To estimate the rent element in aluminium and its distribution between bauxite exporting and aluminium producing countries, Jamaica and the USA were chosen as the corresponding countries. Jamaica is one of the major bauxite producing and exporting countries in the world (in 1976, its share amounted to 14.3% in world production and 19.2% in world exports). About 85% of Jamaica’s bauxite exports go to the USA. Despite a lower aluminium content, Jamaica’s bauxite enjoys a substantial advantage over other countries in the US market because of low mining and ocean
Table
A. B. C. D. E. F.
G. H. I. J.
Source:
140
3. Estimates
of rent elements
for aluminium,
Jamaica
Mining, inland transportation costs Export price, fob Kingston Economic rent to Jamaica (6 - A) Ocean freight, insurance, and costs (Jamaica-USA) Production costs in USA, excluding costs of bauxite Production costs in USA, including costs of bauxite lB + D + E) Aluminium price Economic rent to USA (G - F) Total economic rent (C + HI Percentage share of Jamaica in total economic rent (C + I x 100)
Line G-99.5%
of ingot, New York, Metals
freight costs. The USA is the largest aluminium producing country (29% in 1976) and so is the largest bauxite consumer in the world. About 50% of US bauxite imports come from Jamaica. Jamaica, a pioneering member of the International Bauxite Association, has implemented a production levy on bauxite exports since 1974.t The rent elements accruing to Jamaica are considered among the largest of the bauxite producing countries. Bauxite is first processed into alumina, and then into aluminium. No substitute for bauxite is commercially available at bauxite’s current price level, although vast sources of alumina bearing clays (alunite, dawsonite) could become potentially economic at much higher prices. The substitution by other metals such as copper and steel for aluminium could be significant in determining rent elements in the aluminium price. However, this was not taken into consideration, partly because aluminium production could be increased sipniticantly within the likely range of future market prices, and aluminium maintains considerable advantages over other metals in its traditional uses. Trade can take place in primary, intermediate and final forms - bauxite, alumina and aluminium. Jamaica exported about 35% of its output in the form of alumina in 1976 (aluminium was zero). Rent elements are affected by the degree of domestic processing which, however, was not taken into account in computing the rent. The results for Jamaican-US trade are shown in Table 3. t
The production levy was first implemented in 1974, and is tied to the aluminium price. The current levy rate is on average about 7.5% of aluminium ingot price.
- US case
(US $/tonne)
1972
1973
25 41
28 41
16
1975
1976
34 87
38 98
39 106
13
53
60
67
11
13
13
11
11
502
535
648
740
792
554 582
589 551
748 752
849 877
909 977
4 57
28 88
68 135
93
68
50
28 44
1974
-38 -25
36
Week,
(various issues). Others-World
Bank estimates.
RESOURCES
POLICY
June 1978
Economic rent: Incidence in selerted metals and minerals Table
A. 0. C. D. E. F. G. H. I. J. K. L. M. N.
a
4.
rent estimates
for copper.
Chile to Japan
Production costs a fob price h (E - D) Economic rent to Chile (B - A) Ocean freight and insurance costs cif price Wholesale distribution costs c Japanese market price Economic rent to Japan (G - F - E) Total economic rent (C + H) Share of Chile in total rent Share of Japan in total rent Total rent as % of price Chile’s rent as % of price Japan’s rent as % of price
Includes operating
b Actual c
Economic
Sources:
1972
1973
1974
1975
44.0 48.5 4.5 1 .o
73.0 64.8 - 8.2 1 .o
94.0 90.6 - 3.4 2.0
56.0 55.8 - 0.2 3.0 58.8 3.0
49.5 2.7
65.8 4.0
92.6 4.8
54.0 1.8
80.6 10.8
97.9 0.5
6.3 71.4 28.6 11.7 8.3 3.3
_ -
_ -
13.4
0.5
-
60.3 1.5 _
profits of companies.
unit values of export per pound for Chile in 1972-I
Assumed
(USC/lb)
975
were 41 c, 63~. 82~ and 5 1 c per pound respectively.
as 5%of the Japanese market price. A and D from Codelco (for five largest mining companies in Chile). E from Japan, Ministry of Finance, Japan Exports and Imports, Vol I, various issues. G from Japan, Committee of the Outlook of Non-Ferrous Metals Industry, 1976.
The rent elements in aluminium price accruing to Jamaica increased substantially in 1974, when the production levy was first implemented. Rent elements accruing to the USA, which are the sum of various rents such as the economic rent, monopolistic rents, labour rent and windfall gains or losses, have fluctuated considerably. The lower (even negative) rent elements for the USA in 1973 and 1974 could be attributable to delayed increase in the price of aluminium and increases in power prices respectively.
