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The decline and rise of the multinational corporation in the metal mineral industry
VIEWPOINT
The decline and rise of the multinational corporation in the metal mineral industry
Marian Radetzki
The golden age of the mining multinational in the 1950s and the early 1960s gave way to decline as a consequence of economic nationalism in many host countries in the late 1960s and 1970s. During the /ate 198Os, however, the mining multinational began to regain prominence in international mineral development. This paper reviews the historical evolution of the role of the mining multinational and then looks to the future. It predicts a period of greater cooperation between host governments and mining multinationals. Marian Radetzki is President of SNS Energy, Stockholm and Visiting Professor, Mineral Economics Department, Colorado School of Mines, Golden, CO, USA.
In this paper I intend to track the evolution of the multinational corporation in the metal mineral industry. I will refer to it in what follows simply as the ‘mining multinational’. After briefly describing how and why it was created, I discuss the important roles that this institution played during its golden age in the 1950s and early 1960s. There follows an analysis of its decline in the late 1960s and 1970s in consequence of the widespread nationalizations that occurred at the time, and of the tendencies of resurrection in the late 1980s. The paper then employs these historical insights in mapping the future role of the mining multinational until the end of the century and beyond. I believe that we will see much more of a global partnership in mineral resources development and trade as the 20th century draws to a close, with the multinational corporation playing a key role as integrator.
In the beginning In the beginning all was quite simple. Demands for metals on a significant scale emerged in response to the industrialization process in Europe and North America in the course of the
2
19th century, and somewhat later in Japan. This demand led to increasing levels of exploitation and processing of metal minerals, initially close to the industrial centres of the day. The enterprises involved in this activity were tightly integrated with the local economy. Their establishment was prompted by local demand. Their needs for inputs like finance, equipment and mangement, too, was satisfied from nearby sources. With the expanding use of metals, a need gradually emerged to cast the net wider, and to exploit deposits at ever increasing distances from the industrializing centres where the demand was generated. The rationale of such far away exploitation was usually based on the lower cost of exploiting the far away, superior, deposits, but at the same time the ventures suffered from the higher costs for transporting the produce to the final market. Over time, the economies of the far away projects tended to improve. As industrialization progressed, and the most economical local mineral deposits became gradually depleted, the advantage of unspoilt resource bases elsewhere became more accentuated. At the same time, technological progress led to a continuous and very impress-
0301-4207/92/010002-7
0
1992 Butterworth-Heinemann
Ltd
Viewpoint
‘Raymond Vernon, Two Hungry Giants, Harvard University Press, Cambridge, MA, 1982.
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POLICY
March 1992
ive decline in the cost of transport. Both developments favoured the geographical spread of mineral production. Expensive metal minerals, like the concentrates of precious metals, tin and copper, took the lead. The deterrent of transport costs played a lesser role, given the high value represented by each ton of these products. Cheaper materials, eg iron ore and bauxite, had to await the transport revolution of the 19_5Os, before transcontinental shipment became economic. The established mining and mineral processing enterprises of the old industrial centres had a head start as managers of the distant mineral ventures. They had developed, over the years, a superior expertise in the management and technology of large-scale mineral ventures. They could generate the finance needed for project investment. They had an easy and natural access to the markets for the final output. They derived substantial advantage from the political protection afforded by their home governments. Several of these governments exercised colonial powers in Asia and Africa, where, in any case, little if any local entrepreneurship existed to compete with the established firms in opening up the mineral riches. Political protection was extended to ventures in Latin America too, for despite the continent’s formal independence, it was politically and economically subordinated to the great power of the time. The existing Latin entrepreneurs had experience of small-scale mining only, and were no match for the giants from North America and Europe. The established mineral enterprises became not only managers, but also owners of the emerging mineral sector in developing countries. This came about automatically, given the absence of alternative agents who could assume the ownership role. But ownership was also strongly preferred by the corporate managements, since it provided a superior control over the raw materials needed for the mineral processing facilities at home. Ownership was favoured by the home governments, too, because it was seen as the best assurance of a stable national supply of strategically important pro-
ducts. In this way, a truly multinational industry developed. The subsidiaries had only limited linkages with the local economy. Their capital and management was foreign, and their output was consumed abroad. As a rule, only the raw materials, like metal concentrates, were produced, all further processing being undertaken in the multinational companies’ smelters and refineries at an undepleted home. As noted, mineral wealth constituted the main attraction for establishing mines in far away places. There was no similar incentive for moving the processing facilities out of the home country. Reliable and meaningful figures are hard to come by, but my own calculations suggest that by the late 1950s to early 196Os, more than 40% of nonsocialist world metal mineral output was produced by foreign subsidiaries of multinational enterprises, a major share of the total being located in the developing countries. Japan represents an anomaly in the picture I have painted. Now a leading rich and mature economy, its industrialization is of relatively recent origin. The unimportance of its involvement as direct foreign investor in the minerals sector may be partly due to its being a latecomer, but it is also a consequence of the disintegration of its colonial ambitions at the end of the Second World War. In response to an extraordinarily fast growth of metal demand in the 1950s and 1960s Japanese industry, too, reached for the outside world to secure its import needs. But in distinction from the North Atlantic habits, the Japanese engagements seldom involved majority ownership positions in mineral development projects abroad. Instead, as has been vividly described by Raymond Vernon,’ consortia of Japanese metal mineral consumers offered long-term finance and sometimes technology to induce the establishment of new mineral ventures, in exchange for long-term supply contracts for the output.
