Currently the quite a few export markets specially raw materials and long segments are showing a kind of very strange and rapid growth. Some products added more than USD 100 just in the couple of last days.The market looks like a ball that felt down on the ground and start to jump…but is seams that each following jump will be smaller than previous one.Coal mining giant, Peabody Energy Corporation has posted a more than tenfold increase in third quarter profit on a 59% YoY increase in revenues driven by strong volumes and higher pricing. It also raised its financial forecast for the fiscal 2008.
Peabody Energy earned USD 369.6 million for the third quarter, up from USD 32.3 million in the last year period. Income from continuing operations was USD 377.1 million, higher than USD 55 million per share in the comparable prior year quarter. EBITDA for the quarter was USD 609.8 million, up by 190% YoY from USD 210 million in the prior year.
Third quarter revenues were USD 1.91 billion, up by 59% YoY from USD 1.20 billion. Ten Wall Street analysts expected revenues of USD 1.68 billion. Peabody sold a volume of 66 million tonnes of coal in the latest quarter, up by 6% YoY from 62.1 million tonnes a year ago.
Coal companies have benefited from rising North American coal prices over the past several quarters, benefiting from increasing global demand and supply disruptions. Revenue from the company's US mining operations rose to USD 930.7 million from USD 805.5 million in the prior year quarter. Australian revenue soared to USD 789 million from USD 307.6 million a year ago. EBITDA from mining operations nearly tripled, and Trading and Brokerage increased 168%. Meanwhile, operating profit rose 324% to USD 490.2 million.
For the January to September 2008 period, Peabody reported net income of USD 660.2 million as compared to USD 228.5 million. Revenues increased to USD 4.71 billion from USD 3.38 billion in the prior year period.
Looking forward, for the fiscal year 2008, it raised its earnings from continuing operations guidance to a range of USD 3 to USD 3.25 per share from earlier estimated range of USD 2.50 to USD 3 per share. Seventeen Street analysts expect earnings of USD 2.86 per share. The current guidance range of USD 3 to USD 3.25 per share represents an increase of as much as 103% from 2007.
Peabody now expects 2008 EBITDA in a range of USD 1.75 billion and USD 1.85 billion, as much as 92% higher than 2007. Earlier, it expected full year EBITDA in the range of USD 1.6 billion to USD 1.8 billion.
Mr Richard Navarre president & chief commercial officer of Peabody said that "While there is uncertainty in today's economy, any easing of demand growth is likely to be offset by diminished global coal supply. Supply challenges around the world and lack of capital to respond to market shortages will continue to drive a tight global supply demand balance for coal. In addition, we believe that the long term coal demand profile is very strong and will continue to be led by emerging economies."
Peabody noted that, currently, approximately 300 gigawatts of new coal fueled generation is under construction around the world and expected to come on line over the next several years, requiring up to 1 billion tons of annual coal supply.
It added it has 10 million to 20 million tons of US production un priced for 2009, and 75 million to 85 million tonnes for 2010. Peabody said it has 6 million to 7 million tonnes of Australian based metallurgical coal available to be priced for the last three quarters of 2009 and 10 million to 11 million tonnes for 2010. Un priced Australian thermal coal volumes include 6 million to 7 million tonnes for the last three quarters of 2009 and 12 million to 13 million tons for 2010.
Monday, November 17, 2008
Sunday, November 16, 2008
Let us take the charges seriously !
THE iron ore mining sector in Bellary district in Karnataka and the expanding web of illegal and corrupt practices that sustains it are finally to be brought under official scrutiny.
The explosion in iron ore mining, powered by a spurt in the international prices of iron ore in the past four years, has resulted in the overnight enrichment of mine owners in the area.
Of the 54 mining lease-holders in the reserve forest areas of Bellary division, the majority got their leases between the 1960s and the 1980s. Another 57 received temporary leases after 2004 from the government on patta or revenue lands.
Following the mining boom, there has been wholesale violation of laws governing mineral extraction and environmental protection by sections of the lease-holders. They have escaped prosecution largely by bribing the administrative and law-enforcing machinery at the district and State levels.
The mining sector escaped any serious official investigation in the past. It was only when the weight of the scandal threatened the very survival of the present coalition government headed by H.D. Kumaraswamy of the Janata Dal (Secular), that the Chief Minister ordered an inquiry into all aspects of illegality in the mining sector.
The allegations made by G. Janardhana Reddy, a Bharatiya Janata Party (BJP) Member of the Legislative Council (MLC) and a wealthy mine owner himself, that bribes totalling Rs.150 crores were collected from mine owners by Forest Minister C. Chennigappa on behalf of the Chief Minister rocked the government and dominated the proceedings of the Legislative Assembly and the Legislative Council for several days.
