|Mining in Africa today - Strategies and Prospects (UNU, 1987, 91 pages)|
The question of local processing has two aspects which should always be clearly distinguished. The first is the geographical location of mineral-based industries, such as copper and aluminium metallurgy or the steel industry. The second relates to the ownership of capital and to the control of production, investment, technology, marketing and, more generally, of the development of these industries. Location and control are not one and the same thing. These mineral-based industries can be transferred from developed countries and relocated in Third World countries while remaining under the close control of Western mining and industrial enterprises. We can conceive, also, of the location of these industries remaining in developed economies but becoming the property of those Third World countries that supply them with the necessary raw materials. The present situation is, however, one in which such industries are still largely concentrated in advanced countries and owned or controlled by the big mining and industrial enterprises of those countries. There are some examples of Third World mining companies' investments in the processing facilities of importing countries, but to assume that the developed economies' metallurgical industries could be under the control of the mineral producing countries is unrealistic. The only serious possibilities of large scale relocation are either a transfer of metallurgy to the mining countries, under the control of Western (and Japanese) operators, or the development of local processing in the Third World under state control.
Two main arguments are put forward to justify processing of minerals in the country where they are produced, The first relates to the maximization of value added, in the sense that, relative to mining, processing is supposed to increase the unit value added (wages, profits and rents). The second relates to the national economic integration which processing is meant to induce. These two arguments form the substance of the usual plea for local processing in the Third World. In Africa, the Economic Commission of the United Nations as well as the Lagos Plan of Action (1980) strongly recommend the development of local processing in the mining countries. There is, however, another argument, which is specific to Africa. In most African countries, industrialization through import substitution was exhausted earlier than elsewhere, than in South America, for example. The usual drawbacks to this type of industrialization - limiter) size of markets low saving rate tehnical dependency and lack of foreign exchange - had their effects well before investments could develop the production of capital goods. In addition, an industrialization process based on the export of labour-intensive manufactured products, as in some South-East Asian countries, seems to be an unlikely development in most African countries, because their systems of education, transport and administration are relatively less developed and because the conditions of the making of the working class are very different. Consequently, mineral-based industrialization is, apparently, the only way, at least for the mining countries.
In so far as African mineral production feeds the metallurgical industries of the West and Japan, its local processing would imply a progressive relocation of these industries in the mining countries: the USA, Japan and Western Europe would substitute the importation of metals (copper, aluminium, steel) for the importation of corresponding minerals. However, such a relocation can either be 'pulled' by the mining states, and possibly imposed on the big enterprises of the world metallurgical industry, or 'pushed' by those enterprises or their parent states, and possibly forced upon the mining countries.
The arguments put forward in favour of the development of local processing do not, in fact, exclude explicitly foreign capital from the control of mineral production and processing in the mining economies. Value added maximization and the development of economic integration around the metallurgical industries are usually considered in purely technical terms, as if they required no political or economic planning. In some cases, association with the big mining transnationals is seen as a prerequisite by the experts who recommend the development of local processing as a means of industrializing.
If we assume that local processing is initiated by the state, is such a policy possible in the medium and long term and, if so, is it desirable?
There are, indeed, some barriers - commercial, technological and financial - to entry in the mineral-based industries. Commercial barriers depend on the degree of concentration of the industry and, in particular, on the structure of its international market. For alumina and aluminium, the world capitalist market is largely controlled by the big European and North American 'majors', but things are different for copper and iron ore, where there is a multiplicity of operators. Technological barriers are less important, because, as we have seen, the basic technical processes and equipment have not changed for a long time. Technical barriers can, however, be erected by the strategies of the Western and Japanese operators. Technical and commercial barriers can be sometimes connected, as with the diffusion of the continuous casting technique for copper in the 1970s. In 1970, the total capacity of the continuous casting plants was 800,000 tons but in 1979 it was five million tons out of a total world copper output of eight million tons. This technique, which uses copper cathodes for the manufacture of copper finished products, broadens the international market for cathodes but reduces that for copper ingots, which are obtained by the traditional technique. Because it could not readily adopt the continuous casting technique, Zambia thus has to reduce its ingot production and to stop its copper processing at the cathode stage since cathodes are now easier to sell on the world market.
