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Mineral endowment, public policy and competitiveness>
Comment by Tapani Erling Mineral endowment, public policy and competitiveness: a survey of issues by John Tilton John Tilton has once again prepared a good paper on some key issues relevant for current business analysis. Competitiveness is an evergreen theme, whose importance has become overriding for survival in the business recession. 1 found Tilton’s categorization of competitiveness very stimulating. Public policy and mineral endowments have become especially interesting topics now when Eastern Europe and the CIS, successor to the USSR, are gradually opening up and - very slowly - becoming part of the international trade system. But I must object to Tilton’s reference to the ‘free trade system’ in the world mineral markets. There are many obstacles to the free trade flow of metals even in the Western world, and a few of them are in fact discussed by the author himself. In what follows, I begin on a lighter note by briefly elaborating one of the categorizations relevant to competitiveness, employed by Tilton. I continue to discussing my own recent experiences, illuminating crucial aspects of competitiveness which in my view have not received the prominence they deserve in the author’s analyses.
Greenfields, brownfields
redfields and
One way to look at competitiveness is to distinguish between the competitiveness of greenfield, redfield and brownfield projects, as is done in Tilton’s paper. I think this is a useful and instructive distinction. Obviously, greenfield projects have to meet the most stringent profitability criteria, since their revenues must cover not only operat-
250
ing expenditures but the full capital costs as well. Redfield projects, in which all capital has already been depreciated, face the least demands on returns except, of course, when they have to live up to some new requirements eg environmental legislation. Brownfield projects are typically very attractive, as expansion and modernization often involves a combination of falling unit costs and improved environmental performance. I am somewhat at a loss, however, regarding the choice of colours. Greenfield seems unambiguous. Redfield also fits, if the colour refers to rust. To a large extent it also fits if red refers to the former socialist bloc. So, redfield is at least partly understandable. But a question mark remains with the brownfields. Would it not be more appropriate to call them greyfields, suggesting that the plant is already in a grey area? Or maybe yellowfields, given that yellow colour is a danger signal in nature?
Competitiveness and political and cultural environment On a more serious note, I would like to describe some of my own recent experiences with greenfield competitiveness. Until early 1992, I was the manager of Outokumpu’s copper smelter project in Portugal. The plan was to build a smelter with a capacity of 210 000 tonnes, and a refinery of 100 000 tonnes. Total estimated investment costs amounted to US$500 million. The venture was to be carried out by a consortium in which Outokumpu held 60%, the rest being divided between several Portuguese partners. The project has since been
put on ice. Active development by Outokumpu is not pursued for the time being. I will try to explain why this decision was taken. There are several criteria for competitiveness in a greenfield project like the proposed Portuguese smelter. I refer to the first one as the right business concept. This may sound vague, but it is not. In the case under scrutiny, the right business concept comprised integration with mining, other excellent logistics and new, efficient technology. Let me elaborate. Portugal is interesting as a location of a new smelter, because it possesses Europe’s best copper mine which could supply about half of the smelter’s concentrate feed. Other logistics are also very favourable. A greenfield project will typically benefit from the most modern, cost saving technology. In this case, the intention was to employ the flash converting system, a new method developed jointly by Kennecott and Outokumpu, with the first industrial scale application in a smelter being built by Kennecott in Utah. The technology offers considerable savings in investment and operating costs, and it is environmentally outstanding, all in comparison with current run of the mill copper smelting techniques. The second precondition for competitiveness is related to markets. There must be a demand for additional capacity, or else the newcomer should be so strong in relation to existing competitors that he can beat them in most terms despite the handicap imposed on him by the capital cost. This handicap explains the frequent competitiveness and survival of redfields, particularly when such plants are supported by public policies, as is often the case. In the Portuguese case, the market conditions were relatively favourable, as shortage of smelting capacity seems to be emerging. However, there are several competing greenfield projects at the planning stage around the world and, of course, many additional brownfield projects. Nevertheless, our project was also quite favourably placed from the point of view of markets. Why, then, was it put on ice? In my
RESOURCES
POLICY
December
1992
Mineral endowment, public policy and competitiveness:
view, this decision was due to a third criterion having to do with the political and cultural aspects of the host country. In this particular case, the problem arose from the core of the business concept, the integration of the smelter with the mine. The latter is 51% owned by the Portuguese state, the rest of the equity being held by RTZ. This mine is considered a crown jewel by the government and by the local business community. Hence, the Portuguese majority holding in it seems to be untouchable. An effective integration of the smelter and the mine, a key to the smelter’s competitiveness, could only be achieved through a merger or, at least, cross-ownership of the two companies. Accepting this would almost automatically lead to a loss of the
RESOURCES
POLICY
December
Portuguese majority stake in the mine. Such a move, therefore, has stumbled against the obstacle of ‘political impracticability’, despite the substantial gains that a merger would have brought to all concerned. Even on purely patriotic grounds, one could argue for the benefit to Portugal from downstream copper processing, increasing the national value-added of the country’s natural resources. Furthermore, the integrated company would have been a strong player in Europe, and Portugal would have become a power to reckon with in world copper. The cultural dimension of the case under scrutiny is reflected in the country’s weak industrial traditions. Commerce and trade have dominated Portugal’s economy for centuries. Hence, it seems difficult to take an extended
1992
comment
view of business, and to perceive the longer-term benefits of the large, capital intensive smelter project. The political and cultural dimensions as described here have impeded the establishment of a potentially highly competitive project, and have caused the partial withdrawal of Outokumpu. But we are still hopeful. There are chances that on further reflection the Portuguese government and business community will realize the national advantage of the proposed venture, and reassess their cultural attitudes in that light. The project could still go ahead if the right business concept were approved.
