Nationalism over natural resources is rising; Miners can suffer

Countries rich in natural resources have become increasingly protectionist in recent years as Covid-19 threatens their economies, a new study has shown.

A report published Thursday by risk consultant Verisk Maplecroft indicated that 34 countries had seen a “significant increase” in the nationalism of resources over the course of 2020, with the pandemic exacerbating the existing trend toward government intervention.

Verisk Maplecroft has determined that 18 of the 34 countries are dependent on the minerals or hydrocarbons they export, and predicts that the threat of isolation will increase in the coming years as governments try to close fiscal holes following the pandemic.

According to the report, the mining sector will bear the greatest pressure from some of the world’s top producers of copper and iron ore, especially in Africa and South America, which are among the top ten countries.

“It is quite understandable that governments want to push for extra revenue in these fiscally limited times,” mining risk chief Hugo Brennan told CNBC on Friday.

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

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

“These are countries that are likely to use the clumsy tools in the resource box for resource nationalism, such as direct expropriation without or insufficient compensation,” said Mariano Machado and Jimena Blanco, analysts at Verisk Americas.

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

Meanwhile, Zambia is embroiled in a long-running legal dispute with Vedanta Resources over its attempt to liquidate the company Konkola Copper Mines.

President Edgar Lungu’s government has 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 a swing producer.

“The next step in gaining a majority stake in Mopani highlights President Lungu’s efforts to increase state control over strategic mining assets in Zambia, and his populist credentials have also done no harm,” Africa analyst Aleix Montana told CNBC said.

Emerging markets and developing economies ended 2020 with an average year-on-year decline of 10.9 percentage points in government revenue as part of GDP, according to IMF data compiled by Verisk. The countries hardest hit were sub-Saharan Africa, with a 12.55 percentage point and Latin America with 8.7 percentage points.

In addition to the highly dependent countries above, many more diversified economies, according to the index, have had sharper but more nuanced pressure on the nationalism of their resources in recent years.

“The countries that need to be watched the most are the mining jurisdictions, which are characterized by a painful Covid economic contraction and an increase in these less explicit forms of resource nationalism,” Blanco said.

“The governments of these countries are becoming more willing to intervene in the economy, use indirect expropriation or increase the demand for local content requirements – this opens the door to a more sophisticated, but still disruptive, path of nationalism.”

In South America, the deployment of these ‘less blunt’ mechanisms tends to be driven by one of two factors, analysts have suggested: ideology, as with Mexico or Argentina; or community pressure from mining areas or wider society, such as in Chile and Colombia.

In sub-Saharan Africa, however, there is a more complex breadth of underlying motivations.

“The interventionism seen in Liberia and Mauritania, for example, is driven by shortcomings in structural governance, not by nationalist sentiments,” the report explained.

“In Mali, the political concern of the transitional government is the issue, while in Guinea it is the need to maximize bauxite revenue – both countries want to review existing contracts.”

Nationalist measures brought about by social pressure tend to be more subtle, but pose just as much risk to mining companies, Verisk analysts argued, citing the example of a debate on water rights in Chile that reduces the regulatory burden and operating costs for companies during the next decade.

Although the coronavirus pandemic was not the only factor in the recent pursuit of nationalism, it has catalyzed a trend that has been reflected in the index since 2017.

Verisk expects this trend to increase sharply over the next two years. In the report, in ‘rentier mining economies’, those who mainly derive government revenue from the exploitation of a particular asset tend to turn to the mining industry to halt public finances.

However, analysts have suggested that mining companies should closely monitor ESG (environmental, social and governance) factors in diversified emerging economies, where more covert methods of government intervention are becoming the instruments of choice.

“Issues around income distribution, poverty, access to education and health care – to name a few – can trigger socio-political processes that require more of the state,” they said.