Nationalism over natural resources is increasing; Miners can suffer

Kolwezi, Democratic Republic of the Congo – The sun sets on one of the open pit copper mines at Mutanda Mining Sarl on July 6, 2016 in Kolwezi, Democratic Republic of the Congo.

Per-Anders Pettersson / Getty Images

Resource-rich countries have become increasingly protectionist over the past year as Covid-19 threatened their economies, a new study showed.

A report released Thursday by risk consultancy Verisk Maplecroft indicated that over the course of 2020, 34 countries had seen a “significant increase” in resource nationalism, and the pandemic exacerbated an existing trend toward government intervention.

Verisk Maplecroft determined that 18 of the 34 countries depend on the minerals or hydrocarbons they export and predicted that the threat of isolationism would increase in the coming years as governments try to plug fiscal holes in the wake of the pandemic.

The mining sector will be the hardest hit by the new measures, according to the report, with some of the world’s leading producers of copper and iron ore, particularly in Africa and South America, among the 10 highest risk countries.

“It is entirely understandable that governments are looking for additional sources of revenue in these times of fiscal restrictions,” Hugo Brennan, Verisk’s director of Mining Risk, told CNBC on Friday.

“Commodity prices have enjoyed a stellar start to 2021 and this places the mining sector firmly on the radar of national governments.”

The top 10 on the Verisk Maplecroft Resource Nationalism Index included Venezuela, the Democratic Republic of the Congo, Russia, Zambia, Zimbabwe, Kazakhstan, North Korea, Tanzania, Bolivia, and Papua New Guinea.

“These are the countries most likely to resort to the strongest instruments in the resource nationalism toolbox, such as direct expropriations without compensation or inadequate,” said Verisk Americas analysts Mariano Machado and Jimena Blanco.

In recent years, North Korea has announced a new five-year plan that analysts say confirms the decision to increase self-reliance and further centralize control of the economy.

Meanwhile, Zambia has been embroiled in a long-running legal dispute with Vedanta Resources over its attempt to liquidate the company’s Konkola copper mines.

The government of President Edgar Lungu also threatened to suspend Glencore’s license to operate the Mopani copper mine in April 2020, amid tensions over the use of the asset as an alternative producer.

“The subsequent move to acquire a majority stake in Mopani underscores President Lungu’s desire to increase state control over strategic mining assets in Zambia and has also not hurt his populist credential,” Africa analyst Aleix Montana told CNBC.

Kitwe, ZAMBIA – Copper is mined at the Mopani Glencore copper mine on January 9, 2019 in Kitwe, Zambia.

Ute Grabowsky / Photothek via Getty Images

Emerging markets and developing economies closed 2020 with an average annual decline of 10.9 percentage points in government revenue as a percentage of GDP, according to IMF data aggregated by Verisk. The most affected regions were Sub-Saharan Africa, with an impact of 12.55 percentage points, and Latin America, with 8.7 percentage points.

In addition to the highly dependent nations mentioned above, many more diversified economies saw sharper but more nuanced drives toward resource nationalism over the past year, according to the index.

“The countries to look more closely are mining jurisdictions characterized by both a painful Covid-related economic downturn and an increase in these less explicit forms of resource nationalism,” Blanco said.

“The governments of these countries are increasingly willing to intervene in the economy, use indirect expropriation or demand increases in local content requirements, opening the door to a more sophisticated but still disruptive path of resource nationalism.” .

In South America, the deployment of these “less forceful” mechanisms tends to be driven by one of two factors, analysts suggested: ideology, as in Mexico or Argentina; or community pressure from mining areas or from society in general, as in Chile and Colombia.

However, in sub-Saharan Africa, there is a more complex variety of underlying motivations.

“For example, the interventionism observed in Liberia and Mauritania is driven by structural governance deficiencies, not nationalist sentiments,” the report explains.

“In Mali, the political concerns of the transitional government are the problem, while in Guinea it is the need to maximize revenues from bauxite; both countries are looking to review existing contracts.”

Oil pumps are observed in Lake Maracaibo, in Lagunillas, Ciudad Ojeda, in the state of Zulia, Venezuela.

Isaac Urrutia | Reuters

Nationalist measures brought about through social pressure tend to be more subtle, but carry the same risk for mining companies, Verisk analysts argued, using the example of a debate over water rights in Chile, which could increase the regulatory burden and operating costs for companies throughout the period. the next decade.

While the coronavirus pandemic was not the only factor in the recent push toward nationalism, it has catalyzed a trend reflected in the index since 2017.

Verisk expects this trend to increase sharply in the next two years. In “rentier mining economies,” those that primarily derive government revenue from the extraction of a particular asset, governments have developed a tendency to turn to the mining industry to support public finances, the report noted.

However, analysts suggested that mining companies should closely monitor ESG (environmental, social and governance) factors in diversified emerging economies, where more covert methods of state interventionism become the instruments of choice.

“Problems around income distribution, poverty, access to education and health care, to name just a few, can trigger socio-political processes that demand more from the state,” they said.


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