Period of transition The late 1960s and most of the 1970s constituted an exceptional and painful
3
201ivier Bomsel with Isabel Marques, Djibril Ndiaye, and Paulo de Sa, Mining and Metallurgy Investment in the Third World: The End of Large Projects?, Organisation for Economic Cooperation and Development, Paris, 1990. 3Theodore H. Moran, ‘Mining companies, economic nationalism, and Third World development in the 1990s: deja vu all over again?’ in J.E. Tilton, ed, Mineral Wealth and Economic Development, Resources for the Future, Washington, DC, 1990.
period of transformation for the international mineral industry. This was when the role and usefulness of the mining multinational became increasingly questioned by emancipating governments in developing countries, and also by the administrations of industrial mineral exporting nations like Australia and Canada. The freedom of action of the mineral enterprises was increasingly circumscribed, the fiscal dues imposed on mineral extraction became excessively onerous, and a great number of ventures were nationalized, with little or no compensation to the former owners. Many mining multinationals were left amputated and bleeding in the process, as they were separated from their raw materials sources. The stocks and flows of direct foreign investments in the traditional form were sharply curtailed. The nationalized units evolved into a state-owned enterprise universe constituting an important component of overall supply. Ownership control, the very basis of raw materials supply security, distintegrated in the process, but supply security as such was never compromised by the change. The state owned units took over from the multinationals’ subsidiaries the role of supplying the industrialized world with its metal minerals import needs. To the mining multinationals, however, the decades of conflict were a traumatic and costly experience, as their activities shrank and their roles were constrained. A variety of so called new investment forms grew up in response to these developments. Through these the mutinationals continued to be involved, but in far more limited and less flagrant roles, which lessened their exposure to the vagaries of public policy. I will not develop these themes for reasons of space limitation, but also because I tend to believe that the new investment forms are a transient phenomenon. In any case, Olivier Bomsel of Ecole des Mines in Paris has described these arrangements in considerable detail in a recent OECD publication.* Retrospectively it is clear that the Japanese arrangements proved more successful than the North Atlantic direct investment involvements in
weathering the troubles of the transition period. For it turns out that physical security of supply was never endangered. But by not being so conspicuous, the Japanese approach aroused less enmity in the host countries. By and large, therefore, Japanese importers avoided the loss through confiscation incurred by North Atlantic investors. The period of rough treatment, fiscal squeeze and nationalization ended in the early part of the 1980s. Some observers, like Ted Moran of Georgetown University in the USA, view this change primarily as a reaction to the depression from which the metal markets have suffered through most of the 1980s.’ With metal demand at a standstill and plenty of unused capacity, there was little profit to squeeze, and the governments of developing countries became increasingly eager to attract the few mineral investments that continued to be made. According to these observers, the governments of developing countries will resume their aggressive treatment of the mining multinationals once a high level of mineral rents is restored. I do not share this view. In my perspective, the 1960s and 1970s were an exceptional period of transition from a colonial to a postcolonial regime, which is now definitely behind us. The newly independent administrations of the mineral exporting developing countries overreacted when they found their economies dominated by foreigners who operated under contracts formulated by the former colonial powers, and which offered little benefit to the local economy. The establishment of national control, the imposition of heavy fiscal dues, and the exercise of sovereign right to take over, were actions of an inexperienced underdog whose bargaining power had been suddenly and extraordinarily improved. Socialist politics were also used to justify the attacks on the mining multinationals, which were seen as the prime agents of capitalism.