JOSH CHIN
FAMILIES OF MINE workers and their makeshift homes. Their living quarters have no water, electricity or sanitation.
The BJP is a constituent of the ruling coalition. Reddy and the Opposition Congress demanded an inquiry by the Central Bureau of Investigation (CBI) into the allegations. The Chief Minister has instead appointed a commission of inquiry, to be headed by U.L. Bhatt, a former Chief Justice of the Madhya Pradesh and Assam High Courts. The commission will file an interim report in two months and the final report in six months.
Terms of reference
The commission has been asked to identify all the fraudulent activities relating to mining from January 1, 2000, until the present, the "systemic distortions for high-profit margins" in the mining sector.
In particular, it has been asked to look into two issues. The first is the outcome of the government order, issued by the S.M. Krishna government in March 2003, to dereserve 11,620 acres (4,648 hectares) of government land for private mining.
The second relates to the joint venture contracts entered into by Mysore Minerals Ltd (MML) that are alleged to have favoured select individuals and companies by arbitrarily allotting iron ore mines and iron ore stocks at rates far below the market price.
"There have been complaints of certain influential individuals who were part of the power structure within the government, who by manipulating the records and interfering in the affairs of MML caused huge losses to the corporations and the State", the notification says. The Commission is also to look into the practice of issuing transport permits for illegal mines on government land.
Profits and power
Profits from mining have gone through the roof in the recent mining boom. "As per a rough estimate, the 50-odd operating leaseholders (lessees) of Bellary district had earned a total profit of around 30,000 to 35,000 million [3,000 crores to 3,500 crores] rupees in the last financial year," an official note prepared by a senior district police officer states. Approximately 30 million tonnes of iron ore was extracted in the district in the last financial year.
The profit that a lease-holder makes for every tonne of ore depends on the market price of the ore. "As a thumb rule," the note says, "it can be safely stated that a leaseholder makes profit in the range of $20 to $40 per tonne of iron ore fines (62.5 plus grade) and Rs.400 to Rs.600 per tonne of iron ore lumps."
This wealth has created a new class of businessmen-politicians whose millions have given them considerable clout in State politics and within the three major political parties in Karnataka. The BJP is a case in point.
If the election campaign of BJP leader Sushma Swaraj set the momentum for the party's growth in Bellary, the wealth from mining appears to have sustained it thereafter. The party has broken the Congress stranglehold over the district. Several of its elected representatives either are mine owners or are in the mining business.
The Member of Parliament from Bellary, Karunakara Reddy, is from the BJP, as are several of the MLCs and the Members of the Legislative Assembly (MLAs) from the area. B. Sriramulu is the BJP MLA from Bellary city, Anil Lad from Kudligi, and Somalingappa from Siruguppa. The BJP has a majority in the Bellary City Corporation, and in the Bellary, Siruguppa and Kudligi taluk panchayats.
The allegations over pay-offs made under coercion by mine owners to members of the JD(S) threaten to destabilise not just the coalition but the BJP as well. It has brought to the surface the differences between the two factions in the BJP, the one led by Deputy Chief Minister B.S. Yediyurappa and younger leaders like Reddy, whose swift rise in the party is attributed to his financial clout.
Reddy was suspended from the party for failing to prove his charges of corruption against the Chief Minster. He nevertheless remains defiant. "I stand by my charges, I am a loyal worker of the party, and the State government did not get the clearance from the central leadership before suspending me," he told Frontline.
The commission of inquiry will not have to start from scratch in its investigations as the contours of corruption and illegality within the mining sector in Bellary has already been laid out in official notings and media reports.
According to the investigations of a police officer in the district, there are four types of illegalities that are commonly committed. The first is when mining operations are carried out without government lease or permission. The second is when mining operations are carried out in contravention of the terms and conditions of the lease, as for example when mine owners encroach on areas outside the lease agreement, or excavate more ore than permitted in the lease agreement.
The third illegality is the theft of extracted minerals belonging to the government or a lessee. And lastly, there are illegalities in transportation and in the violation of pollution control laws.
According to data from the office of the Conservator of Forests in Bellary, there are just 54 official mining leases that are in operation in reserved forest areas - "3,800 hectares out of a forest area in Bellary district of 30,000-odd hectares," C. Jayaram, Conservator of Forests, Bellary Division, said.
"There are only small violations in our jurisdiction, and we have taken action on them," he said.
A report prepared by Chennigappa in March 2006, soon after he assumed office, suggests otherwise. According to the report, there were massive violations of the Karnataka Forest Act in Bellary that were causing a "huge loss of revenue (such a loss would run into crores if a thorough enquiry is done)". His report accuses the operators of several mines of "very serious violations of various mining conditions/Forest Conservation Act/ Karnataka Forest Act/ Environmental Protection Act/ Mines and Minerals Acts, etc".
