The Ebbing Tide Of Resource Nationalism

BMI View: The rising tide of resource nationalism in Asia over the past quarters is set to lose momentum. Against the backdrop of lower commodity prices and slowing economic growth, a growing number of governments will be forced to moderate their mining policies in the coming quarters. Crucially, the challenge will remain how the host governments can best manage their mineral wealth to promote broad social and economic development, while maintaining an adequate risk/reward balance for mining companies.

The stellar run in commodity prices and the bumper profits reaped by mining companies over the past decade encouraged many host governments to become more interventionist in their mineral sectors. In a bid to extract a greater share from the resource sector, many governments have exercised their own forms of resource nationalism ranging from a gradual rise in taxation to the outright expropriation of mining assets. The destruction of value caused by sudden changes in mining policies has been at the heart of investment risks for many miners. However, the rising tide of resource nationalism in Asia over the past quarters is set to lose momentum ( see 'Battling The Rising Tide Of Resource Nationalism', December 6, 2012). Against the backdrop of lower commodity prices and in some cases, mounting economic woes, we believe a growing number of governments will be forced to moderate their mining policies in the coming quarters.

The mining sector has been the central pillar of economic growth for many countries over the last decade. Beyond the generation of tax revenues, mining investment has created employment opportunities, enhanced local infrastructure and brought about widespread social development. Crucially, countries such as India, Indonesia, Thailand and Malaysia can ill-afford to risk souring investor sentiment in the face of deteriorating economic conditions. Fears over the 'tapering' of the quantitative easing (QE) program in the US has sent a wave of risk aversion rippling through emerging markets (EM) since mid-year, prompting debilitating outflows of capital from many EM markets.

Commodities Supercycle Is Over
Select Commodities - Copper & Iron Ore Prices (US$/tonne)

BMI View: The rising tide of resource nationalism in Asia over the past quarters is set to lose momentum. Against the backdrop of lower commodity prices and slowing economic growth, a growing number of governments will be forced to moderate their mining policies in the coming quarters. Crucially, the challenge will remain how the host governments can best manage their mineral wealth to promote broad social and economic development, while maintaining an adequate risk/reward balance for mining companies.

The stellar run in commodity prices and the bumper profits reaped by mining companies over the past decade encouraged many host governments to become more interventionist in their mineral sectors. In a bid to extract a greater share from the resource sector, many governments have exercised their own forms of resource nationalism ranging from a gradual rise in taxation to the outright expropriation of mining assets. The destruction of value caused by sudden changes in mining policies has been at the heart of investment risks for many miners. However, the rising tide of resource nationalism in Asia over the past quarters is set to lose momentum ( see 'Battling The Rising Tide Of Resource Nationalism', December 6, 2012). Against the backdrop of lower commodity prices and in some cases, mounting economic woes, we believe a growing number of governments will be forced to moderate their mining policies in the coming quarters.

Commodities Supercycle Is Over
Select Commodities - Copper & Iron Ore Prices (US$/tonne)

The mining sector has been the central pillar of economic growth for many countries over the last decade. Beyond the generation of tax revenues, mining investment has created employment opportunities, enhanced local infrastructure and brought about widespread social development. Crucially, countries such as India, Indonesia, Thailand and Malaysia can ill-afford to risk souring investor sentiment in the face of deteriorating economic conditions. Fears over the 'tapering' of the quantitative easing (QE) program in the US has sent a wave of risk aversion rippling through emerging markets (EM) since mid-year, prompting debilitating outflows of capital from many EM markets.

Mining Matters
Select Countries - Mining Industry (as % of GDP)

As mineral prices continue to trend lower with the economic slowdown in China ( see 'Minefield Of Challenges, But Opportunities Remain', July 10 ) , the threshold of attracting foreign investment into the mining space will be much lower than many governments anticipate now that the commodities supercycle has run its course. Indeed, the challenge will remain how the host governments can best manage their mineral wealth to promote broad social and economic development, while maintaining an adequate risk/reward balance for mining companies.

Australia: Less Taxing Times Ahead

Australia has been at the forefront of resource nationalism in Asia over the past year. The carbon pricing scheme and the Minerals Resource Rent Tax (MRRT) were introduced by the Australian government in 2012. In our view, the MRRT could potentially be watered down over the coming quarters. The tax has been criticised by major miners such as Fortescue Metals for undermining investment and has so far collected a mere AUD200mn compared with the initial forecast of AUD3bn for FY2012/13.

Boom Cools, Positive Reforms In Sight
Australia - Mining Industry Value

Furthermore, our downbeat macro view on China suggests that the mining boom in Australia has passed its peak and investment activities will not return to the record levels seen over the past years. Mining companies will continue to feel the heat from the slowdown in China and the focus on cost-containment will be a key theme in the mining industry. The abolition of MRRT will be crucial towards restoring competitiveness and supporting mining investment in Australia's resource-reliant economy. While Australia's new Prime Minister Tony Abbott has pledged to dispose the mining tax once elected, the lack of a majority in the Senate suggests that attempts to improve the business climate remains vulnerable to political influence ( see 'Policy Changes May Be Held Back By Senate Politics', September 09).

