Mining Sector At Policy Crossroads As Investment Dwindles
BMI View: In a bid to address rising concerns over the environmental and social impact of mining activities, the Lao government has imposed a ban on all new mining investment. While the mining sector has been of paramount importance towards driving Laos' economy in recent years, we believe the government will stay rooted in its decision and do not expect a moderation in policy stance happening anytime soon. The imminent entrance of Laos into the World Trade Organization (WTO) is likely to engender considerable gains for the economy in the form of increased market access and greater foreign investment inflows.
In view of the Lao government ' s recent decision to impose a ban on all new mining activit i es , we believe growth in the country's mining sector will remain relatively subdued over the coming years. While an abundance of mineral resources has previously attracted a wave of interests by foreign companies ke en on develop ing the country ' s nascent mining sector, we forecast a continued trend of dwindling investment given that proposals for new investment will no longer be accepted by the government. Although companies that have been given the green light to conduct economic feasibility studies for mining projects can continue as planned, we highl ight that growing concerns over the environmental and social impact of mining activities, coupled with the implementation of tighter rules and regulations b y the government, will coalesce to present a modest growth picture at best.
|Source: BMI, USGS|
|Company||Commodity||Location of Main Facilities||Annual Capacity|
|Minerals and Metals Group Lane Xiang Minerals||Copper||Savannakhet Province||88kt|
|Minerals and Metals Group Lane Xiang Minerals||Gold||Savannakhet Province||8kt|
|Viengphoukha Coal Mine Co. Ltd.||Coal||Luangnamtha Province||66kt|
|Phu Bia Mining Ltd||Silver||Vientiane Province||450koz|
|Lao-North Korea Tin Mines||Tin||Khammouane Province||132t|
|Padeang Industry Public Co. Ltd||Zinc||Vientiane Province||1kt|
Mining - An Economic Growth Engine
Ranked as one of the most resource-rich countries in Asia, Laos is home to more than 570 mineral deposits including gold, copper, zinc and lead. The country has witnessed a surge in foreign direct investment since 2004, as an influx of foreign mining companies began to increase production in the mining sector while capitalising on t he elevated prices of minerals. According to the World Bank, mining accounted for approximately 50% of Laos ' exports and contributed more than 15% to th e government's revenue in 2011. The growth in mining exports can be largely attributed to the expansion projects by the two largest miners in Laos , namely Phu Bia Mining and Sepon . Phu Bia, an Australian mining compa ny owned by PanAust , is currently working on the Ban Houayxai project, a US$168mn gold and silver mining facility located in the Vientiane province . The new mining fa cility is designed to have a nominal production profile of 100koz (thousand ounces) of gold and 700koz of silver per year . In addition, the Sepon mine has completed an expansion of its copper processing plant in the Savannakhet province last year.
Avoiding Dutch Disease
Despite the fact that the mining industry has been of paramount importance towards driving Laos' economy in recent years, we believe the government will stay rooted in its decision and do not expect a moderation in policy stance happening anytime soon . For one, the proposal to rein in the industry was partly motivated by the government's plans to diversify its economy and encourage the flow of capital towards investment in other non-resource sectors. Indeed, massive inflows of foreign capital into Laos' mining sector may put the country at risk of suffering from 'Dutch disease' (that is, major currency strength on the back of improving terms of trade leading to an erosion of non-commodity sector competitiveness).
Economic Diversification The Right Path To Take
While we highlight that the failure to attract investment into other non-resource sectors might lead to a significant downturn in the country's economy, the imminent entrance of Laos into the World Trade Organisation (WTO) is likely to engender considerable gains for the economy in the long run. Riding on the recent wave of reform momentum, the government has announced that policy initiatives going forward will be directed towards achieving more balanced economic growth. W e note that the country's ascension to the trade body is likely to accord it access to new trade partners, boosting trade volumes and opening up the country to a fresh pool of foreign investors. This will considerably diversify Laos' economy and reduce the country's reliance on the mining space for revenue growth. We reiterate our view that the Lao government is unlikely to lift the ban on new mining projects and sees no scope for a reversal in policy over the near term. Indeed, this does not bode well for the future prospects of the country's mining industry as it effectively inhibit all investors from entering the sector.
|Green Shoots Of Optimism|
|Laos - Real GDP Growth|
In line with our expectations, economic reform in Laos has gathered pace in recent years and augurs positively for Laos' long-term growth prospects. In the past two years, Vientiane has introduced a series of measures to improve its business environment, boost foreign investment and enhance the economy's trade competitiveness. Moreover, the establishment of a stock market in January 2011 has introduced some semblance of a functioning financial market in the country. We believe that the government's intentions to diversify the economy away from the resources and towards other sectors are likely to lead to a more sustainable model of growth in the longer-term. Overall, we forecast Laos' real GDP growth to average a strong 6.4% between 2013 and 2017.