Strategic Role of Mining in National Security

Mining Philippines Conference 2017

Responsible Mining: Moving Beyond Compliance
6 September 2017

RONALD U. MENDOZA, PHD

ATENEO DE MANILA UNIVERSITY
SCHOOL OF GOVERNMENT
 could transform resource-driven countries
As a result of generally rising resource prices and the expansion of production
into new geographies, the number of countries in which the resources sector
represents a major share of their economy has increased significantly. In 1995,
there were 58 resource-driven economies that collectively accounted for

Text 18percent of global economic output. By 2011, there were 81 such countries,
More developing countries are turning to extractive industries
accounting for 26percent of global economic output (ExhibitE1).

Exhibit E1
The number of resource-driven countries has increased by more than
40 percent since 1995, and most new ones have low average incomes

Number of resource-driven countries over Income class at time of becoming

time, by income class1 resource-driven2
81
%, 19952011
17 40%
58 High
21
Low income 22 11%

Lower-middle income 19 27
Upper
Upper-middle income middle 25%
8 54% Low
High income 16
9
1995 2011
11%
% of world GDP 18 26
Lower
middle
% of world population 18 49

1 We define resource-driven countries using three criteria: (1) resources are more than 20 percent of exports; (2)
Source: McKinsey
resources are Global
more than 20 percentInstitute (2013:2).
of fiscal revenue; or (3) resource rents are more than 10 percent of GDP. Where
data were not available, we estimated based on the nearest years data.
2 World Bank income classifications based on per capita gross national income (GNI) by country; thresholds updated
annually. In 2011, the World Bank thresholds for categorization were $1,026 for lower-middle income, $4,036 for upper-
middle income, and $12,476 for high income.
NOTE: Numbers may not sum due to rounding.
SOURCE: UNCTADstat; International Monetary Fund; World Bank; IHS Global Insight; McKinsey Global Institute analysis
 growth rate. Even when resource-driven economies manage to sustain above-
average economic growth over the long term, they do not necessarily enhance
prosperity in the broader sense, as measured by MGIs economic performance
scorecard.9 On average, resource-driven countries score almost one-quarter less
than countries that are not driven by their resources, even at similar levels of per
capita GDP (ExhibitE4). In Zambia, for example, poverty levels increased from
Text
Resource driven economies tend to have lower income per capita
2002 to 2010 despite strong economic growth.10

Exhibit E4
Resource-driven countries have struggled to Not resource-driven
transform wealth into longer-term prosperity Resource-driven

MGI economic performance scorecard1 Average economic performance score

Index by income bracket
0.9 $ per capita

0.8 Not
Resource- resource-
0.7 driven2 driven
0.6 01,000 0.24 0.28

0.5 1,0003,000 0.31 0.41

0.4 3,0005,000 0.36 0.46

0.3 5,00010,000 0.42 0.51

10,00020,000 0.46 0.64
0.2
20,00040,000 0.73 0.78
0.1
40,000+ 0.88 0.90
0
0 15,000 30,000 45,000 60,000 75,000 90,000
Per capita GDP
2005 $

Source: McKinsey Global Institute (2013:6).

1 MGI index is based on metrics covering productivity, inclusiveness, resilience, connectivity, and agility.
2 Includes six future resource-driven countries.
NOTE: Three resource-driven countries have been excluded due to lack of data.
SOURCE: McKinsey Global Institute analysis

There are three broad reasons for this. The first is that many countries have
struggled to develop sufficiently competitive resources sectors and ensure that
Text
Main features of the resource curse

Economic volatility

Unsustainability

Poor institutions and crowding out of social spending

Long term trend in commodity prices

Crowding out of manufacturing and Dutch disease

Source: Adapted from Frankel (2010).
Text
Resources Value Chain

Infrastructure
Developing
resources Institutions and
governance

Fiscal policy and economic

Capture Value competitiveness
Local content development

Spending the
Transform value windfall
into long-term
development Economic
development
Source: McKinsey Global Institute (2013:8).
 Text
The Philippine Mining Industry