China Rebalances, Miners Under Pressure
China - Select Economic Indicators (% chg y-o-y)

Indonesia: Policy Moderation On The Cards

Indonesia's increasingly strict mining policies, which include a 20% export tax on raw minerals ahead of a complete ban in 2014, have arrived at an awkward time for the country. The new mining policies were implemented following an extended bull run in global commodities prices. Indonesia's external position has weakened considerably since the imposition of new regulations as prices of key exports such as thermal coal and palm oil have taken a battering.

In Early Stages Of Benefication
Indonesia - % Of Mineral Output Refined Domestically (2012)

Against the backdrop of a tumbling currency and a gaping shortfall in its current account deficit, we believe the Indonesian government will eventually backtrack on its minerals export ban over the coming months ( see 'Economic Woes To Derail 2014 Minerals Export Ban', August 28).

The mining sector is of paramount importance to Indonesia's economy, accounting for 12% of the country's GDP and 20% of all foreign direct investment flows. Moreover, Indonesia is still very much in the early stages of being able to refine all of its mineral products ( see 'Trade Policy Casts Shadow Over Commodities Sector', January 22). The construction of smelters is not only time-consuming and capital-intensive, but also economically unviable for minerals such as lead, copper and zinc due to slim refining margins and the size of Indonesia's reserves.

Mongolia: Government Won't Force Hand On Miners

The wave of regulatory changes in Mongolia's mining sector has spooked many investors to the sidelines in recent months. Nonetheless, the successful re-election of incumbent President Tsakhiagiin Elbegdorj should see the Mongolian government toning down its rhetoric against foreign miners over the coming quarters. We believe the government's policy priorities will shift away from the populist tones outlined during the election campaign, back to a more market-friendly platform ( see 'An Improving Political Risk Profile', July 15).

An Improving Political Landscape
Mongolia - BMI Short-Term Political Risk Rating, Out Of 100

Although the underground development of the massive Oyu Tolgoi (OT) asset remains locked in a fractious dispute between Rio Tinto (Rio) and the Mongolian government, our core view remains that the expansion of OT remains on course as both parties have too much to lose from a prolonged suspension of the project. OT is of vital economic importance to Mongolia both in terms of bolstering the country's gaping trade shortfall and also providing significant relief to its public finances. Indeed, Mongolia can ill-afford to suffer the painful consequences of losing such a high profile partner as Rio, whose investment will be viewed as a litmus test for foreign investment.

Myanmar & Vietnam: New Mining Law A Boon, But Resource Boom Not Near

The Myanmar government is on a massive drive to boost foreign investment into the country's nascent mining sector, reversing more than half a century of self-imposed segregation. Reforms to Myanmar's existing 1994 mining law is currently underway and is expected to be finalized by the end of this year. Under the draft law's provisions, foreign companies would be able to own 100% of mining projects, take leases of up to 50 years and enjoy tax holidays during the first five years of operation.

Similarly, the Vietnamese government has been undertaking positive reforms to stimulate mining investment. Although the mining industry in Vietnam is heavily regulated and largely state-led, we believe more foreign miners will be keen to establish a foothold in the country over the medium term. The enactment of a new mining law in July 2011 seeks to improve the management of mineral resources and streamline mining license procedures. Additionally, the law not only took a tougher stance on illegal mining activities, but also provides for longer exploration licenses.

Austerity Rules, Frontier Mining Losing Attraction
Select Companies - Mining Capex (% chg y-o-y)

While the new laws in Myanmar and Vietnam should pave the way for increased capital inflows into the mining space, a resource boom in these countries is unlikely to materialise anytime soon. Miners across the board are displaying a clear preference for brownfield projects rather than greenfield developments. Frontier regions will suffer the brunt from the sharp pullback in investment spending as mining companies exhibit a lower tolerance for high risk projects that could take up to 10 or more years before kicking into production.