Reassessment In the 198Os, the aggressive policies of the mineral exporting countries to-
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POLICY March 1992
wards the mining multinationals have been reassessed. It is becoming increasingly clear to the governments concerned that the costs of these policies have been quite high. The earlier growth of the developing countries’ share in non-socialist world metal mineral supply was arrested or reversed by the conflicts of the postcolonial transition. And many state owned enterprises have turned up a very disappointing performance, and are a long way from fulfilling the expectations for which they were first established. One goal of nationalization was to provide the government with full control over a nationally important activity. In many cases the management of such enterprises was entrusted to influential politicians who used their mandate to create a state within the state, and to favour their own political constituency with little concern for the national benefit. Governments often found it far more difficult to control a state owned enterprise with a powerful national figure at its head than when they had to deal with foreigners who could always be threatened with expulsion. Another goal was to ensure that mineral rents should not dissipate abroad. This goal was achieved, but the inefficiencies typical of state ownership led to a shrinkage of total rent in many cases, leaving the nation worse off than before. There are exceptions to these disenchanting experiences. Things have tended to turn out better where governments abstained from political intervention, and imposed profit maximization as the overriding goal for the state owned enterprise to pursue. Codelco in Chile is a prime example of a highly successful mineral corporation under state ownership; CVRD in Brazil is another. Given the generally disappointing performance of state owned mineral enterprises, however, it is not very surprising that we have seen since the latter half of the 1980s an increasing number of privatizations. Those of the large copper enterprises in Brazil and Mexico have so far been the most conspicuous. More will occur as time goes on. Press reports in 1991 suggest that even the government of Zambia is
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POLICY
March 1992
toying with the possibility of privatizing its copper industry, a prime symbol of nationhood since it was nationalized a couple of decades ago. Privatization has not always meant that the multinational mineral enterprises have been brought back in, for in the past few decades local entrepreneurship capable of running mineral ventures has been established - at least in some developing countries. Quite often, however, the reduction or discontinuation of state ownership goes hand in hand with a more welcoming attitude towards the multinationals. Systematic empirical observations through the 1980s suggest to me that we have witnessed a fundamental reversal in the Third World governments’ appreciation of the contributions that the mining multinationals can make to economic development and welfare. This reversal has several grounds. First is the awareness that state ownership is not a satisfactory alternative for mineral industry operations, especially in terms of efficiency, profitability, maintenance of exploration programmes, international borrowing, and economic execution of large investments. It is now widely recognized that the essential competence possessed by the multinationals in these areas is unique, and not obtainable from other sources. Second is the demonstration of the relative success achieved by the mineral industry in countries which have maintained a multinational presence. The examples from Indonesia, and more recently from Chile, show how a foreign presence can contribute to the mineral sector’s health and performance. These examples also show that it is possible for the government to maintain constructive and amicable relationships with the multinationals, while at the same time exercising a general control over their actions and extracting substantial revenues from them. Coherent and stable mining and fiscal policies are a crucial precondition for achieving this end. The third reason is that now that the era of socialism has come to an end, foreign capitalist enterprises are no longer regarded as enemies as a matter of course. This has become particularly
5
true after the recent political changes in Eastern Europe and the USSR. The attitudes and approaches of the mining multinationals have also undergone a fundamental change in the course of the past decades. In the early 1960s few of the globally active mineral enterprises would accept large involvements in developing countries unless they were granted colonial-type arrangements, comprising a mining lease stretching over many decades, assurance of a favourable and unchanging regulatory and fiscal regime, fully equity ownership, and unequivocal control over all aspects of the venture. In the 1980s the more progressive multinationals have developed into responsible corporate citizens, with concern for the wellbeing of the host nation. They have accepted the host government’s right to a sizable share of mineral rents. Equity partnerships with the host country administration are no longer regarded as a liability. On the contrary, such arrangements have been turned into valuable assets that help to attain satisfactory levels of profitability.
The future The changing attitudes of the governments and the mining multinationals to the prospects for their mutual collaboration provide a key starting point for my assessment of the future. For that assessment, however, it is necessary to bring a few other relevant and important changes into the picture. In the early 196Os, when the conflictridden transition began, virtually all non-socialist world metal mineral consumption took place in the industrialized market economies, comprising the OECD area. The OECD’s own production of these materials, including the exportable surpluses of Australia and Canada, accounted for a major share of the area’s total demand. Exports from the developing countries constituted an important but minor supplement. Such exports took place predominantly within the vertically integrated multinational corporations. The socialist bloc countries had a very limited interaction with the rest of the world in this exchange.
In the early 1990s the industrialized market economies still dominate world consumption, and domestic production continues to provide for a major share of their needs. The developing countries still satisfy almost all OECD import needs. But several other important features that characterized the world mineral sector in the 1960s no longer hold true. The first important change is that a fast increasing share of global metal mineral consumption takes place in the developing world itself, and that a number of developing countries eg South Korea and India, have become significant importers of metal minerals. The opening up of China during the early 1980s has converted this country, too, into a sizable importer of base metals and their concentrates. China’s significance is nowadays frequently reflected by the price impact of its purchase decisions. In consequence of these developments the markets in which metal minerals are sold have become much less of a pure industrialized world preserve than was the case three decades ago. The second change is that the metal and mineral markets have become much more competitive than they were in the 1960s. Two related factors have been at work here. The nationalizations of the integrated multinationals’ raw material sources greatly increased the volume of arm’s length transactions for intermediate products like iron ore, bauxite or copper concentrates. Cosy intrafirm relationships were replaced by fierce competition among the unintegrated raw material suppliers for market outlets. Competition was also enhanced during the 1960s and 1970s by a proliferation of suppliers of metallic raw materials as well as of finished metals. The multinationals of the 1990s have a far lesser scope for rigging the market to their advantage than they had in the 1960s. This explains the introduction of aluminium and nickel trade on the London Metal Exchange, and the increasing use of LME pricing in other base metal markets. The third and probably most important change is the political and economic revolution in the USSR. This country is the world’s most important
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POLICY March 1992
Viewpoint
4Marian Radetzki, State Mineral Enterprises: An Investigation info their Impact on International Mineral Markets, Resources for the Future, Washington, DC, I 985.
