Resource Nationalism, no grip on Extraction: good choice too soon?
It began in Mexico about eight decades ago when President Lazaro Cardenas on March 18, 1938 nationalized the country’s oil reserves previously controlled by foreign companies – ‘resource nationalism’ was born. Broadly, resource nationalism is when governments assert greater control, influence or demand a larger share of mining returns from firms engaged in natural resource extraction.
Over the years, resource nationalism has evolved from outright expropriation of investments in natural resource industries to exacting regulations – including, higher taxes, sizeable local content requirement and beneficiation – and Nigeria appears to have followed this trend. The early cases of resource nationalism in post-independence Nigeria can be traced to the nationalization policies of the 1970s and the Nigerian Enterprise Promotion Decree originally promulgated by General Gowon in 1972.
The upshots of these policies were not all good and some of the adverse outcomes remain till this day. Mining contribution to GDP which declined (see Figure 1) as foreign investors withdrew, and were succeeded by shadow miners, is yet to be revived. The value of mineral outputs have fluctuated widely over the years and is currently well below the 1960s value. Arguably, the bitter lesson is learnt. Nigeria, like many developing nations, is now less bellicose in the quest for greater returns from natural resources.
Different Nigerian governments have tried unsuccessfully to diversify government revenue. The present administration is bent on invigorating solid minerals mining, and the “spectre” is rearing its head again – this time in the subtler form of a “ban on export of raw mineral ores and requiring that miners conduct beneficiation locally”. According to the Minister for Mines and Steel Development, Dr Kayode Fayemi, the policy – aimed at creating jobs and generating more value from extracted minerals – will be effected by October 2017.
Indeed, this policy is beguiling. However, viewed from the lens of history and assessed for priority, it could create needless complications that will deter potential investors.
A Shot at History
In January 2014, Indonesia’s government, in a bid to increase mineral export value and technology transfer, banned the export of unprocessed mineral resources. The immediate and subsequent consequences are telling. Foreign mining companies such as Newmont Mining and BHP Billiton shut down and sold their assets to local operators. Indonesia’s nickel in ore production which accounted for 31% of global production in 2013 declined to 7% in 2014, mine Bauxite production declined from 20% of world production to 1%, and copper concentrate production declined from 3% of global production to 2%.
Partly due to the ban, Indonesia’s GDP contracted by 2.4% between 2013 and 2014, while combined export value of unprocessed and processed aluminum, copper and nickel declined by roughly 50% in 2014. In line with the policy’s objective, FDI inflow for the construction of smelters increased in 2014.
Figure 1: Contribution of Solid Minerals to Nigeria’s GDP
Source: Nigerian Bureau of Statistics; Agusto & Co.
However, by 2016, the adverse impacts of the ban had not eased: Indonesia was stuck with un-exported and unprocessed lower-grade mineral ores and the government had budget deficit problems, given lost tax and royalty revenue. The government had to rethink the ban, easing it in January 2017.
In March 2017, Tanzania’s government banned the export of metallic mineral concentrates and ores. At the inception of the policy, Tanzania, like Nigeria, lacked the capacity to process mineral ores, meaning that miners would stockpile mineral ores until beneficiation could be done. Since it takes about 5 years on average to develop smelters, it would be interesting to see if miners can stock ores for this long.
The early signs are however insalubrious. Acacia Mining, a mining firm in Tanzania, states that it loses about $1 million a day due to the ban. And Endeavour Mining of Canada pulled out of a merger with Acacia, as a result of the ban. Some foreign mining companies are now contemplating arbitration under the bilateral investment treaties between Tanzania and some developed countries, which could harm Tanzania’s bilateral ties.
Matching to Muss
Nigeria is currently a pariah for mining capital due to factors including poor mining business climate, weak institutions, insecurity and infrastructural debility. With an export ban, potential investors, in addition to scouting for the huge capital required for exploration and production, will be required to also develop mineral refining facilities. For Nigeria’s mining industry already perceived as high risk, this is a tall order; it will be successful at further alienating investors.
The commercial case for constructing mineral beneficiation facilities in Nigeria is too weak. As Figure 2 shows, solid mineral production in Nigeria is puny and its contribution to GDP is negligible. What exactly will the beneficiation facilities be processing, especially given the huge capital required for their establishment? Nothing. Indonesia produces far more solid minerals than Nigeria. Yet the case for developing refining facilities in the country remains weak. It says lots about Nigeria’s case.
Given deficient infrastructure and low skilled manpower, Nigeria further lacks cost competitiveness in solid mineral refining. Local miners would prefer to sell minerals unprocessed, and miners in other countries have no incentive to export mineral ores to Nigeria for refining. Should miners be compelled to refine locally, they stand to suffer lesser margins, given higher refining cost. Not many investors would want this. Thus they would tenaciously avoid mining investment in Nigeria and the industry will continue to be smothered by lack of funding.
Ongoing exploration projects in Nigeria could also be scuttled by the ban, as original feasibility studies and projections did not anticipate stockpiling of minerals for local processing. Moreover, production levels could drop and Artisanal and
Figure 2: Mining Profile of Nigeria and recent “Resource Nationalists” in perspective
Source: World Mining Statistics; Agusto & Co.
Small-scale Miners (ASMs) could be forced to sell minerals locally at prices significantly less than the international price. These would result in hefty welfare and deadweight losses: without a public mineral buying board, ASMs could down tools, since there may not be an immediate market for their meagre extracts. Some ASMs and Juniors that continue to operate post-export-ban may develop underground trade networks, with dire consequences: royalties, tax revenue and foreign exchange earnings would be lost, and the shadow economy could be self-reinforcing – nocuous outcomes Nigeria can hardly afford.
Can it be Right?
It remains moot whether resource nationalism in general is good for development. How about mineral ore export ban aimed at developing local beneficiation capacity? Yes, it can be right. If properly timed and judiciously implemented. The Backward Integration Policy (BIP) employed in Nigeria’s cement industry in 2002 exemplifies how the ban could be apt. The BIP encouraged the use of Nigeria’s limestone and gypsum in local cement production, resulting in domestic self-sufficiency in cement, job creation and tax revenue.
However, salient enablers allowed the policy to thrive. Quarrying of limestone, being less costly than underground mining, was relatively common place in Nigeria and the mineral had an immediate local market. With that in mind, the time is not right for mineral ores export ban in Nigeria, given meagre solid mineral production and absence of large scale mining.
In the medium term, policy efforts in Nigeria’s mining industry should focus on improving the operational environment for solid mineral extraction. Such efforts should strengthen the institutional capacity, improve economic infrastructure, particularly key road and rail networks, and enhance regulatory efficiency. These should improve investor perception, attract mining capital, boost mineral production and yield much needed government revenue and foreign exchange.
Beyond this phase, policy efforts could then target developing local mineral beneficiation capacity, given a track record of successful mining experience. Sizeable local mineral output and an improved investor perception should better the business case for investment in beneficiation. Even then, a blanket export ban on all mineral ores would be inappropriate.
A common parlance in Chinese policy making says “cross the river by feeling the stones”. It suggests a more fruitful policy option for Nigeria’s mining industry. Based on careful feasibility studies, the government could encourage the development of beneficiation capacity of a few minerals, then learn vital lessons to continue or nix the development of beneficiation capacity for other minerals. What is more, the industry, through market forces, could evolve naturally from ore production to beneficiation, making rigid government guidance unnecessary.