Asia - Mining Regulatory Scorecard
Source: BMI. Note: Score from 0 to 100, with 100 being the best.
Country 12 Month Outlook Score Comment
Australia Positive 75 New Prime Minister Tony Abbott has pledged to restore competitiveness to the mining industry
Malaysia Positive 70 Many mineral-rich states are adopting positive reforms to mining policies in a bid to encourage foreign investment
South Korea Positive 65 FDI is welcome. Allow for 100% foreign ownership.
Vietnam Positive 65 Government has been undertaking positive reforms to stimulate mining investment
Myanmar Positive 60 Government is on a massive drive to boost foreign investment into the mining sector
Philippines Neutral 60 Resource nationalism on the rise
Japan Neutral 50 Tougher restrictions and greater scrutiny on mining operations
China Negative 40 Rising environmental regulations and government intervention
Thailand Neutral 40 Complex bureaucracy, only grant mineral rights to foreign miners under a special agreement or if the project is promoted by the Board of Investment.
India Negative 35 Complex bureaucracy, frequent land and environmental disputes, prevalent corruption, ongoing ban on iron ore mining
Mongolia Neutral 35 Successful re-election of incumbent President Tsakhiagiin Elbegdorj should see the government toning down its rhetoric against foreign miners
Indonesia Negative 30 Regulatory uncertainty will remain a key risk in the run up to the 2014's presidential elections
Laos Negative 25 Government banned all new applications on mining investment until 2015

Improvements Won't Be Universal

Philippines: Maintaining A Hard Line

The Philippine government is looking to impose a single excise tax rate of 10% on gross sales of mineral products in lieu of the existing 2% excise tax and 5% royalty tax on minerals in so-called state reservations. We believe this tax hike would significantly take the shine off mining investment in the Philippines. Already, Glencore Xstrata is adopting judicious cuts to what could be the biggest single foreign direct investment in the Philippines - the US$5.9bn Tampakan copper-gold project. The miner will slash monthly expenditure at the mine from US$4mn to US$1mn, and Tampakan is unlikely to achieve its revised target for first production in 2019. T he austerity push in the global mining industry could further gain traction in the face of falling commodity prices and diminishing profit margins.

Tough Riches
Philippines - Metal & Coal Mines

India: Major Stumbling Blocks In Place

The most notable feature of India's mining sector is the complex bureaucracy which dissuades much foreign investment into the country. Land and environmental disputes continue to delay projects, while disagreements between various mining and environment ministries damage confidence in the business environment. We believe domestic companies will continue to proliferate in the mining sector. Despite the liberalisation of investment restrictions, the Indian government continues to have a strong preference for domestic companies compared with the western counterparts. Unless the government undertakes serious efforts to combat deep-rooted shortcomings in the implementation of key policies, we believe pervasive lawlessness coupled with scandals will remain a major problem for investors to grapple with.

India's Bureaucracy Hinders Potential
Asia - Mining Risk/Reward Ratings

China: More Regulations On The Way

Mining activity in China is heavily regulated by the government which is responsible for the implementation of regulations, issuance of exploration rights and provision of funding for projects. The sector is dominated by domestic companies as tax breaks and export quotas, as well as language barriers, restrict foreign investment. While the Chinese government has been opening up its mining sector to greater foreign investment in recent years, there is nevertheless, increasing regulatory pressure on the mining industry as part of the country's 12th Five-year Plan (2011-2015). In line with our view, miners operating across the different sectors have continued to witness increasing tax burden and tighter regulations as part of the government's efforts to restrict environmental pollution, improve operating efficiencies and crackdown on illegal mining activities.

Table: Mining Regulations In Asia
Source: BMI, Various News Sources
Country Mining Policies Implementation Date
Australia The carbon pricing scheme requires entities which emit over 25ktpa of carbon dioxide equivalent greenhouse gases to surrender their emissions permits. 12-Jul
Australia The MRRT taxes profits of more than AUD75mn on coal and iron ore miners at an effective rate of 22.5%. 12-Jul
China Increased mining taxes on iron ore, tin, molybdenum, magnesium, talc and boron in a bid to control production output 12-Feb
India Proposed 2011 Mines and Minerals Development and Regulation (MMDR) bill seeks to improve transparency and introduce better legislative environment for attracting mining investment In progress
Indonesia 20% export tax on 64 different raw minerals 12-May
Indonesia Exports of raw minerals will be banned in 2014 12-Jun
Indonesia Foreign miners must divest at least 51% of their stake to locals after 10 years of operations 12-Feb
Laos Government banned all new applications on mining investment until 2015, in a bid to diversify the economy away from the resources sector. Jun-12
Mongolia New securities law will allow mining companies to be simultaneously listed on domestic and foreign bourses 14-Jan
Mongolia Announced plans to scrap the 2012 Strategic Entities Foreign Investment Law (SSEFIL) In progress
Myanmar Reforms to existing 1994 mining law is currently underway and is expected to be finalized by 2013. Under the draft law's provisions, foreign companies would be able to own 100% of mining projects, take leases of up to 50 years and enjoy tax holidays during the first five years of operation In progress
Philippines Looking to impose a single excise tax rate of 10% on gross sales of mineral products in lieu of the existing 2% excise tax and 5% royalty tax on minerals in so-called state reservations In progress
Vietnam New mining law took a tougher stance on illegal mining activities and provides for longer exploration licenses 11-Jul

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This article is tagged to:
Sector: Mining
Geography: Asia, Australia, China, Indonesia, India, Myanmar, Mongolia, Philippines, Vietnam
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