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producer of metal minerals. It is also a significant exporter of a number of such products. The political and economic change of the USSR is so recent that it is hard to gauge its full implications for the subject under study. Nevertheless, a few inferences can be drawn. The greater economic openness of the USSR has revealed the extreme inefficiency characterizing the centrally planned Soviet economy, at the macro as well as the micro level. This suggests a great potential for reduced waste in metal consumption, and for expanded internationally competitive production of metal minerals, with an ensuing very substantial increase in exports, provided market reforms are successfully pursued. If I am to judge from what is happening in the USSR energy sector, the opening up of the Soviet metal minerals industries to the rest of the world will require large imports of foreign capital and technology and will provide huge and attractive opportunities to the mining multinationals. Having outlined these changes, I will now summarize what I see to be the prospects for the mining multinationals and for their roles in mineral resource development in the 1990s and beyond. I believe that this will be a period during which the mining multinationals regain a large chunk of the territory that they lost during the transition of the 1960s and 1970s. The reputation of these corporations is improving. Those who handle mineral policy in developing countries increasingly recognize the uniqueness and indispensability of the competences that the multinationals provide. Since the debt crisis erupted, the active participation of a financially strong mining multinational has become a virtual necessity for obtaining the loan finance needed for new projects in heavily indebted countries. The recognition of the mining multinationals’ valuable contribution is reinforced by the energetic efforts of the policy makers in the USSR to attract direct investment from abroad into the Soviet mineral sector. The contrast between what these firms can accomplish and the achievements of state owned and state directed units is stark. The apprehension and fear that
POLICY March 1992
mining multinational aroused in the past has all but vanished with the economic emancipation of the government administrations in developing countries, with the more flexible and cooperative attitudes that the multinationals have adopted vis-d-vis their hosts, and with the rising competitiveness of mineral markets. In recent years, the mining multinationals have been exhibiting an increasing willingness to take advantage of the more congenial environment offered by Third World governments; but given the painful past, the response has so far been somewhat cautious and slow. In a book on state owned mineral enterprises in developing countries that I published in 1985,j I expressed the opinion that state ownership would remain an important feature in the non-socialist world mineral industry, even though its share of the total would not expand. The experience that I have gained since then has altered my view. I now believe that we will see a gradual shrinkage of the state owned universe, with the multinationals picking up many of the equity positions that the governments decide to cede. Some countries will take a lead in such policy shifts, other will be laggards. The process will continue beyond the present decade. In an increasingly integrated world of finance, the governments of mineral exporting countries as well as their nationals will have ample opportunities to pick up some equity in the multinationals that exploit their mineral wealth. This could be a way to increase the feeling of active host country participation. There will be a continued role for the traditional Japanese contribution to mineral development through provision of long-term finance against long-term delivery contracts. The mining multinationals will be the natural counterparts in such deals. But it is unlikely that the alternative modes will fare as differently as in the past, now that the painful transition from colonial times has been completed. More likely, the return to the lenders, from Japan or elsewhere, will equal the return to the equity investors, minus the commercial and geological risk premium to which the latter are entitled.
the
7
Viewpoint
Although a permanent conflict between government and company about division of mineral rents will always remain, cooperation to make the total rent as large as possible will predominate in the relationship. Governments will provide a constructive policy framework. Mineral exploration, exploitation and exports will be pursued by the companies on the basis of commercial criteria, with due attention being paid to the social, environmental and other interests of the host country. In the more cooperative world that seems to be emerging, supply security will be a less pressing issue than in the past. With roughly equal treatment by the authorities in industrialized and developing countries, the multinationals will often prefer the latter countries as hosts, given the superior resource potential in many developing countries. All else being equal, the Third World’s share of world metal mineral output will again expand after the standstill and decline caused by the conflicts of transition. All else may not be quite equal, however. If the political and economic transformation of the USSR proceeds speedily, that country might become a formidable competitor to the develop-
ing countries in attracting the mining multinationals’ attention. The economics of Soviet mineral resource wealth could well prove to be equal to that in developing countries. Competition for the participation of the mining multinationals in the development of these resources would raise, at most, a temporary problem, for the companies should be able to stretch their technical, managerial and commercial expertise availability over time. A more fundamental and longer-run problem is, of course, that if the developing countries successfully expand their metal mineral supply with active and efficient help from the multinationals, and if the USSR does the same, the result could be an excess of supply over demand, with an extended price depression, from which both the host governments and the multinationals would suffer. In a freely operating market economy, the problem should eventually be automatically resolved. Lower prices will lead to lower profits and reduced incentives for everybody to make further investments in capacity expansion or capacity maintenance. But this reflection is admittedly beside the subject proper of my paper, that of the decline and rise of the multinationals.
