Resources Value Addition
Towards a
Resource-based African Industrialisation Strategy
(RAIS)
Dr Paul Jourdan
Resources Value Addition
Towards a
Resource-based African Industrialisation Strategy
(RAIS)
Dr Paul Jourdan
OM
Presentation Structure
1.Africa’s Natural Resources2.Commodity Prices- Where
to?3.Resource-based
industrialisation– Resource s Linkages: Fiscal,
Spatial, Backward, Forward, Knowledge
4.Conclusion5.Way Forward
OM
Africa’s Natural ResourcesAfrica’s natural (static) comparative advantages lie in its natural resources endowment & potential, particularly:
• Agriculture & Animal husbandry;• Water;• Minerals;• Energy;• Forestry & Biomass;• Fisheries & Aquaculture; and• Tourism (natural endowment-
based).This static advantage MUST be
transformed into a dynamic advantage
OM
Postulation:Africa’s unique natural resource base could
provide it with an important lever to achieve its industrialisation objectives through realising
the resource linkages opportunities (backward & forward).
Alternatively, These assets could be squandered under “free
entry” resource regimes (such as the “free mining” FIFA mineral regimes) and a continued “free market” (non-interventionist) scenario, which is likely to leave the Africa with little
more than ghost-towns (like Kabwe & Stilfontein) with holes in the ground,
desertification & exhausted soils and depleted natural fisheries & forests. OM
Africa has significantAgro-potential
(especially between the Tropics)
OM
Withdrawals by sectorRegion Agriculture Communitie
sIndustries Total % of
total% of internal
resources
10 6 m³/yr 10 6 m³/yr 10 6 m³/yr 10 6 m³/yr % %
Northern 65 000 5 500 5 800 76 300 50.9 152.6
(85%) (7%) 18%) (100 %)
Sudano-Sahelian
22 600 1 200 300 24 100 16.1 14.2
(94%) (5%) (1%) (100%)
Gulf of Guinea 3 800 1 600 700 6 100 4.1 0.6
(62%) (26%) (12%) (100%)
Central 600 600 200 1 400 0.9 0.1
(43%) (43%) (14%) (100%)
Eastern 5 400 900 200 6 500 4.3 2.5
(83%) (14%) (3%) (100%)
Southern 14 100 3 000 1 800 18 900 12.6 6.9
(75%) (16%) (9%) (100%)
Total 127 900 13 000 9 020 149 920 100% 3.8 (85%) (9%) (6%) (100%) Source: FAO
And water potential…(except for North Africa)
OMAfrica uses less than 4% of its water
Agri-mineral deposits (ex- gas/coal & K)
And has abundant known fertiliser minerals for
agriculture!
Nitrogen sources (oil/gas & coal) &
K resources
But, generally undeveloped for the African market, mainly due to severe logistics constraints.
OM
Africa is well-endowed with mineral resources
Mineral Production ‘04
Rank
Reserves Rank
PGMs* 54% 1 60+% 1
Phosphate 27% 1 66% 1
Gold 20% 1 42% 1
Chromium 40% 1 44% 1
Manganese
28% 2 82% 1
Vanadium 51% 1 95% 1
Cobalt 18% 1 55+% 1
Diamonds 78% 1 88% 1
Aluminium 4% 7 45% 1
Also Ti (20%), U (20%), Fe (17%), Cu (13%), etc.*PGMs: Platinum Group Minerals
OM
African Geology & Mineral Resources
OM
African Geology
Areas covered with recent overburden
(unknown underlying geology)
OM
Africa has diverse energy resources:fossil fuels, solar, HEP & geothermal
potential
And Africa has huge HEP (Congo R: 200GW)
Goethermal Potential:
Great African Rift Valley
Solar Potential: Deserts
OM
Africa also has huge biomass potential.
Giving it large bio-fuels production potential:
(mainly between the Tropics) OM
Commodity (resources) PricesBeyond the US Toxic Assets
Crisis?