+ Tax revenue
Public Spending
Investment

Job creation
MINING Processing Inputs for Downstream
Industries
INDUSTRY Tax revenue

-
Environment Risk of Degradation
Tensions with China despite thawed relations

PRC military
installations on
Michief Reef

Source: Philippine Daily Inquirer

OR Source: CNN / CSIS (2017)
(2017)

Source: China Investment Research Source: New York Times(2017)

(2017)
 but is our trade dependency coherent with
our security?
PH Iron and Steel Our Vulnerable Trade Balance with China (2016)
demand driven by FOB Value FOB Value
Construction, Imports (US$-M) Rank Share of Total Exports (US%-M) Rank Share of Total
Shipbuilding, and TOTAL 15,564.9 1st 18.5% TOTAL 6,372.52 4th 11.1%
Machinery and Electronic Electronic
Products 3,299.17 1st 14.8% Products 3804.60 2nd 12.9%
Industry
Other
Manufactu High Chinese
Iron and Steel 2,331.92 1st 70.2% res 521.87 2nd 13.5% consumption
Mineral Fuels, of Other
Lubricants Other
Mineral
Dependent on and Related Mineral
Materials 1,163.05 1st 14.6% Products 495.40 1st 47.1% Products
Chinese imports
Industrial and
to critical inputs Machinery 1,110.92 2nd 18.4% 291.58 1st 18.2%
Chemicals Chemicals
to our industrial Machinery
and Miscellaneous &
infrastructural Manufactured Transport
Articles 984.42 1st 38.1% Equipment 6.5 3rd 4.10%
development
Source: Philippine Statistics
Authority (2015)
Golden Age for Chinese Steel Imports?

CHINESE STEEL IMPORTS TO PH (IN KG)

6,000,000,000.00

5,000,000,000.00

4,000,000,000.00

3,000,000,000.00

2,000,000,000.00

1,000,000,000.00

-
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Source: Philippine Statistics Authority (2017)
60 million tonnes of additional Chinese steel

At a projected PHP8- to 9-trillion in additional infra spending,

the Build, Build, Build program of the Duterte administration
could require importing Chinese steel between ten (1060%) to
twelve (1193%) times present import levels. Government
presently forecasts only one-third of this steel consumption.
(*Assuming past import trends persist, the full implementation of BBB, and adjusting projected BBB spending to
Constant 2000 figures via the Construction Materials Wholesale Price Index)
Is processing advantageous?

Of all the
segments of
Based on a 2003 iron/steel
Roadmap for the processing, only
Upgrading of the Continuous
PH Iron and Steel (Category A) Billet
Industry prepared to Bar Conversion
for MIRDC/DOST having lower
costs in PH

Source: Garcia and Vicente (2005)

Is processing advantageous?

Major challenges to mineral processing feasibility WB Logistics

Performance Index (2016)
High cost and unreliability of power supply
High domestic freight costs Country 2016 LPI Ranking

Volatile supply and cost of raw materials for processing (e.g. Singapore 5th
coking coal for steel) Malaysia 32nd
Trade-offs between environmental/social standards and cost of Thailand 45th
technologies (e.g. blast furnaces, HPAL facilities)
Indonesia 64th
Lower grade of local ores (e.g. nickel, iron) leading to more
processing costs, and lower investor preferences Vietnam 64th
Bureaucracy and permitting problems Brunei 70th
Policy inconsistency across administrations; peace and order issues Philippines 71st
Tariff distortions and smuggling concerns Cambodia 73rd
Is processing advantageous?
Taganito HPAL Plant
Begun operations in 2014 in Surigao del Norte
Owned by Nickel Asia (10%), Sumitomo (75.0%),
Mitsui (15.0%) as of 2017
100% of ore feed (30k m.t. of Ni; 2.6k of Cobalt)
from Taganito Nickel Mining Corp
Net income margin in 2014: 9.1%; but profitability
affected by lower nickel prices in 2015 and 2016

Copper Wire Rod Recasting Plant

To be sited in Leyte Industrial Development Estate
PASAR Pre-feasibility study completed in September
2013: a 12,000-ton rod $10-M capacity facility
being marginally feasible and a 24,000-ton $100-
M rod facility being slightly feasible
Now a focus of investment attraction efforts by DTI;
mentioned in the 2014-2016 DTI IPP
Is processing advantageous?