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POLICY March 1992
The decline and rise of the multinational corporation in the metal mineral industry
Marian Radetzki
The golden age of the mining multinational in the 1950s and the early 1960s gave way to decline as a consequence of economic nationalism in many host countries in the late 1960s and 1970s. During the /ate 198Os, however, the mining multinational began to regain prominence in international mineral development. This paper reviews the historical evolution of the role of the mining multinational and then looks to the future. It predicts a period of greater cooperation between host governments and mining multinationals. Marian Radetzki is President of SNS Energy, Stockholm and Visiting Professor, Mineral Economics Department, Colorado School of Mines, Golden, CO, USA.
In this paper I intend to track the evolution of the multinational corporation in the metal mineral industry. I will refer to it in what follows simply as the ‘mining multinational’. After briefly describing how and why it was created, I discuss the important roles that this institution played during its golden age in the 1950s and early 1960s. There follows an analysis of its decline in the late 1960s and 1970s in consequence of the widespread nationalizations that occurred at the time, and of the tendencies of resurrection in the late 1980s. The paper then employs these historical insights in mapping the future role of the mining multinational until the end of the century and beyond. I believe that we will see much more of a global partnership in mineral resources development and trade as the 20th century draws to a close, with the multinational corporation playing a key role as integrator.
In the beginning In the beginning all was quite simple. Demands for metals on a significant scale emerged in response to the industrialization process in Europe and North America in the course of the
2
19th century, and somewhat later in Japan. This demand led to increasing levels of exploitation and processing of metal minerals, initially close to the industrial centres of the day. The enterprises involved in this activity were tightly integrated with the local economy. Their establishment was prompted by local demand. Their needs for inputs like finance, equipment and mangement, too, was satisfied from nearby sources. With the expanding use of metals, a need gradually emerged to cast the net wider, and to exploit deposits at ever increasing distances from the industrializing centres where the demand was generated. The rationale of such far away exploitation was usually based on the lower cost of exploiting the far away, superior, deposits, but at the same time the ventures suffered from the higher costs for transporting the produce to the final market. Over time, the economies of the far away projects tended to improve. As industrialization progressed, and the most economical local mineral deposits became gradually depleted, the advantage of unspoilt resource bases elsewhere became more accentuated. At the same time, technological progress led to a continuous and very impress-
0301-4207/92/010002-7
0
1992 Butterworth-Heinemann
Ltd
Viewpoint
‘Raymond Vernon, Two Hungry Giants, Harvard University Press, Cambridge, MA, 1982.
RESOURCES
POLICY
March 1992
ive decline in the cost of transport. Both developments favoured the geographical spread of mineral production. Expensive metal minerals, like the concentrates of precious metals, tin and copper, took the lead. The deterrent of transport costs played a lesser role, given the high value represented by each ton of these products. Cheaper materials, eg iron ore and bauxite, had to await the transport revolution of the 19_5Os, before transcontinental shipment became economic. The established mining and mineral processing enterprises of the old industrial centres had a head start as managers of the distant mineral ventures. They had developed, over the years, a superior expertise in the management and technology of large-scale mineral ventures. They could generate the finance needed for project investment. They had an easy and natural access to the markets for the final output. They derived substantial advantage from the political protection afforded by their home governments. Several of these governments exercised colonial powers in Asia and Africa, where, in any case, little if any local entrepreneurship existed to compete with the established firms in opening up the mineral riches. Political protection was extended to ventures in Latin America too, for despite the continent’s formal independence, it was politically and economically subordinated to the great power of the time. The existing Latin entrepreneurs had experience of small-scale mining only, and were no match for the giants from North America and Europe. The established mineral enterprises became not only managers, but also owners of the emerging mineral sector in developing countries. This came about automatically, given the absence of alternative agents who could assume the ownership role. But ownership was also strongly preferred by the corporate managements, since it provided a superior control over the raw materials needed for the mineral processing facilities at home. Ownership was favoured by the home governments, too, because it was seen as the best assurance of a stable national supply of strategically important pro-
ducts. In this way, a truly multinational industry developed. The subsidiaries had only limited linkages with the local economy. Their capital and management was foreign, and their output was consumed abroad. As a rule, only the raw materials, like metal concentrates, were produced, all further processing being undertaken in the multinational companies’ smelters and refineries at an undepleted home. As noted, mineral wealth constituted the main attraction for establishing mines in far away places. There was no similar incentive for moving the processing facilities out of the home country. Reliable and meaningful figures are hard to come by, but my own calculations suggest that by the late 1950s to early 196Os, more than 40% of nonsocialist world metal mineral output was produced by foreign subsidiaries of multinational enterprises, a major share of the total being located in the developing countries. Japan represents an anomaly in the picture I have painted. Now a leading rich and mature economy, its industrialization is of relatively recent origin. The unimportance of its involvement as direct foreign investor in the minerals sector may be partly due to its being a latecomer, but it is also a consequence of the disintegration of its colonial ambitions at the end of the Second World War. In response to an extraordinarily fast growth of metal demand in the 1950s and 1960s Japanese industry, too, reached for the outside world to secure its import needs. But in distinction from the North Atlantic habits, the Japanese engagements seldom involved majority ownership positions in mineral development projects abroad. Instead, as has been vividly described by Raymond Vernon,’ consortia of Japanese metal mineral consumers offered long-term finance and sometimes technology to induce the establishment of new mineral ventures, in exchange for long-term supply contracts for the output.
