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Tuesday, 28 January 14
RESOURCE NATIONALISM OR PROTECTIONISM FOR THE MINING AND EXTRACTIVES INDUSTRY - JOHN WHITTAKER & MICHAEL SWANGARD
 Resource nationalism or protectionism for the mining and extractives industry as well as soft commodities sector and the oil industry.
‘Resource nationalism’ or, ‘protectionism’, is one of the major issues affecting the commodities markets today. The state introduction of legislation to protect the ownership and management of natural resources is not a new phenomenon. It has, however, been on the rise over the last few years, particularly in Asia. John Whittaker and Michael Swangard, trade & commodities partners at Clyde & Co, examine the issues.
The mining and extractives industry is particularly vulnerable to the uncertainty, risks and costs associated with resource nationalism, but the phenomenon is also an ever present threat in the soft commodities sector and the oil industry. Ongoing volatility in the global economy means that governments are looking to companies to fund the shortfall in revenues and to regain control over natural resources.
Although the natural resources within the territory of a state ultimately belong to that state and its people; certain rights over these resources can be ceded to businesses to allow the resources to be exploited and the benefits realised. When a state lacks the financial, technical or administrative expertise required for the sole exploitation of its resources, investment from large international organisations is often vital. However, resource nationalism is often determined by the prevailing economic and geo-political circumstances in that country and the value of the commodity concerned.
Indonesia, for example, is an important player in the global mining industry. It is one of the world’s largest exporters of thermal coal, nickel and tin. The mining industry is also very important within Indonesia; it contributes between 5 – 6 percent of Indonesia’s total GDP, and in particular provinces of the country, mining forms a much higher percentage of the local economy. In recent years, the Indonesian government has sought to secure greater control by suppressing the export of non-value added (raw and unprocessed) mining products, such as mineral ores. In September 2013 however it reversed its thinking as these nationalistic resource rules threatened to slash mining exports from January and widen a current account deficit which is already at a near-record high.
China meanwhile continues to pursue its policy of imposing export quotas on Resource nationalism rare earths despite their declining price and demand. This policy has raised allegations that the Chinese government is artificially orchestrating the increase in the price of rare earths, prompting the US, EU and Japan to jointly file a complaint with the WTO in March 2012. In response, China has argued that its actions were taken to ensure sustainable development and environmental protection. Protectionist policy is likely to be kept under review by governments in the region while economic uncertainty persists – resulting in more disputes between host governments and foreign investor companies. This means we can expect a rising tide of litigation and increased diplomatic tensions, particularly as state-owned enterprises (SOEs) and Sovereign Wealth Funds invest more in resource projects overseas.
Feeling the consequences
Even where no barrier or restriction exists, the spectre of resource nationalism is sufficient to dissuade many potential investors from ‘going to the source. ’Resource nationalism can increase both sunk and prospective costs thereby damaging the viability of certain projects. These costs include tax and royalty payments; heightened financial costs and insurance payments (due to the increased risk); export duties; and the cost of setting up the infrastructure required to exploit the raw materials.
Projects have undoubtedly been deferred and delayed, and in some cases investment withdrawn altogether, because of the degraded ‘risk/reward equation’ brought about by resource nationalism.
Managing the threat
As long as the current geo-political and economic conditions prevail, states will have the upper hand and the shadow of resource nationalism will hover over the commodities market. In order to deal with this risk, businesses need to consider how best to manage and mitigate their exposure and adopt sensible measures to address the issue.
Strategies include:
- Maintaining a positive and transparent relationship with the host state and adopting good internal and external corporate social responsibility practices.
- Partnering with local firms with good political links/ welcoming equity participation of the host state so as to build common interests.
- Making stabilisation, adaptation and foreign arbitration clauses part of any agreements with the host state.
- Taking advantage of bilateral and multilateral investment treaties.
- Obtaining insurance against political and other risks associated with resource nationalism.
When a state changes its laws and such changes impact negatively on a foreign investor’s business, there are options open to that investor to pursue. Provided the investment has been structured to take “As long as the current geo-political and economic conditions prevail, states will have the upper hand and the shadow of resource nationalism will hover over the commodities market. In order to deal with this risk, businesses need to consider how best to manage and mitigate their exposure” advantage of a Bilateral Investment Treaty, the investor may consider bringing a claim.
Looking to the future
Increasingly the phenomenon is not limited to emerging economies and a growing number of countries, including Australia and the UK, are implementing or evaluating policies designed to ensure their home state retains the maximum benefit possible from its natural resources.
Ultimately the phenomenon is not going away and therefore organisations must continue to implement appropriate risk management and engage with local governments to promote better understanding of the value projects bring to the host state and the people who live there.
By: John Whittaker & Michael Swangard, Clyde & Co, UK.
About Authors
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| John Whittaker |
John Whittaker : John has extensive experience of acting for some of the world’s largest trading companies and also governments. His primary focus is on international arbitration, litigation disputes arising in commodity trades and public international law.