Factors lowering The financial feasibility of smelters does not look particularly good in
commercial prospects: Indonesia, given the complementary public infrastructure required,
the huge capital costs involved and the complexity of financing them,
Competition with low capital and current problems in the business environment. On top of these
and operating costs in China issues, world markets today have substantial excess capacity in
Capital investments very
high, imposing steep
downstream mineral processing and extremely low TRCCs (treatment
opportunity costs and refining charges)
Low treatment and refining
charges due to global excess - USAID (2013), Economic Effects of Indonesias Mineral-Processing
capacity in processing Requirements for Export
Expensive, complementary
public investments required
(energy, transport)
Financing challenging due to
significant debt financing
required
The Blue Economy:
Develop the PHs maritime potential

2nd largest archipelagic

Maritime zones country; 5th longest
form 86.3% of coastline in the world;
the PHs total and 70% of the Coral
territory Triangle

The worlds 10th largest

fishing catch, the 4th
largest shipbuilding
industry, the leading
provider of global
maritime manpower

Source: Roel Balingit / Antonio Carpio, The South China

Sea Dispute (2017)
The Blue Economy:
Develop the PHs maritime potential

Vertical Ocean
Farming: Marine
Shellfish, seaweed biotechnology:
Farming with Marine biodiversity
climate restoration, products for
food security and health/cosmetic,
energy benefits environmental, and
nutritional purposes

Ocean-based
Renewable Energy:
Harnessing tidal,
wave power, and
marine biofuels for
sustainable and
reliable energy
 Text
The Blue Economy: Benham Rise

13-million-hectare
underwater plateau
located near Aurora.
It is larger than
Luzon, and is
considered part of
the countrys
continental shelf

Potentially a rich
source of natural gas
Source: Screen grab from a document the Philippines submitted to UN; as seen in Rappler. and other resources
such as heavy
metals.
 The Blue Economy:
The Ship-Building and Maritime Industry

Hanjin made LPG Carrier Kaprijke ordered by BRP Tagbanua, a Navy cargo ship made by
Belgian shipping company Subic-based Propmech Corp (2011)

PH Navy missile-capable multi-purpose attack High-speed Trimaran (three-hulled vessel)

craft (MPACs), made by Propmech (2017) made by Austal PH, ordered by UK government
Text
The Blue Economy:
The Ship-Building and Maritime Industry

Smiling Curve Framework

High

R&D Sales & service

Value added

Design & Marketing & brand

development management

Manufacturing
Low
Upstream Downstream
Source: Stan Shih: World Bank (1992)
The Blue Economy:
Industrial Development in the Blue Economy
 Text
From Curse to Blessing?

VOLATILITY AND CRISES STABILIZATION FUND / FISCAL RULES

CROWDING OUT MANUFACTURING / INDUSTRIAL POLICY / EXPORT

DUTCH DISEASE ORIENTATION / EXT. INVESTMENTS

UNSUSTAINABILITY SOVEREIGN WEALTH FUNDS / HARTWICK RULE

CONFLICT / POOR INSTITUTIONS REDISTRIBUTION / TAX CLAWBACK

INSUFFICIENT INVESTMENT IN HUMAN CAPITAL AND INCREASED INVESTMENT IN HUMAN

DEVELOPMENT CAPITAL AND DEVELOPMENT

Source: Authors synthesis based on review of literature.