Period of transition The late 1960s and most of the 1970s constituted an exceptional and painful
3
201ivier Bomsel with Isabel Marques, Djibril Ndiaye, and Paulo de Sa, Mining and Metallurgy Investment in the Third World: The End of Large Projects?, Organisation for Economic Cooperation and Development, Paris, 1990. 3Theodore H. Moran, ‘Mining companies, economic nationalism, and Third World development in the 1990s: deja vu all over again?’ in J.E. Tilton, ed, Mineral Wealth and Economic Development, Resources for the Future, Washington, DC, 1990.
period of transformation for the international mineral industry. This was when the role and usefulness of the mining multinational became increasingly questioned by emancipating governments in developing countries, and also by the administrations of industrial mineral exporting nations like Australia and Canada. The freedom of action of the mineral enterprises was increasingly circumscribed, the fiscal dues imposed on mineral extraction became excessively onerous, and a great number of ventures were nationalized, with little or no compensation to the former owners. Many mining multinationals were left amputated and bleeding in the process, as they were separated from their raw materials sources. The stocks and flows of direct foreign investments in the traditional form were sharply curtailed. The nationalized units evolved into a state-owned enterprise universe constituting an important component of overall supply. Ownership control, the very basis of raw materials supply security, distintegrated in the process, but supply security as such was never compromised by the change. The state owned units took over from the multinationals’ subsidiaries the role of supplying the industrialized world with its metal minerals import needs. To the mining multinationals, however, the decades of conflict were a traumatic and costly experience, as their activities shrank and their roles were constrained. A variety of so called new investment forms grew up in response to these developments. Through these the mutinationals continued to be involved, but in far more limited and less flagrant roles, which lessened their exposure to the vagaries of public policy. I will not develop these themes for reasons of space limitation, but also because I tend to believe that the new investment forms are a transient phenomenon. In any case, Olivier Bomsel of Ecole des Mines in Paris has described these arrangements in considerable detail in a recent OECD publication.* Retrospectively it is clear that the Japanese arrangements proved more successful than the North Atlantic direct investment involvements in
weathering the troubles of the transition period. For it turns out that physical security of supply was never endangered. But by not being so conspicuous, the Japanese approach aroused less enmity in the host countries. By and large, therefore, Japanese importers avoided the loss through confiscation incurred by North Atlantic investors. The period of rough treatment, fiscal squeeze and nationalization ended in the early part of the 1980s. Some observers, like Ted Moran of Georgetown University in the USA, view this change primarily as a reaction to the depression from which the metal markets have suffered through most of the 1980s.’ With metal demand at a standstill and plenty of unused capacity, there was little profit to squeeze, and the governments of developing countries became increasingly eager to attract the few mineral investments that continued to be made. According to these observers, the governments of developing countries will resume their aggressive treatment of the mining multinationals once a high level of mineral rents is restored. I do not share this view. In my perspective, the 1960s and 1970s were an exceptional period of transition from a colonial to a postcolonial regime, which is now definitely behind us. The newly independent administrations of the mineral exporting developing countries overreacted when they found their economies dominated by foreigners who operated under contracts formulated by the former colonial powers, and which offered little benefit to the local economy. The establishment of national control, the imposition of heavy fiscal dues, and the exercise of sovereign right to take over, were actions of an inexperienced underdog whose bargaining power had been suddenly and extraordinarily improved. Socialist politics were also used to justify the attacks on the mining multinationals, which were seen as the prime agents of capitalism.