Source: IMF: www.imf.org/external/np/res/commod/chart1.pdf OM
1991M011992M081994M031995M101997M051998M122000M072002M022003M092005M042006M112008M062010M010
50
100
150
200
250
Commodity Prices Index (2005=100, IMF)
Non-Fuel Polynomial (Non-Fuel )All Commods Polynomial (All Commods)
Non-Fuel
All Com-modities
Commodity (resources) PricesBeyond the US Toxic Assets
Crisis?
Source: IMF: www.imf.org/external/np/res/commod/chart1.pdf
1980M011982M061984M111987M041989M091992M021994M071996M121999M052001M102004M032006M082009M010
20
40
60
80
100
120
140
160
180
Agri Raw Materials Index ('05=100, IMF)
Agri Raw Materials Index ('05=100, IMF)Polynomial (Agri Raw Materials Index ('05=100, IMF))
OM
Commodity (resources) PricesBeyond the US Toxic Assets
Crisis?
Source: IMF: www.imf.org/external/np/res/commod/chart1.pdf
1980M011982M061984M111987M041989M091992M021994M071996M121999M052001M102004M032006M082009M010
50
100
150
200
250
300
Metal price index 1980-2011
Metal price index Polynomial (Metal price index)
OM
Asian Boom:New “scramble for resources”?
High intensity, sellers market:
Colonial system
Low intensity, buyers market:
stagnation & instability
High intensity,
Africa’s new opportunity?
Steel- good proxy for most minerals OM
How long will boom last?
Steel Intensity
(all metals proxy)
~$16k/capita
Data Source: BHPB 2006
PRC
China + India > 2X pop’n of First World!
2025?
India
However, prices will fall with increasing supply over the medium-long term, but at a higher level (lower grades)OM
Africa
Resource-based Industrialisation?
Maximise the 5 VA resource linkages
5. FORWARDValue-addition: (beneficiation)
Export of resource-based
articles
3. BACKWARDInputs: Capital
goods, consumables, services, (also
export)
4. KNOWLEDGE Linkages:
“Nursery” for new tech clusters,
adaptable to other sectors
2. SPATIALPuts in critical infra-structure (transport,
energy) to realise other economic
potential & intra-regional trade
If the linkages cannot be made, the people’s resources would be best left unexploited- Need to maximise the developmental & inter-
generational impact whilst still extant!
1. FISCAL: Capture & invest of resource rents (RRT) in long-
term economic physical & human
infra (inter-generational)
Use depleting assetsto underpin growth in
sustainable sectors
HRD, R&D
PJ
African Mining Vision
“Transparent, equitable and optimal exploitation of mineral resources to underpin broad-based sustainable
growth and socio-economic development”
Promotion of Linkages1. Fiscal linkages (reinvest of rents)2. Downstream beneficiation & manufacturing3. Upstream into capital goods, consumables and
services4. Spatial linkages (infrastructure, logistics, ICT)5. Knowledge linkages (skills, HRD & R&D)
PJ
Resources provide opportunities for
backward & forward linkages
MiningMineral
ProcessingExplorationSmelting &
RefiningFabrication
expl. capital goods• geophysical• drilling• survey• etc.
mining capital goods• drilling• cutting• hauling• hoisting, etc.
processing cap. goods• crushers/mills• hydromet plant• materials handling• furnaces, etc.
Refining Cap. Goods• Smelters• Furnaces• Electro winning cells• Casters
Fabrication Cap.goods• Rolling• Moulding• Machining• assembling
exploration services• GIS• analytical• data processing• financing• etc
mining services• mine planning• consumables/
spares• sub-contracting• financing• analytical, etc
processing services• comminution• grinding media• chem/reagects• process control• analytical, etc
Refining services• Reductants• Chemicals• Assaying• Gas & elec
supply
Value adding services• Design• Marketing• Distribution• Services
PJ
Resources inputs sector (up-stream) has a comparative advantage in:
1. Relatively large local market 2. Development of techs for local conditions3. National assets: permits for concessioning
with linkages conditionality
The resource curse can be avoided!“Deepening” the resource sector linkages:
development of the resource inputs & outputs industries is critical , but requires the
development of a resources tech capacity!