According to Mathew Guru, the owner of a large transport business in Bellary, the mining boom has benefited not just mining lease-holders but the district as a whole as it has given jobs to lakhs of people.
"On an average the cost of mining is between Rs.200 and Rs.250 a tonne. The price of C-ore and fines (iron ore dust) is Rs.1,400 a tonne at the mines and Rs.2,700 if transported to the harbour. Most mine owners in Bellary are worth more than Rs.1,000 crores," he said.
RED DUST
Roughly 7,500 lorries move out of Bellary daily carrying ore and fines (ore dust) to the ports in the east and the west. The dust these lorries generate settles on everything.
At the Government Model Higher Primary School in Taranagar, Sandur taluk, respiratory disorders among children in the last five years have increased substantially because of the dust that is thrown up by the lorries that ply up and down the road in front of the school, according to Sundaresh Kumar, the physical instruction teacher in the school.
"At least 2,000 lorries pass in front of the school every day," he said. "By the evening the children are covered in red dust."
Even as the mine owners turn from millionaires to billionaires, the mine workers - thousands of migrant agricultural workers among them - labour under the most appalling conditions. In the smaller and most often illegal "float-ore" mines, working families dig shallow pits to bring up lumps of iron ore that is then broken down by hand. At larger mines, they operate heavy machinery such as excavators and dumpers.
They drive the endless convoys of ore-laden lorries from work sites to ports in Mangalore, Karwar, Vishakhapatnam and Chennai. They work for over 12 hours a day in the lung-choking environment created by swirling ore-laden clouds of red dust that permeate even the small hovels that entire families crowd into to sleep. Their living quarters have no water, electricity or sanitation.
"There was no work for us in our village in Kushtagi [Raichur taluk]: here we get Rs.5 for every putti [iron basin] of ore we break down," said Sharadamma, an emaciated young mother of three, as she and her friends Padma and Shara pick up dry twigs from the roadside near Subburayanahalli village in Sandur, a region whose forested hillsides and fertile valleys are being fast denuded by uncontrolled private mining. She can break roughly 10 puttis on a good day of work. "The rate used to be Rs.8 for a putti, but now that so many people want work, the price has been pushed down. We are our own enemies."
The biggest wrongdoing committed by mining companies, with the exception of state-owned companies, is the gross exploitation of labour, including children, the class that creates their wealth. This is an issue that does not find a mention in the terms of reference of the Bhatt Commission of Inquiry, nor in any of the official reports on the mining sector. A report that investigates mining illegalities but which does not investigate the violations of labour rights will, indeed, be a partial one.
The explosion in iron ore mining, powered by a spurt in the international prices of iron ore in the past four years, has resulted in the overnight enrichment of mine owners in the area.
Of the 54 mining lease-holders in the reserve forest areas of Bellary division, the majority got their leases between the 1960s and the 1980s. Another 57 received temporary leases after 2004 from the government on patta or revenue lands.
Following the mining boom, there has been wholesale violation of laws governing mineral extraction and environmental protection by sections of the lease-holders. They have escaped prosecution largely by bribing the administrative and law-enforcing machinery at the district and State levels.
The mining sector escaped any serious official investigation in the past. It was only when the weight of the scandal threatened the very survival of the present coalition government headed by H.D. Kumaraswamy of the Janata Dal (Secular), that the Chief Minister ordered an inquiry into all aspects of illegality in the mining sector.
The allegations made by G. Janardhana Reddy, a Bharatiya Janata Party (BJP) Member of the Legislative Council (MLC) and a wealthy mine owner himself, that bribes totalling Rs.150 crores were collected from mine owners by Forest Minister C. Chennigappa on behalf of the Chief Minister rocked the government and dominated the proceedings of the Legislative Assembly and the Legislative Council for several days.
JOSH CHIN
FAMILIES OF MINE workers and their makeshift homes. Their living quarters have no water, electricity or sanitation.
The BJP is a constituent of the ruling coalition. Reddy and the Opposition Congress demanded an inquiry by the Central Bureau of Investigation (CBI) into the allegations. The Chief Minister has instead appointed a commission of inquiry, to be headed by U.L. Bhatt, a former Chief Justice of the Madhya Pradesh and Assam High Courts. The commission will file an interim report in two months and the final report in six months.
Terms of reference
The commission has been asked to identify all the fraudulent activities relating to mining from January 1, 2000, until the present, the "systemic distortions for high-profit margins" in the mining sector.
In particular, it has been asked to look into two issues. The first is the outcome of the government order, issued by the S.M. Krishna government in March 2003, to dereserve 11,620 acres (4,648 hectares) of government land for private mining.