Reassessment In the 198Os, the aggressive policies of the mineral exporting countries to-
RESOURCES
POLICY March 1992
wards the mining multinationals have been reassessed. It is becoming increasingly clear to the governments concerned that the costs of these policies have been quite high. The earlier growth of the developing countries’ share in non-socialist world metal mineral supply was arrested or reversed by the conflicts of the postcolonial transition. And many state owned enterprises have turned up a very disappointing performance, and are a long way from fulfilling the expectations for which they were first established. One goal of nationalization was to provide the government with full control over a nationally important activity. In many cases the management of such enterprises was entrusted to influential politicians who used their mandate to create a state within the state, and to favour their own political constituency with little concern for the national benefit. Governments often found it far more difficult to control a state owned enterprise with a powerful national figure at its head than when they had to deal with foreigners who could always be threatened with expulsion. Another goal was to ensure that mineral rents should not dissipate abroad. This goal was achieved, but the inefficiencies typical of state ownership led to a shrinkage of total rent in many cases, leaving the nation worse off than before. There are exceptions to these disenchanting experiences. Things have tended to turn out better where governments abstained from political intervention, and imposed profit maximization as the overriding goal for the state owned enterprise to pursue. Codelco in Chile is a prime example of a highly successful mineral corporation under state ownership; CVRD in Brazil is another. Given the generally disappointing performance of state owned mineral enterprises, however, it is not very surprising that we have seen since the latter half of the 1980s an increasing number of privatizations. Those of the large copper enterprises in Brazil and Mexico have so far been the most conspicuous. More will occur as time goes on. Press reports in 1991 suggest that even the government of Zambia is
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March 1992
toying with the possibility of privatizing its copper industry, a prime symbol of nationhood since it was nationalized a couple of decades ago. Privatization has not always meant that the multinational mineral enterprises have been brought back in, for in the past few decades local entrepreneurship capable of running mineral ventures has been established - at least in some developing countries. Quite often, however, the reduction or discontinuation of state ownership goes hand in hand with a more welcoming attitude towards the multinationals. Systematic empirical observations through the 1980s suggest to me that we have witnessed a fundamental reversal in the Third World governments’ appreciation of the contributions that the mining multinationals can make to economic development and welfare. This reversal has several grounds. First is the awareness that state ownership is not a satisfactory alternative for mineral industry operations, especially in terms of efficiency, profitability, maintenance of exploration programmes, international borrowing, and economic execution of large investments. It is now widely recognized that the essential competence possessed by the multinationals in these areas is unique, and not obtainable from other sources. Second is the demonstration of the relative success achieved by the mineral industry in countries which have maintained a multinational presence. The examples from Indonesia, and more recently from Chile, show how a foreign presence can contribute to the mineral sector’s health and performance. These examples also show that it is possible for the government to maintain constructive and amicable relationships with the multinationals, while at the same time exercising a general control over their actions and extracting substantial revenues from them. Coherent and stable mining and fiscal policies are a crucial precondition for achieving this end. The third reason is that now that the era of socialism has come to an end, foreign capitalist enterprises are no longer regarded as enemies as a matter of course. This has become particularly
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true after the recent political changes in Eastern Europe and the USSR. The attitudes and approaches of the mining multinationals have also undergone a fundamental change in the course of the past decades. In the early 1960s few of the globally active mineral enterprises would accept large involvements in developing countries unless they were granted colonial-type arrangements, comprising a mining lease stretching over many decades, assurance of a favourable and unchanging regulatory and fiscal regime, fully equity ownership, and unequivocal control over all aspects of the venture. In the 1980s the more progressive multinationals have developed into responsible corporate citizens, with concern for the wellbeing of the host nation. They have accepted the host government’s right to a sizable share of mineral rents. Equity partnerships with the host country administration are no longer regarded as a liability. On the contrary, such arrangements have been turned into valuable assets that help to attain satisfactory levels of profitability.
The future The changing attitudes of the governments and the mining multinationals to the prospects for their mutual collaboration provide a key starting point for my assessment of the future. For that assessment, however, it is necessary to bring a few other relevant and important changes into the picture. In the early 196Os, when the conflictridden transition began, virtually all non-socialist world metal mineral consumption took place in the industrialized market economies, comprising the OECD area. The OECD’s own production of these materials, including the exportable surpluses of Australia and Canada, accounted for a major share of the area’s total demand. Exports from the developing countries constituted an important but minor supplement. Such exports took place predominantly within the vertically integrated multinational corporations. The socialist bloc countries had a very limited interaction with the rest of the world in this exchange.
In the early 1990s the industrialized market economies still dominate world consumption, and domestic production continues to provide for a major share of their needs. The developing countries still satisfy almost all OECD import needs. But several other important features that characterized the world mineral sector in the 1960s no longer hold true. The first important change is that a fast increasing share of global metal mineral consumption takes place in the developing world itself, and that a number of developing countries eg South Korea and India, have become significant importers of metal minerals. The opening up of China during the early 1980s has converted this country, too, into a sizable importer of base metals and their concentrates. China’s significance is nowadays frequently reflected by the price impact of its purchase decisions. In consequence of these developments the markets in which metal minerals are sold have become much less of a pure industrialized world preserve than was the case three decades ago. The second change is that the metal and mineral markets have become much more competitive than they were in the 1960s. Two related factors have been at work here. The nationalizations of the integrated multinationals’ raw material sources greatly increased the volume of arm’s length transactions for intermediate products like iron ore, bauxite or copper concentrates. Cosy intrafirm relationships were replaced by fierce competition among the unintegrated raw material suppliers for market outlets. Competition was also enhanced during the 1960s and 1970s by a proliferation of suppliers of metallic raw materials as well as of finished metals. The multinationals of the 1990s have a far lesser scope for rigging the market to their advantage than they had in the 1960s. This explains the introduction of aluminium and nickel trade on the London Metal Exchange, and the increasing use of LME pricing in other base metal markets. The third and probably most important change is the political and economic revolution in the USSR. This country is the world’s most important
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POLICY March 1992
Viewpoint
4Marian Radetzki, State Mineral Enterprises: An Investigation info their Impact on International Mineral Markets, Resources for the Future, Washington, DC, I 985.