Finland managed to shift from a 1970 resources (pc) trajectory to a 1998 manufactures (mf) trajectory, through the development of its resources inputs (machinery) and outputs (value-addition) sectors (source Palma, G. 2004)
Finland: e.g. Forestry- grew capital goods
(machinery) & value-added exports (wood
manufactures, pulp/paper)Thru’ investment in R&D!
Finland: 1970 on primary commodities (pc- mining & forestry) inverted U-curve, but shifts to 1998
manufacturing curve (mf- resources inputs &
outputs/beneficiation).
Chile: 1970 on manufacturing U-curve (ISI), but shifts to 1998
primary commodities (mining & agriculture) curve, after opening up
its economy (coup) in the 70’s.
PJ
Finland: The mature forestry industrial cluster 1997a
BACKWARD LINKAGES
1. Specialized inputsChemical and biological inputs (for production of fibres, fillers, bleaches)
2. Machinery and equipmentFor harvesting (cutting, stripping, haulage)For processing (for production of chips, sawmills, pulverization)For paper manufacture (30% of the world market)
3. Specialized servicesConsultancy services on forest managementResearch institutes on biogenetics, chemistry and silviculture
NATURAL COMPARATIVE ADVANTAGE
Abundant forestry reserves and plantations
(400-600m3 per capita)b
FORWARD LINKAGES
1. RoundwoodSawnwoodPlywood (40% of the world market)
2. Wood productsFurnitureFor construction
3. Wood pulp
4. Paper and cardboardNewsprintArt paper (25% of the world market)Toilet paperPackagingSpecial products
Source: Ramos 1998 p111 (CEPAL Review, #68, 12/1998);
a: Generates 25% of Finland’s exports; b: Compared with 25-30m3 per capita in the rest of the world.
SIDE LINKAGES
Related activitiesElectricity generationProcess automationMarketingLogisticsEnvironment industries (paper)Mining (sulphuric acid)
Using a natural comparative advantage to develop a competitive advantage
PJ
Prolong the life of the resources, migrate to exports of resource techs and value-added
products: survive beyond resource depletion!
Oil & Gas Development Strategy:
(Norway: OG21 tech strategy)
>Tech exports
>Gas VA
>resources>recovery
R&DHRD
Extraction ex-linkages
PJ
The foreign resource capital “trade-off”
Resources TNC (DFI) distortions
PJ
TNC Distortion Impact on Africa Solutionglobal TNC purchasing strategies
less likely to develop local suppliers (<backward linkages)
Impose local content milestones
optimise their global processing (VA) facilities
denies local VA opportunities (<forward linkages)
Impose local VA targets
locate their tech development (R&D) in OECD countries
Denies tech development & tech capacity (knowledge linkages)
Local tech development conditions
locate their high level HRD in OECD countries
denies Africa HRD capacity development
Impose local HRD conditions & skills targets
political disquiet on foreign dominance of national assets
Fuels local discontent and xenophobia
Facilitate growth of indigenous resource companies
TNC “core competence” conundrum.
dirt-digging = no linkages
Competitive auctions against linkages realisation
Almost all African Mining Regimes are based on the principle of free mining, or “free entry”. Free mining includes:1. “a right of free access to lands in which the minerals are in public
ownership, 2. a right to take possession of them and acquire title by one’s own act of
staking a claim, and 3. a right to proceed to develop and mine the minerals discovered.”*
The Africa minerals regimes broadly fit into the World Bank’s revision of African mineral regimes from the 80’s till current. “..certain elements of the free mining doctrine that animated the nineteenth-century formulation of mining regimes in the American and British spheres have also guided the liberalisation process of African mining regimes over the 1980s and 1990s. One of the ways this came about was through the retrenchment of state authority, which in turn contributed to the institutionalisation of asym-metrical relations of power and influence that had important consequences for local political processes, local participation, and community welfare.”*
Free mining originated in small enclaves in Medieval Europe but was formalised in California and other European colonies in the 19th century, as a vehicle to promote dispossession & colonisation.
