Nationalism in relation to natural resources is increasing. Miners could suffer


Kolwezi, DRC – The sun sets on one of the open pit copper mines at Mutanda Mining Sarl on July 6, 2016 in Kolwezi, DRC.

Per-Anders Pettersson / Getty Images

Countries rich in natural resources have become increasingly protectionist over the past year when Covid-19 threatened their economies, a new study showed.

A report released Thursday by Risk Advisory Council Verisk Maplecroft indicated that there had been a “significant rise” in resource nationalism in 34 countries over the course of 2020, with the pandemic exacerbating an existing trend towards government intervention.

Verisk Maplecroft noted that 18 of the 34 countries depend on the minerals or hydrocarbons they export and forecast that the risk of isolationism will increase in the coming years as governments try to fill fiscal gaps after the pandemic.

The mining sector will bear the brunt of new measures, according to the report, with some of the world’s leading producers of copper and iron ore, particularly in Africa and South America, among the top ten countries at risk.

“It is completely understandable that governments are looking for additional sources of income in these fiscally constrained times,” Hugo Brennan, head of mining risk at Verisk, told CNBC on Friday.

“Commodity prices have got off to a great start into 2021 and this puts the mining sector firmly on the radar of national governments.”

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

“These are countries that are most likely to resort to the most blunt instruments in the resource nationalism toolbox, such as direct expropriations with no or inadequate compensation,” said Verisk Americas analysts Mariano Machado and Jimena Blanco.

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

Meanwhile, Zambia is embroiled in a longstanding legal battle with Vedanta Resources for attempting to liquidate the company’s Konkola copper mines.

Kitwe, ZAMBIA – Copper is mined at the Mopani Glencore copper mine in Kitwe, Zambia on January 9, 2019.

Ute Grabowsky / Photo library via Getty Images

Emerging and developing countries closed 2020 with an average decline in government revenue to GDP of 10.9 percentage points compared to the previous year. This is based on IMF data aggregated by Verisk. The regions hardest hit were sub-Saharan Africa with 12.55 percentage points and Latin America with 8.7 percentage points.

In addition to the heavily dependent nations above, according to the Index, much more diversified economies have made sharper but more differentiated efforts in the past year to nationalistically shape their resources.

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

“The governments in these countries are increasingly ready to intervene in the economy, use indirect expropriation or increase the requirements for local content – which opens the door to a more differentiated, but still disruptive path of resource nationalism.”

In South America, the use of these “less blunt” mechanisms is usually determined by one of two factors, according to the analysts: ideology as in Mexico or Argentina; or community pressure from mining areas or a broader society like in Chile and Colombia.

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

“For example, interventionism in Liberia and Mauritania stems from structural governance flaws, not nationalist sentiments,” the report said.

“In Mali, the political concerns of the transitional government are the problem, while in Guinea there is a need to maximize bauxite revenues. Both countries are trying to review existing contracts.”

Oil pumps can be seen in Lake Maracaibo in Lagunillas, Ciudad Ojeda, in the state of Zulia, Venezuela.

Isaac Urrutia | Reuters

Nationalist measures generated by social pressures are usually more subtle, but pose an equally high risk for mining companies, argued Verisk analysts, using the example of a debate over water rights in Chile, which could potentially increase the regulatory burden and operating costs for companies in the country US could increase next decade.

While the coronavirus pandemic wasn’t the only factor behind the recent push towards 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 “rentier mining economies,” which primarily generate government revenue from the mining of a particular asset, governments have tended to turn to the mining industry to halt public finances, the report stressed.

However, analysts suggested that miners need to closely monitor environmental, social and governance (ESG) factors in diversified emerging markets, where more covert methods of government interventionism are becoming the tools of choice.

“Problems related to income distribution, poverty, access to education and health care – to name a few – can trigger sociopolitical processes that demand more from the state,” they said.