Copper World copper production is distributed among the developed, developing and the centrally planned countries (CPEs) in the ratio 2:2:1. The CPEs are more or less selfsufficient in copper. Consumption in the developing countries is relatively small (6% of world consumption in 1973-75). They produce mainly for export to the developed countries, where over 50% of their production is refined. Principal exporters of copper are Chile (19%), Zambia (16%), Zaire (1 I%), and Canada (15%). Copper is by far the most important metal exported by the developing countries and the rent involved and its distribution has a major significance. Estimation of the rent was attempted by decomposing the Japanese price with Chile as a supplier, but serious difficulties were encountered in estimating the economic rent. For example, the cost of production for copper in Chile reported by Codelco, including reported profits, was consistently higher than the fob price for every year (Table 4). An attempt was made to analyse the pricing in trade between Germany and Chile, but the results seemed even less meaningful than in the case of Japan and Chile. In view of
RESOURCES
POLICY
June 1978
the suspect nature of the available data, an enquiry economic rent for copper had to be deferred.
into
Iron ore World production of iron ore in 1976 was shared between the developed, developing countries and the CPEs in the ration 40:25:35. However, the developing countries’ share in world exports was much higher (44%) and nearly equalled the developed countries’ share (46%). Australia, Brazil, Canada, the USSR, Liberia, India, Sweden and Venezuela are the main exporters. The developed countries accounted for 85% of world imports. The largest iron ore importers are Japan (36%), the EEC countries (34%) and the USA (12%). Major trade flows of iron ore are from Australia and Brazil to Japan and the EEC, and from Africa to the EEC. African iron ore producers are considered to have a comparative advantage over Latin American and Australian producers in the EEC markets, because of favourable geographical location. Thus the EEC as an importer and Africa as an (efficient) exporter with Australia as a marginal supplier were analysed. The methodology used in measuring economic rent accruing to iron ore was described earlier (method II). The investigation was limited to the iron ore stage and rents accruing at the iron and steel stage were not examined. The results are shown in Table 5.
Phosphate
rock
Phosphate rock is an essential raw material for phosphate fertilizers (superphosphates, diammonium phosphates, etc) for which no substitute now exists. It is produced mostly from open-cast mines of sedimentary deposits. The major
141
Economic rent: Incidence in selected metals and minerals
Table
5.
Rent
accruing
to iron ore imported
from
Africa
and Australia
(in EEC
1972 Africa
A.
ProductIon
cats
and inland
markers)
1974
1973
1975
1976
Australia
Africa
Australia
Africa
Australia
Africa
Australia
Africa
Australia
9.6
1 I .7
11.4
13.6
14.0
15.8
15.8
16.7
16.0
17.0
3.0
5.0
6.0
9.0
6.0
9.0
4.0
7.0
4.0
7.0
12.6
16.7
17.4
22.6
20.0
24.8
19.8
23.7
20 .o
24 .O
1.6
15
1.6
1.5
1.6
1.5
27.8
33.9
transportat~~
costs of iron ore B.
(US $/ton gross weight) Ocean transportation costs (US $/ton gross weight
C.
Total
costs (US $/ton
iron ore) D.
gross weaght of
IA + BJ
Iron ore requirements Fe content
E.
of !ron ore)
Total
per ton of
costs per ton of Fe content
(US$) F.
Rent
per ton of Fe content
Rent
per ton
H.
Rent Rent
per ton
J.
1F
Estimated EEC
by consuming
L.
Total
rent
Total
rent galned
N.
Total
(US $1
of iron ore
countries
25.1
37.2
31.7
35.6
32.0
36.0
(million
4.9
0
6.1
0
5.2
0
3.9
0
4.0
0
3.1
0
3.8
0
3.3
0
2.4
0
2.5
0
1.5
0
2.0
0
2.0
0
0.5
0
1 .o
0
I .6
0
1.8
0
1.3
0
I .9
0
I .5
0
Africa
of
15.7
16.7
21.2
22.6
23.3
24.8
22.3
23.7
10
38
11
30
9
22.5
24.9
(C f Gl and
29
8
34
90 44
0
129
0
125
0
72
0
68
0
76
0
I5
31
9
0
78
0
0
31
0
0
47
0
tons in gross weight)
US $)
(G x K)
by producing
countries
US 8) (H x K)
rent galned by consuming ~I lmillion US $1 (I x KJ
countries
46
0
producing and exporting countries are the USA, the USSR, and Morocco, followed by Algeria, Jordan, Senegal, Tunisia, and Togo. Western Europe and Japan are the major importers. Morocco is the largest and also the least-cost producer among the developing countries. The distribution of the economic rent for phosphate rock is presently largely between the rock-exporting countries’ governments and the fertilizer industry of the consuming countries. The rent was estimated by decomposing the price and the total cost. Table 6 shows a breakdown of the price paid by farmers in France for phosphate fertilizers made from phosphate rock imported from Morocco. We take up this case because France is the largest importer of Morocco’s phosphate rock and is also representative of the other Western European countries. Wide fluctuations in the total rent and its distribution between Morocco and France during the 1970-76 period reflect the boom in phosphate rock prices in 1974-75 and the subsequent collapse starting from the last quarter of 1975. Before the price rise in 1974, Morocco’s share in the total rent had been only 152.5%. The estimates of the shares in Table 6 for the following years are distorted because of the time lags involved. The rock export prices shown in Table 6 are the prices realized in that year. However, it takes some time until the exported rock reaches the farmers in the form of phosphate fertilizers and becomes reflected in the prices to the farmer. Information on this is not available. The estimate of Morocco’s share for 1974, therefore, is clearly an overestimate and that for 1976, an underestimate. Nevertheless, a clear indication emerges from Table 6 that Morocco was able to increase substantially its share of the
142
32.0
(US $)
gross weight)
of iron ore from (thousand
M.