John has handled disputes before many international arbitral bodies including the LCIA, ICC, SIAC trade bodies and foreign tribunals and before the Commercial Court in London. This includes a number of significant cases in the countries of the former Yugoslavia, Russia and the Far East. (John Whittaker, Partner, London, E: john.whittaker@clydeco.com)
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| Michael Swangard |
Michael Swangard : Mike specializes in international dispute resolution governed by arbitration bodies including: LME, ICSID, UNCITRAL, LCIA and ICC, as well as trade association tribunals such as GAFTA, FOSFA, CTF, SAL and RSA. He also advises clients on disputes before the English High Court and in the context of private mediations.
Mike is “lauded for his “fresh, no-nonsense approach to legal issues.” Chambers UK (Michael Swangard, Partner , E: michael.swangard@clydeco.com)
About Clyde & Co
Clyde & Co is a global law firm with a pioneering heritage and a resolute focus on its core sectors of aviation, energy, infrastructure, insurance, marine, and trade. With over 1,400 lawyers operating from 35 offices and associated offices in six continents, the firm advises corporates, financial institutions, private individuals, and governments. The firm has a reputation for its work in emerging markets, being the largest international firm in the Middle East and with a rapidly expanding network across Asia, Latin America and Africa.
Views and opinions / conclusion expressed herein are personal views of the authors and not that of COALspot.com.
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Thursday, 06 February 14
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- Interocean Group of Companies - India
- Africa Commodities Group - South Africa
- The Treasury - Australian Government
- Makarim & Taira - Indonesia
- Parliament of New Zealand
- Gujarat Sidhee Cement - India
- Altura Mining Limited, Indonesia
- PNOC Exploration Corporation - Philippines
- CIMB Investment Bank - Malaysia
- Chettinad Cement Corporation Ltd - India
- IHS Mccloskey Coal Group - USA
- Bukit Makmur.PT - Indonesia
- Mercator Lines Limited - India
- Neyveli Lignite Corporation Ltd, - India
- Tamil Nadu electricity Board
- Leighton Contractors Pty Ltd - Australia
- GN Power Mariveles Coal Plant, Philippines
- GAC Shipping (India) Pvt Ltd
- Trasteel International SA, Italy
- Xindia Steels Limited - India
- Billiton Holdings Pty Ltd - Australia
- Oldendorff Carriers - Singapore
- Independent Power Producers Association of India
- Sojitz Corporation - Japan
- PowerSource Philippines DevCo
- Vizag Seaport Private Limited - India
- Therma Luzon, Inc, Philippines
- TNB Fuel Sdn Bhd - Malaysia
- Semirara Mining Corp, Philippines
- Bukit Baiduri Energy - Indonesia
- Aditya Birla Group - India
- Sarangani Energy Corporation, Philippines
- New Zealand Coal & Carbon
- Kartika Selabumi Mining - Indonesia
- Mjunction Services Limited - India
- Samtan Co., Ltd - South Korea
- Sical Logistics Limited - India
- GMR Energy Limited - India
- Global Business Power Corporation, Philippines
- Sree Jayajothi Cements Limited - India
- Commonwealth Bank - Australia
- Power Finance Corporation Ltd., India
- Standard Chartered Bank - UAE
- AsiaOL BioFuels Corp., Philippines
- Goldman Sachs - Singapore
- Orica Australia Pty. Ltd.
- Sindya Power Generating Company Private Ltd
- Asmin Koalindo Tuhup - Indonesia
- ASAPP Information Group - India
- Bangladesh Power Developement Board
- Indogreen Group - Indonesia
- Salva Resources Pvt Ltd - India
- Kapuas Tunggal Persada - Indonesia
- Romanian Commodities Exchange
- Australian Coal Association
- Petrochimia International Co. Ltd.- Taiwan
- Anglo American - United Kingdom
- Port Waratah Coal Services - Australia
- Kideco Jaya Agung - Indonesia
- Savvy Resources Ltd - HongKong
- SN Aboitiz Power Inc, Philippines
- Marubeni Corporation - India
- Kaltim Prima Coal - Indonesia
- Singapore Mercantile Exchange
- Merrill Lynch Commodities Europe
- Indian Energy Exchange, India
- ICICI Bank Limited - India
- Sakthi Sugars Limited - India
- Bayan Resources Tbk. - Indonesia
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Bulk Trading Sa - Switzerland
- The University of Queensland
- Kobexindo Tractors - Indoneisa
- Formosa Plastics Group - Taiwan
- India Bulls Power Limited - India
- Kepco SPC Power Corporation, Philippines
- Lanco Infratech Ltd - India
- Cement Manufacturers Association - India
- Cigading International Bulk Terminal - Indonesia
- Jaiprakash Power Ventures ltd
- Parry Sugars Refinery, India
- Minerals Council of Australia
- Thiess Contractors Indonesia
- Ambuja Cements Ltd - India
- GVK Power & Infra Limited - India
- Semirara Mining and Power Corporation, Philippines
- Karaikal Port Pvt Ltd - India