The main barriers to entry in these industries are actually financial in nature; the capital costs of processing are usually higher in the Third World. For example, investment cost per ton of steel produced was about $1,200 in the USA in the late 1970s but $3,0004,000 in Nigeria. For copper, the investment cost per ton is about $2,100 for smelting in developed countries but $2,500 in the Third World, and $600 and $1,000 respectively for refining. The gap is explained not only by the higher overhead costs in developing economies but also by the monopolistic prices charged for equipment to the Third World investor. It has been estimated that around the early 1980s, the capital cost of smelting bauxite was $700 per ton of alumina and for refining alumina it was $2,800 per ton of aluminium. Such figures are quite high but they should be compared with the costs of mining which have increased more than the costs of processing during the last IS years. Thus the total investment cost in the aluminium industry tripled during the 1970s but the cost of bauxite mining increased fivefold. The investment for iron mines of ten million tons capacity also increased three- or fourfold according to the grade of the ores. The opening of lower grade fields and the building of new infrastructures explain this steep rise in mining costs, which means that, in terms of financial requirements, processing is no more difficult to develop than is mineral extraction.
Lastly, two other obstacles to local processing must be mentioned, these are: the standards and specifications and the protectionism of developed countries. Whether they result from technical changes or from the changes in consumption patterns, the specifications for more or less processed ores or for more or less elaborated metals tend to discourage the importation of products which are not directly provided by the big Western and Japanese enterprises. Thus, for example, very strict specifications for steel manufacture in developed economies considerably hamper the importation of such semifinished products as slabs, billets or coils produced by state companies of the Third World. Another example is given by the new processes introduced in copper ore smelting which require specific types of ore.
Protectionism by developed countries against the industrial products of the Third World has been greatly reinforced by the present economic crisis. The rate of protection increase with the degree of manufacture of the imported product. For instance, import duties are higher for steel finished products than for semi-finished ones and for these more than for iron ore. Protection is relatively weak for copper up to the refining stage but is very strong for the finished products; and beyond the stage of bauxite it is at its maximum for the aluminium industry.
All the obstacles we have discussed cannot actually prevent the development of local processing in some Third World countries which have either sufficient financial resources, an industrial and technical basis or an educated and trained labour force. But, as we have noted, such conditions are usually absent in most African mining countries where the obstacles to processing seem quite difficult to overcome, especially if the state must act against the will of the Western and Japanese operators which control its mining industry. Mineral processing is, then, unlikely to be undertaken on a large scale in the African mining countries unless it becomes a policy objective for the Western operators themselves.
But supposing that local processing can be developed in the mining country even if it does not accord with the strategies of foreign enterprises, is it a desirable policy?
Clearly local processing of minerals is likely to create jobs, distribute incomes, stimulate the domestic market and favour professional and technical learning by the workers, although it must be said that the impact on employment and income may be rather limited in view of the highly mechanized character of metallurgy.
The estimation of the theoretical gains of local processing of ores is founded on the comparison between the price of the mineral and the price of the metal from which it is made. The value added (wages, profits and rents) as a proportion of the price of the metals varies from 20% for copper to 70% for iron and to 90% for aluminium. This value added is determined by the world price system for the products, the factors of production and the labour force. It depends also on a given technology, a given production scale, a specific labour process and on a particular market structure. Now, in order to get the same value added, the mining country where processing is being developed should reproduce all these determining elements, which is obviously impossible. From this point of view, it is not at all certain that, by comparison with the export of raw materials, local processing should be associated with more monetary gains. The country which exported processed rather than raw materials would not necessarily realize a net foreign exchange gain, either because the imported techniques and equipment are overpriced or because the conditions of the labour process are such that labour productivity is very low, the foreign exchange cost of local processing may actually be higher than the price of processed ores on the international market.
The substitution of the export of metals for the export of minerals has another consequence, in so far as it develops backward and forward linkages around the mineral-based industries. This would make large sections of the national economy dependent on the international market for metals.
These are not simply abstract objections, as is illustrated by the case of the oil countries which have developed the processing of hydrocarbons into refined or petrochemical products in the last decade. In fact, local processing can be a viable strategy only if it is, partly at least, detached from the objectives of value added maximization and economic integration. This implies that the 'production' of foreign exchange must be based on an adequate combination of primary mining and processing activities rather than on the substitution of the latter for the former.
During the 1970s, after the oil price rise, business circles in the West often talked about the necessity to relocate the mineral-based industries in the mining countries of the Third World but under the control of the Western enterprises. This has been said and repeated for the steel industry, but also for copper, aluminium, refining and petrochemicals. An official report of the EEC written in 1975 states that 'Europe must progressively accept to relinquish the industrial activities which can be better exercised elsewhere, especially when the relocation of such industries is accompanied by European investments in these mining countries'. In the words of the report, 'it is better to follow the propensity of the mining countries to assure the first processing of minerals instead of resisting it'. It was supposed that this relocation under transnationals' control would be stimulated by the rising costs of energy, labour, transport, and by increasing pollution in the industrial West.