“Free Mining” Colonial Mineral Regimes
*Sources: Barton 1993 & Campbell 2010
But is the wholesale application of this doctrine in the interests of the Africa’s
people? PJ
Extracting Greater Benefits?Beyond “free mining” regimes?
ExplorationTerrain
Exploration LicenseAutomaticity
RoR*/RRT tax
“Mining Charter “type conditions
Knownassets
Unknown assets
DelineationTerrain
Auction on:• Rent share (RRT)• Infra development• Upstream- local VA• Downstream VA• HRD & R&D, tech transfer• Community development
Mining Concession/Licence*RoR: Rate-of-Return
PartiallyKnown
Mineral Terrains
Geo-ReserveTerrain
•Further geo-survey: CGS
•Risk exploration for future step-in rights.
OM
Extracting Greater Benefits?Beyond “free mining” regimes?
ExplorationTerrain
Exploration LicenseAutomaticity
RoR*/RRT tax
“Mining Charter “type conditions
Knownassets
Unknown assets
DelineationTerrain
Auction on:• Rent share (RRT)• Infra development• Upstream- local VA• Downstream VA• HRD & R&D, tech transfer• Community development
Mining Concession/Licence*RoR: Rate-of-Return
PartiallyKnown
Mineral Terrains
Geo-ReserveTerrain
•Further geo-survey: CGS
•Risk exploration for future step-in rights.
1st come 1st served (“free mining”) to add NEW state mineral assets
Transparent & competitive concession: to maximise
development impact
OM
Forward linkages: Critical Industrial Feedstocks
•Manufacturing• Steel• Polymers• Base metals
•Agriculture• Fertilisers (NPK)
•Infrastructure• Cement• Steel (rebar)• Copper
(precious metals mainly only offer fiscal linkages!)
OM
Key Challenges to VA linkages• Requisite Infrastructure
– Transport (road/rail/ports)– Energy – Water – Investment environment– Knowledge: HEIs- Skills development
• OECD et al bi/multilateral accords– EU EPAs & REACH curtail value addition– Kyoto? Doha?
• Technology development– Well functioning R&D required to drive
linkages. Regional approach through:– Networking of R&D Institutions, universities– Joint research & funding – pooling resources OM
Steel is the most important material into manufacturing By value, steel is the 2nd largest global commodity:
Steel
PJ
Steel Demand (uses)
PJ
Steel is followed by Polymers...
(2nd most important feedstock into manufacturing)
PJ
USES OF POLYMERS
PJ
Regional African Steel & Energy Strategies- 1st step?
• Regional integration started in EU with steel & coal (energy)- ECSA;
• Need to be close to raw materials for steel (iron ore & coal/gas) and polymer (hydrocarbons) production;
• High economies-of-scale for steel, petrochems and energy;
• Africa should assess regional steel & energy integration – “customs unions” with compensatory mechs – as a 1st step to full economic integration PJ
Fiscal Linkages: Capturing resource rents
• Resource rents or differential rents are those returns above the “expected” rate of return.
• Resources often embody huge differential rents due to their quality, amenability, location, etc.
• Africa should impose a resource rent tax (RRT) on ALL resource concessions that would trigger in once the expected rate of return is achieved;
• The RRTs should be kept offshore in Regional Development Funds and reinvested in long-term physical and human (HRD/R&D) infrastructure=>
Avoid: Dutch Disease (currency appreciation)Avoid: Industrial Polarisation (bambazonke)Enhance: Equitable regional growth & development
Resource Rent Tax (RRT)
Sovereign Wealth Fund
Regional Dev Funds
Regional Infrastructure
Intra-regional trade & invest PJ
Proving Adam Smith Wrong 240y later?