Tapani Erling Outokumpu Metals and Resources Espoo, Finland
251
Greenfields, brownfields
redfields and
One way to look at competitiveness is to distinguish between the competitiveness of greenfield, redfield and brownfield projects, as is done in Tilton’s paper. I think this is a useful and instructive distinction. Obviously, greenfield projects have to meet the most stringent profitability criteria, since their revenues must cover not only operat-
250
ing expenditures but the full capital costs as well. Redfield projects, in which all capital has already been depreciated, face the least demands on returns except, of course, when they have to live up to some new requirements eg environmental legislation. Brownfield projects are typically very attractive, as expansion and modernization often involves a combination of falling unit costs and improved environmental performance. I am somewhat at a loss, however, regarding the choice of colours. Greenfield seems unambiguous. Redfield also fits, if the colour refers to rust. To a large extent it also fits if red refers to the former socialist bloc. So, redfield is at least partly understandable. But a question mark remains with the brownfields. Would it not be more appropriate to call them greyfields, suggesting that the plant is already in a grey area? Or maybe yellowfields, given that yellow colour is a danger signal in nature?
Competitiveness and political and cultural environment On a more serious note, I would like to describe some of my own recent experiences with greenfield competitiveness. Until early 1992, I was the manager of Outokumpu’s copper smelter project in Portugal. The plan was to build a smelter with a capacity of 210 000 tonnes, and a refinery of 100 000 tonnes. Total estimated investment costs amounted to US$500 million. The venture was to be carried out by a consortium in which Outokumpu held 60%, the rest being divided between several Portuguese partners. The project has since been
put on ice. Active development by Outokumpu is not pursued for the time being. I will try to explain why this decision was taken. There are several criteria for competitiveness in a greenfield project like the proposed Portuguese smelter. I refer to the first one as the right business concept. This may sound vague, but it is not. In the case under scrutiny, the right business concept comprised integration with mining, other excellent logistics and new, efficient technology. Let me elaborate. Portugal is interesting as a location of a new smelter, because it possesses Europe’s best copper mine which could supply about half of the smelter’s concentrate feed. Other logistics are also very favourable. A greenfield project will typically benefit from the most modern, cost saving technology. In this case, the intention was to employ the flash converting system, a new method developed jointly by Kennecott and Outokumpu, with the first industrial scale application in a smelter being built by Kennecott in Utah. The technology offers considerable savings in investment and operating costs, and it is environmentally outstanding, all in comparison with current run of the mill copper smelting techniques. The second precondition for competitiveness is related to markets. There must be a demand for additional capacity, or else the newcomer should be so strong in relation to existing competitors that he can beat them in most terms despite the handicap imposed on him by the capital cost. This handicap explains the frequent competitiveness and survival of redfields, particularly when such plants are supported by public policies, as is often the case. In the Portuguese case, the market conditions were relatively favourable, as shortage of smelting capacity seems to be emerging. However, there are several competing greenfield projects at the planning stage around the world and, of course, many additional brownfield projects. Nevertheless, our project was also quite favourably placed from the point of view of markets. Why, then, was it put on ice? In my
RESOURCES
POLICY
December
1992
Mineral endowment, public policy and competitiveness:
view, this decision was due to a third criterion having to do with the political and cultural aspects of the host country. In this particular case, the problem arose from the core of the business concept, the integration of the smelter with the mine. The latter is 51% owned by the Portuguese state, the rest of the equity being held by RTZ. This mine is considered a crown jewel by the government and by the local business community. Hence, the Portuguese majority holding in it seems to be untouchable. An effective integration of the smelter and the mine, a key to the smelter’s competitiveness, could only be achieved through a merger or, at least, cross-ownership of the two companies. Accepting this would almost automatically lead to a loss of the
RESOURCES
POLICY
December
Portuguese majority stake in the mine. Such a move, therefore, has stumbled against the obstacle of ‘political impracticability’, despite the substantial gains that a merger would have brought to all concerned. Even on purely patriotic grounds, one could argue for the benefit to Portugal from downstream copper processing, increasing the national value-added of the country’s natural resources. Furthermore, the integrated company would have been a strong player in Europe, and Portugal would have become a power to reckon with in world copper. The cultural dimension of the case under scrutiny is reflected in the country’s weak industrial traditions. Commerce and trade have dominated Portugal’s economy for centuries. Hence, it seems difficult to take an extended
1992
comment
view of business, and to perceive the longer-term benefits of the large, capital intensive smelter project. The political and cultural dimensions as described here have impeded the establishment of a potentially highly competitive project, and have caused the partial withdrawal of Outokumpu. But we are still hopeful. There are chances that on further reflection the Portuguese government and business community will realize the national advantage of the proposed venture, and reassess their cultural attitudes in that light. The project could still go ahead if the right business concept were approved.
Tapani Erling Outokumpu Metals and Resources Espoo, Finland
251