(million
I .5
of iron ore
price cif in the EEC markets
imports
Austraha
of
by producingcountries
iron ore (US $/ton K.
I .6
-D)
in gross weight
per ton in gross weight
gained
20.2
(US $,
I” gross weight
iron ore (US $) gained
I .5
(C + D)
G.
I.
I .6
(tons gross weight)
61
0
49
0
57
total rent by raising the export price. It shows an increase to about 50% in 1975, which we may consider as an average for the 1974-76 period.
Tin The bulk of world tin output comes from developing countries. Six countries - Malaysia, Bolivia, Indonesia, Thailand, Nigeria and Zaire - produce 70% of world tin output. Developing countries account for almost 80% of world exports. Malaysia is by far the largest exporter. In 1976 it accounted for 62% of total world tin exports. Consumption of tin is concentrated in developed countries, which as a group absorb about 75% of world production. Centrally planned economies account for about 20%, and the remainder is consumed in developing countries. The USA is the single most important tin consuming country with a share of about 25% of total world consumption. Malaysia and the USA, the largest exporter and the largest importer, were chosen to estimate the resource rent. This was done through decomposition of price as shown in Table 7. Mining costs shown are weighed average costs and include inland transportation and capital costs. Import duties and taxes are not imposed by the consuming developed countries. The Malaysian government taxed tin at a lower flat rate from 1960 to 1974, which resulted in a tax on metal of about 16% at a price of US%8 025/tonne. In 1974 a progressive surcharge related to market prices was enacted, which resulted in an additional tax of 8% at a price of $8025. Thus, export taxes and royalties vary according to market price.
RESOURCES
POLICY
June 1978
Economic rent: Incidence in selected metals and minerals
Table
6. Economic
B. C.
E.
F.
G. H. I. J. K.
.%urce:
Table
I. J. K. L. M. N.
a
phosphate
rock, Morocco
(6 -A) Ocean freight, insurance, and costs Production costs in France, excluding costs of phosphate rock Production costs in France, including costs of phosphate rock (6 + D + E) Wholesale and retail distribution costs Price paid by French farmers Economic rent to France (H-G-F) Total economic rent (C + I) Percentage share of Morocco in total economic rent (C/J x 100)
D.
E. F. G. H.
estimates for
Mining, beneficiation, inland transportation costs Export price, fas Casablanca Economic rent to Morocco
A.
A. B. C. D.
rent
Line H-based Others-World
7. Economic
on 18% P2 05 superphosphate Bank estimates.
rent estimates
for tin, Malaysia
POLICY
1976
26
31
38
43
44
34 8
40 9
160 122
197 154
106 62
15
24
29
19
15
76
84
91
100
105
125
148
280
316
226
40
48
59
67
68
214 49
258 62
373 34
544 161
465 171
57 14
71 13
156 78
315 49
233 27
in Foreign Agricultural
Service, USDA,
7 June 1977.
to USA (US $/tonne)
1971
1972
1973
1974
1975
1976
2 611 3 272 661 60
2 782 3 497 715 65
3 445 4 338 893 75
5 068 6 895 1 827 85
5 207 6 728 1 521 100
5331 7 309 1 978 115
3 332 255 3 688 101
3 562 270 3913 81
4413 350 5 018 255
6 980 610 8 737 1 147
6 828 525 7491 138
7 424 585 8 373 364
762
796
1 148
2 974
1 659
2 342
86.7
89.8
77.8
61.4
91.7
84.5
13.3
10.2
22.2
38.6
8.3
15.5
20.7 17.9 2.7
20.3 18.3 2.1
22.9
34.1 20.9 13.1
22.1 20.3 1.8
28.0 23.6 4.3
17.8 5.1
costs and capital costs.
b Assumed as 7% of the wholesale price. Sources: A and C from International Tin Council and World D from US Maritime Commission G from American Metal Market.