“There are in Africa none of those great inlets, such as the Baltic and Adriatic seas in Europe, the
Mediterranean and Euxine seas in both Europe and Asia, and the gulphs of Arabia, Persia, India, Bengal, and Siam in Asia, to carry maritime
commerce into the interior parts of that great continent: and the great rivers of Africa are at too
great a distance from one another to give occasion to any considerable inland navigation.”
Smith, Adam, 1776, An Inquiry into the Nature and Causes of the Wealth of Nations.
Resources could finance the infrastructure intra-continental trade
& development!
Spatial (infrastructure) Linkages
Africa has extremely high logistics costs due to NTBs and bad transport
infrastructure!
PJ
e.g: Sn African SDIs under development or consideration
Use high rent resources to catalyse sustainable high-impact sectors, esp.
agriculture & agro-processingPJ
ProcessingIntermediates(feedstocks)
ResourcesExploitation
Exploitation capital goods: e.g. plant, equipment,
after-market, etc.
.
Exploitation services:
e.g. financial, technical, consumables, logistics,
energy, skills, etc.
Processing capital goods
Processing services
Intermediatescapital goods
Intermediatesservices
Infrastructure: transport, energy, skills, R&D
Catalyse other Sectors & Areas (agri, tourism, etc.)
Feedstocks &
Tech. (bene.)
Ma
nu
factu
ring (e
.g. ca
p g
ood
s)
Resource Linkages: key to growth & development
BEYOND COMMODITIES?Use Asian resource demand to kick-start a
Resource-based African Industrialisation Strategy“RAIS”
Recap:
OM
Resource Exploitation & infrastructure phase
Resource Consumables & HRD phase
Resource R&D, capital goods & services phase
Lateral migration & diversification phase
Resource Exploitation
Resource Beneficiation (value-addition)
Resource Infrastructure
Densification Infrastructure
Unskilled resource labour
Rents from Resource diversification industries Diverse tax base
Resource rents (tax)
From AMV: Schematic RAIS Phasing (relative economic importance)
Resource Inputs production & Lateral migration (diversification)
Skill intensity (HRD)
Import of Resource Inputs
Phase 1 Phase 2 Phase 3 Phase 4
Resource R&D. high level skills and tech development
Import of Resource Technologies
Complex regulation, M&E, arbitration, governanceLocal judicial system
Contract/license resource & infra (PPP) governance
I
II
III
IV
V
VI
VII
OM
Most African states in Ph I-2
Conclusions• The Asian boom and concomitant strong demand for
Africa’s natural resources could provide a window of opportunity for a resource-based African industrialisation strategy (RAIS)
• Such a RAIS must optimise the developmental impact of resources by ensuring that the resource economic linkages are made (fiscal, spatial, knowledge, backward and forward)
• African resource regimes (particularly mineral regimes) need to be overhauled to allow for the competitive concessioning of the region’s resource endowments (land, minerals, water, fisheries, state rights, etc.), to maximise price discovery and developmental objectives (linkages)
• VA economies-of-scale and competition would be greatly enhanced by a common Africa markets (customs unions) which could start with regional steel & energy groupings. PJ
Way ForwardAlign with the AU minerals strategy:
1. Develop an “AFRICA INDUSTRIALISATION VISION”2. Unpack the VISION into a coherent African value addition
Industrialisation Strategy (in sync with the AU minerals & other strategies), using regional validation workshops;
3. Concretise the AU Industrialisation Strategy with templates, toolkits, model resources concession agreements, model legislation/regulation, sub-sector strategies and other useable tools/aids
4. Establish ongoing continental & regional peer learning fora to develop African “best practice” strategies for VA
5. Establish regional African Steel and Energy economic groupings (RECs)
6. Impose a Resource Rent Tax, on all excess profits above the expected return, on all resource exploitation concessions. Should be kept offshore (<DD) to capitalise regional development funds to finance long-term regional physical and knowledge (HRD & R&D) infrastructure for more equitable regional economic integration (<IP, bambazonke) PJ