- Holcim Trading Pte Ltd - Singapore
- Price Waterhouse Coopers - Russia
- Latin American Coal - Colombia
- Tata Chemicals Ltd - India
- Agrawal Coal Company - India
- Coal and Oil Company - UAE
- Indo Tambangraya Megah - Indonesia
- The State Trading Corporation of India Ltd
- Bukit Asam (Persero) Tbk - Indonesia
- Vijayanagar Sugar Pvt Ltd - India
- PTC India Limited - India
- Jorong Barutama Greston.PT - Indonesia
- Eastern Energy - Thailand
- Kohat Cement Company Ltd. - Pakistan
- Baramulti Group, Indonesia
- SMG Consultants - Indonesia
- Riau Bara Harum - Indonesia
- Karbindo Abesyapradhi - Indoneisa
- Videocon Industries ltd - India
- San Jose City I Power Corp, Philippines
- Carbofer General Trading SA - India
- Energy Link Ltd, New Zealand
- Mintek Dendrill Indonesia
- Malabar Cements Ltd - India
- Rashtriya Ispat Nigam Limited - India
- Orica Mining Services - Indonesia
- Global Green Power PLC Corporation, Philippines
- Attock Cement Pakistan Limited
- VISA Power Limited - India
- Alfred C Toepfer International GmbH - Germany
- Electricity Authority, New Zealand
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Iligan Light & Power Inc, Philippines
- Wilmar Investment Holdings
- Bhoruka Overseas - Indonesia
- Deloitte Consulting - India
- Offshore Bulk Terminal Pte Ltd, Singapore
- Ministry of Mines - Canada
- Sinarmas Energy and Mining - Indonesia
- Manunggal Multi Energi - Indonesia
- Thai Mozambique Logistica
- Dalmia Cement Bharat India
- Ceylon Electricity Board - Sri Lanka
- Directorate General of MIneral and Coal - Indonesia
- Eastern Coal Council - USA
- Binh Thuan Hamico - Vietnam
- Jindal Steel & Power Ltd - India
- Indonesian Coal Mining Association
- IEA Clean Coal Centre - UK
- Antam Resourcindo - Indonesia
- Uttam Galva Steels Limited - India
- CNBM International Corporation - China
- Essar Steel Hazira Ltd - India
- Chamber of Mines of South Africa
- Miang Besar Coal Terminal - Indonesia
- TeaM Sual Corporation - Philippines
- Bharathi Cement Corporation - India
- PetroVietnam Power Coal Import and Supply Company
- Economic Council, Georgia
- McConnell Dowell - Australia
- Bhushan Steel Limited - India
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Vedanta Resources Plc - India
- SMC Global Power, Philippines
- Star Paper Mills Limited - India
- Toyota Tsusho Corporation, Japan
- Ministry of Finance - Indonesia
- Bhatia International Limited - India
- White Energy Company Limited
- Ministry of Transport, Egypt
- Intertek Mineral Services - Indonesia
- Mercuria Energy - Indonesia
- Edison Trading Spa - Italy
- Siam City Cement - Thailand
- South Luzon Thermal Energy Corporation
- MS Steel International - UAE
- Directorate Of Revenue Intelligence - India
- Globalindo Alam Lestari - Indonesia
- Coastal Gujarat Power Limited - India
- Wood Mackenzie - Singapore
- Rio Tinto Coal - Australia
- Kumho Petrochemical, South Korea
- Madhucon Powers Ltd - India
- Georgia Ports Authority, United States
- Global Coal Blending Company Limited - Australia
- Gujarat Electricity Regulatory Commission - India
- Energy Development Corp, Philippines
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Indian Oil Corporation Limited
- International Coal Ventures Pvt Ltd - India
- Borneo Indobara - Indonesia
- Maharashtra Electricity Regulatory Commission - India
- Pipit Mutiara Jaya. PT, Indonesia
- Simpson Spence & Young - Indonesia
- Barasentosa Lestari - Indonesia
- Central Electricity Authority - India
- Pendopo Energi Batubara - Indonesia
- Central Java Power - Indonesia
- Kalimantan Lumbung Energi - Indonesia
- Larsen & Toubro Limited - India
- Electricity Generating Authority of Thailand
- Maheswari Brothers Coal Limited - India
- Petron Corporation, Philippines
- Meenaskhi Energy Private Limited - India
- European Bulk Services B.V. - Netherlands
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- London Commodity Brokers - England
- Australian Commodity Traders Exchange
- Bank of Tokyo Mitsubishi UFJ Ltd
- Banpu Public Company Limited - Thailand
- Straits Asia Resources Limited - Singapore
- Aboitiz Power Corporation - Philippines
- Timah Investasi Mineral - Indoneisa
- Bahari Cakrawala Sebuku - Indonesia
- Indika Energy - Indonesia
- Meralco Power Generation, Philippines
- Siam City Cement PLC, Thailand
- LBH Netherlands Bv - Netherlands
- Medco Energi Mining Internasional
- Grasim Industreis Ltd - India
- Posco Energy - South Korea
- Ind-Barath Power Infra Limited - India
- OPG Power Generation Pvt Ltd - India
- Coalindo Energy - Indonesia
- Renaissance Capital - South Africa
- Gujarat Mineral Development Corp Ltd - India
- Krishnapatnam Port Company Ltd. - India
- Planning Commission, India
- Heidelberg Cement - Germany
- Metalloyd Limited - United Kingdom
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