RESOURCES
1975
1974
1973
(H+C) Share of Malaysia in total rent Share of USA in total rent Total rent as % of price Malaysia’s rent as % of price US rent as % of price
inland transportation
(US $/tonne)
1972
prices reported
Production costs a Export price, fob (A + C) Economic rent to Malaysia Ocean freight and insurance cost Imported cif price (B + D) Wholesale cost& Wholesale price (USA) Economic rent to USA (G - E - F) Total economic rent
Includes
to France
June 1978
Bank.
143
Economic rent: Incidence in selected metals and minerals
Table 8. Economic
rent of petroleum,
Saudi Arabia to Western Europe
1972
1973
1974
1975
1976
A. B.
Export price of the marker crude (US $/bbl) Economic rent to Saudi Arabia (revenue of the government) (US $/bbl)
I .90 1.60
2.70 2.30
9.78 9.10
IO.72 10.10
11.51 10.90
C.
Company margins and various cost elements (US $/bbl)
6.00
6.80
7.30
8.20
9.30
D.
Economic rent to Western Europe (taxes by consuming country government) (US $/bbl)
9.40
11.40
10.30
12.70
13.90
E.
Weighted average price to consumers in Western Europe (US $/bbl)
17.00
20.50
26.70
31 .oo*
34.10
1 I .oo
13.70 67 17 83
19.40 73 47 53
22.80 74 44 56
24.80 73 44 56
F. . . Toral Share Share
Total rent (B + D) (US $/bbl) ^, ~ . rent as x ot price of exporting country (%) of consuming country (%)
Source:
65 I5 85
1972-l 975 -Ali M. Jaidah, Secretary 1976 and *-World Bank estimates.
General of OPEC, ‘Pricing of Oil, the Basic Facts’.
Petroleum World energy production and consumption is dominated by crude oil. In 1975, crude oil represented 55% of world energy production, followed by natural gas and coal, both with about 18% contribution. The world market is dominated by OPEC countries who together exported $117 billion worth of crude oil in 1976. Substitutes for petroleum are coal, natural gas, hydra/nuclear electricity, and a number of non-commerical and non-conventional energy sources. Several factors make it difficult to evaluate economic rent of petroleum on the basis of its least-cost substitutes:
Table 9. Economic
Including
oil industry integrated
of the economic
rent in Table 8 consist only of
1972
1973
1974
1975
1976
4.10
4.65
4.15
5.60
5.70
1.80
2.60
10.55
11.10
11.80
5.40 11.30 7.20 64 25 75
6.60 13.85 9.20 67 28 72
7.85 22.55 18.40 82 57 43
10.40 27.10 21.50 79 52 48
9.70b 27.20 21.50 79 55 45
margin on a replacement
b Apparent decline due to currency conversion 1973-l 976 -Shell Briefing Service. Source: 1972 -World Bank estimates.
144
The estimates
rent of petroleum
Cost of oil industry operations (lJS$/bbl? Rent to exporting country (US $/bbl) Rent to consuming country (US $/bbl) Average consumer price (US $/bbl) Total rent (US $/bbl) Rent as % of price Share of exporting country (%I Share of consuming country (%I
a
The substitution possibility is limited to a certain subset of the petroleum end-use sectors. A number of non-economic considerations environmental, political, etc - add to the costs of substitution. Over an extended period, the costs of the alternative sources, as compared with petroleum, are certain to increase, and the long-run marginal costs from these sources are yet unclear.
cost basis.
factors.
RESOURCES
POLICY
June 1978
Economic rent: Incidence in selected metals and minerals those parts that the producing and consuming country governments take in the form of taxes and duties. The estimates would, therefore, understate the total economic rent to the extent of the rent elements contained in the company margins and various cost categories. Data for decomposition of this category are not available. Estimates of the economic rent are shown in Tables 8 and 9 and Figure 5. Before the exploitation of monopoly rent through exercise of market power in 1974, the oil exporting countries received a comparatively small share of total rent. The total rent has also increased since then. But the details differ according to the source used. OPEC data (Table 8) show that in the trade between Saudi Arabia and Western Europe during 1972 and 1973, exporting countries received only 15.17% of the rent. Shell data (Table 9) place the exporting countries’ share at 25.28% (the countries involved are not specified and the data may not be comparable). Another important difference is that OPEC data show that Saudi Arabia still receives a smaller proportion of the total rent, whereas Shell now places importing countries’ share at a lower level.
q q q
32
0 ,”
24
??
16
Cost and morgm of 011Industry operations Consumer government Exporting
government
8
0
32
;
24
,” * -
16
8 Figure 5. Consumer price breakdown Sources:top-Shell: bottom-OPEC.
RESOURCES
POLICY
for petrol.
June 1978
n
i 1972
1973
1974
1975
I976
145