Energy consumption is, indeed, very important in the mineral-based industries and their production costs have been much affected by the rise in energy prices after 1974. It is clear that such countries as Guinea and Zaire, which are well endowed with hydro-electrical resources, or the OPEC countries, have a comparative advantage from this point of view.
Labour costs in developed countries are also important, although the mineral-based industries are highly mechanized. According to a study of the US Bureau of Mines, the wage costs in a US copper smelter of 400,000 tons capacity represent 43% of the production cost, and the proportion is 30% in a copper refinery of 300,000 tons. Labour costs for aluminium represent 12% of the production cost in smelting and 20% in refining, for a US plant using Jamaican bauxite. Wages are, of course, much lower in Third World countries and, if the technology used is the same as in developed countries, labour costs will be much lower.
Transport costs are an important component of the price of imported ores. They represent, for instance, 27% of the price of imported iron ore, but only 12% for steel products. The smelting of bauxite allows great reductions in weight and, therefore, in transport costs, as two tons of bauxite are needed to obtain one ton of alumina. For copper also, transport costs are higher for ore concentrates than for blister or refined copper.
The additional costs imposed on industry by stricter government regulations, aimed to combat growing environmental pollution in the developed countries, were thought to be an additional incentive for relocation.
Lastly, two political arguments were put forward. The first was that relocation of the mineral-based industries would entail only a limited reallocation of the labour force in developed countries, as these industries, with the exception of the steel industry, do not employ great masses of workers. It was thought that for this reason, the unions would not strongly oppose the movement towards relocation. The second argument was that these industries are mainly controlled by transnational firms, which are not exclusively dependent on their national bases and which are, moreover, close to the political decision-making centres.
Yet, in spite of the multiplication of mineral processing projects in Third World countries during the 1970s, especially for steel and alumina, the relocation of metallurgy has been much more modest than had been initially announced.
The crisis of the mid-1910s has, of course, delayed or cancelled many investment projects, as it generated over-capacity in the mineral-based industries in developed economies. Conditions of over-capacity mean that relocation depends, not on stronger industrial growth in Third World countries, but on a reduction of production capacities in developed economies, which is obviously far more difficult.
But other factors probably explain the very limited extent of the relocation of mineral-based industries in Third World mining countries. First, recent technical changes reduce the cost advantage of Third World mining producers. New processes, more capital intensive and energy saving and less polluting, are being rapidly developed in the advanced countries. Secondly, the cost advantage is also reduced by the necessary investments in infrastructure and training. The extension of existing production facilities in developed economies is less expensive than the building of new plants in the Third World, as we saw when we compared the investment costs. Likewise, the location in advanced countries of very big production capacities generates important economies of scale.
More generally, the location of processing plants in the advanced countries gives the enterprises greater flexibility both for their mineral supplies and for the structure of their production. All these factors explain why most of the investment projects of Western and Japanese groups in Third World copper fields during the 1970s were limited to ore extraction, as in Papua New Guinea, the Philippines and in Indonesia. In fact, not only did these investments not include local processing of the ore, but they were undertaken to provide alternative ore supplies to the smelting plants of Japan, West Germany and the USA, because of a reduction in their traditional imports from Africa and South America. Here, the choice of mining locations was clearly not determined by the possibility of developing local processing on site.
In sum, if the relative costs for energy, labour, transport and pollution seem to favour a relocation of mineral-based industries in the mining countries of the Third World, technical changes, economies of scale and of infrastructural costs, supply and output flexibility, militate against such a relocation, especially in the context of the economic crisis.
The firms' apparent strategy of maintaining processing facilities in developed countries also accords more closely to the political considerations of their parent states. From the point of view of the Western states, relocation in the Third World of the mineral-based industries, which are so basic and so closely linked to the armaments sector would imperil 'national security', even if such a step was demanded by their big enterprises. Both private firms and governments apparently prefer to import raw minerals rather than metals, and still see the primary specialization of Third World mining countries as the best guarantee for their metal supplies.
The initiative of local processing can only come, therefore, from the governments of the mining countries, as is illustrated by the recent history of the mineral industry in some countries of Asia and South America, where local processing has, moreover, been developed in the framework of a state capitalist industrialization process and not as an alternative external specialization.