Features

The Paradox of Resource Nationalism

Mining a photo by Jennifer Woodard Maderazo

photo by Jennifer Woodard Maderazo

Few industries evoke stronger feelings of nationalism than commodities. Think Gulf of Mexico Oil Spill. Think (alleged) Oil Wars in the Middle East. Think Blood Diamonds.

From developed countries such as Australia to many a nation in sub-Saharan Africa, commodities form the backbone of economies. For others, such as Japan, for whom nature hasn’t dealt such a generous hand, reliance on external sources for natural resources can sometimes lead to unexpected and violent economic jolts. The links to policy-making are, therefore, significant; the opportunities for politicking perhaps even more so.

Traditionally, as commodity prices rise, national governments have sought to boost their share of the proceeds, either to save or to spend. However, when prices fall, they have tended to shed their hawkish stance to encourage extraction. The period from 2005 through 2008 was true to form replica watches uk, in this respect. As commodity prices increased, countries ranging from Kazakhstan to Venezuela sought to reduce the share of key projects managed by foreign companies; even the Canadian province of Alberta tried to change its royalty regime.

Before the specter of European sovereign indebtedness reared its ugly head again this summer, the run in equity capital markets was driven largely by a spectacular run in commodity prices for the better part of 2 years. The debate around resource nationalism during this period intensified again, most famously in the fiasco around Australia’s so-called 40% ‘super tax’. Forget glad tidings – high commodity prices now spell vulnerability for commodity producers.

While these policy changes may be politically popular and even aid infrastructure development, they also run the risk of further deferring investment in the energy and commodities sectors. The combination of weak demand, lower prices and tighter credit create a toxic environment for commodity companies over the foreseeable future anyway. Speculation around politically inspired regulatory constraints will only exacerbate matters. Natural resources are seen by many as a national patrimony, meaning all profits should be shared. But, following news of the super tax, the sharp decline in mining equities – which form a disproportionately large proportion of the Australian stock market – exposed the skewed nature of this argument.

Nowhere is the impact of misguided policymaking more profound than in Zimbabwe. Before Morgan Tsanvgirai’s recent elevation as Prime Minister, President Robert Mugabe was determined to impose his brainchild, the so-called “indigenization law” – a draconian version of the Black Economic Empowerment laws in neighboring South Africa where Mugabe envisaged firms to ensure that at least 51% of their shares are held by black Zimbabweans. This scribe had personally spent several months trying to raise financing for world-class gold deposits in Zimbabwe in London, which boasts the biggest pool of investors for such an asset class. While investors understand the historical context of South Africa’s more amenable BEE laws in a post-apartheid world, the whimsical thresholds proposed by Mugabe scare them out of sight. For investors, certainty and evidence of impartiality is key.

Given the recent decline in commodity prices, the global regulatory picture seems mixed, with several countries bringing back incentives for the riskiest projects to encourage private sector investment. Others are seeking to clarify somewhat clouded regimes. These reforms, if implemented correctly, could give greater certainty to investors. Yet it remains to be seen how these policies might encourage or delay greater investment, which will be needed to meet even sluggish demand growth in commodities.

 

 AUTHOR BIOGRAPHY replica breitling

Sherry Malik is a former investment banker based in London who spent the last five years providing strategic and financing advice to companies in the mining, oil, and gas sectors.

October 19, 2011
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