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producer of metal minerals. It is also a significant exporter of a number of such products. The political and economic change of the USSR is so recent that it is hard to gauge its full implications for the subject under study. Nevertheless, a few inferences can be drawn. The greater economic openness of the USSR has revealed the extreme inefficiency characterizing the centrally planned Soviet economy, at the macro as well as the micro level. This suggests a great potential for reduced waste in metal consumption, and for expanded internationally competitive production of metal minerals, with an ensuing very substantial increase in exports, provided market reforms are successfully pursued. If I am to judge from what is happening in the USSR energy sector, the opening up of the Soviet metal minerals industries to the rest of the world will require large imports of foreign capital and technology and will provide huge and attractive opportunities to the mining multinationals. Having outlined these changes, I will now summarize what I see to be the prospects for the mining multinationals and for their roles in mineral resource development in the 1990s and beyond. I believe that this will be a period during which the mining multinationals regain a large chunk of the territory that they lost during the transition of the 1960s and 1970s. The reputation of these corporations is improving. Those who handle mineral policy in developing countries increasingly recognize the uniqueness and indispensability of the competences that the multinationals provide. Since the debt crisis erupted, the active participation of a financially strong mining multinational has become a virtual necessity for obtaining the loan finance needed for new projects in heavily indebted countries. The recognition of the mining multinationals’ valuable contribution is reinforced by the energetic efforts of the policy makers in the USSR to attract direct investment from abroad into the Soviet mineral sector. The contrast between what these firms can accomplish and the achievements of state owned and state directed units is stark. The apprehension and fear that
POLICY March 1992
mining multinational aroused in the past has all but vanished with the economic emancipation of the government administrations in developing countries, with the more flexible and cooperative attitudes that the multinationals have adopted vis-d-vis their hosts, and with the rising competitiveness of mineral markets. In recent years, the mining multinationals have been exhibiting an increasing willingness to take advantage of the more congenial environment offered by Third World governments; but given the painful past, the response has so far been somewhat cautious and slow. In a book on state owned mineral enterprises in developing countries that I published in 1985,j I expressed the opinion that state ownership would remain an important feature in the non-socialist world mineral industry, even though its share of the total would not expand. The experience that I have gained since then has altered my view. I now believe that we will see a gradual shrinkage of the state owned universe, with the multinationals picking up many of the equity positions that the governments decide to cede. Some countries will take a lead in such policy shifts, other will be laggards. The process will continue beyond the present decade. In an increasingly integrated world of finance, the governments of mineral exporting countries as well as their nationals will have ample opportunities to pick up some equity in the multinationals that exploit their mineral wealth. This could be a way to increase the feeling of active host country participation. There will be a continued role for the traditional Japanese contribution to mineral development through provision of long-term finance against long-term delivery contracts. The mining multinationals will be the natural counterparts in such deals. But it is unlikely that the alternative modes will fare as differently as in the past, now that the painful transition from colonial times has been completed. More likely, the return to the lenders, from Japan or elsewhere, will equal the return to the equity investors, minus the commercial and geological risk premium to which the latter are entitled.
the
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Viewpoint
Although a permanent conflict between government and company about division of mineral rents will always remain, cooperation to make the total rent as large as possible will predominate in the relationship. Governments will provide a constructive policy framework. Mineral exploration, exploitation and exports will be pursued by the companies on the basis of commercial criteria, with due attention being paid to the social, environmental and other interests of the host country. In the more cooperative world that seems to be emerging, supply security will be a less pressing issue than in the past. With roughly equal treatment by the authorities in industrialized and developing countries, the multinationals will often prefer the latter countries as hosts, given the superior resource potential in many developing countries. All else being equal, the Third World’s share of world metal mineral output will again expand after the standstill and decline caused by the conflicts of transition. All else may not be quite equal, however. If the political and economic transformation of the USSR proceeds speedily, that country might become a formidable competitor to the develop-
ing countries in attracting the mining multinationals’ attention. The economics of Soviet mineral resource wealth could well prove to be equal to that in developing countries. Competition for the participation of the mining multinationals in the development of these resources would raise, at most, a temporary problem, for the companies should be able to stretch their technical, managerial and commercial expertise availability over time. A more fundamental and longer-run problem is, of course, that if the developing countries successfully expand their metal mineral supply with active and efficient help from the multinationals, and if the USSR does the same, the result could be an excess of supply over demand, with an extended price depression, from which both the host governments and the multinationals would suffer. In a freely operating market economy, the problem should eventually be automatically resolved. Lower prices will lead to lower profits and reduced incentives for everybody to make further investments in capacity expansion or capacity maintenance. But this reflection is admittedly beside the subject proper of my paper, that of the decline and rise of the multinationals.
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POLICY March 1992