The second relates to the joint venture contracts entered into by Mysore Minerals Ltd (MML) that are alleged to have favoured select individuals and companies by arbitrarily allotting iron ore mines and iron ore stocks at rates far below the market price.
"There have been complaints of certain influential individuals who were part of the power structure within the government, who by manipulating the records and interfering in the affairs of MML caused huge losses to the corporations and the State", the notification says. The Commission is also to look into the practice of issuing transport permits for illegal mines on government land.
Profits and power
Profits from mining have gone through the roof in the recent mining boom. "As per a rough estimate, the 50-odd operating leaseholders (lessees) of Bellary district had earned a total profit of around 30,000 to 35,000 million [3,000 crores to 3,500 crores] rupees in the last financial year," an official note prepared by a senior district police officer states. Approximately 30 million tonnes of iron ore was extracted in the district in the last financial year.
The profit that a lease-holder makes for every tonne of ore depends on the market price of the ore. "As a thumb rule," the note says, "it can be safely stated that a leaseholder makes profit in the range of $20 to $40 per tonne of iron ore fines (62.5 plus grade) and Rs.400 to Rs.600 per tonne of iron ore lumps."
This wealth has created a new class of businessmen-politicians whose millions have given them considerable clout in State politics and within the three major political parties in Karnataka. The BJP is a case in point.
If the election campaign of BJP leader Sushma Swaraj set the momentum for the party's growth in Bellary, the wealth from mining appears to have sustained it thereafter. The party has broken the Congress stranglehold over the district. Several of its elected representatives either are mine owners or are in the mining business.
The Member of Parliament from Bellary, Karunakara Reddy, is from the BJP, as are several of the MLCs and the Members of the Legislative Assembly (MLAs) from the area. B. Sriramulu is the BJP MLA from Bellary city, Anil Lad from Kudligi, and Somalingappa from Siruguppa. The BJP has a majority in the Bellary City Corporation, and in the Bellary, Siruguppa and Kudligi taluk panchayats.
The allegations over pay-offs made under coercion by mine owners to members of the JD(S) threaten to destabilise not just the coalition but the BJP as well. It has brought to the surface the differences between the two factions in the BJP, the one led by Deputy Chief Minister B.S. Yediyurappa and younger leaders like Reddy, whose swift rise in the party is attributed to his financial clout.
Reddy was suspended from the party for failing to prove his charges of corruption against the Chief Minster. He nevertheless remains defiant. "I stand by my charges, I am a loyal worker of the party, and the State government did not get the clearance from the central leadership before suspending me," he told Frontline.
The commission of inquiry will not have to start from scratch in its investigations as the contours of corruption and illegality within the mining sector in Bellary has already been laid out in official notings and media reports.
According to the investigations of a police officer in the district, there are four types of illegalities that are commonly committed. The first is when mining operations are carried out without government lease or permission. The second is when mining operations are carried out in contravention of the terms and conditions of the lease, as for example when mine owners encroach on areas outside the lease agreement, or excavate more ore than permitted in the lease agreement.
The third illegality is the theft of extracted minerals belonging to the government or a lessee. And lastly, there are illegalities in transportation and in the violation of pollution control laws.
According to data from the office of the Conservator of Forests in Bellary, there are just 54 official mining leases that are in operation in reserved forest areas - "3,800 hectares out of a forest area in Bellary district of 30,000-odd hectares," C. Jayaram, Conservator of Forests, Bellary Division, said.
"There are only small violations in our jurisdiction, and we have taken action on them," he said.
A report prepared by Chennigappa in March 2006, soon after he assumed office, suggests otherwise. According to the report, there were massive violations of the Karnataka Forest Act in Bellary that were causing a "huge loss of revenue (such a loss would run into crores if a thorough enquiry is done)". His report accuses the operators of several mines of "very serious violations of various mining conditions/Forest Conservation Act/ Karnataka Forest Act/ Environmental Protection Act/ Mines and Minerals Acts, etc".
According to Mathew Guru, the owner of a large transport business in Bellary, the mining boom has benefited not just mining lease-holders but the district as a whole as it has given jobs to lakhs of people.
"On an average the cost of mining is between Rs.200 and Rs.250 a tonne. The price of C-ore and fines (iron ore dust) is Rs.1,400 a tonne at the mines and Rs.2,700 if transported to the harbour. Most mine owners in Bellary are worth more than Rs.1,000 crores," he said.
RED DUST
Roughly 7,500 lorries move out of Bellary daily carrying ore and fines (ore dust) to the ports in the east and the west. The dust these lorries generate settles on everything.
At the Government Model Higher Primary School in Taranagar, Sandur taluk, respiratory disorders among children in the last five years have increased substantially because of the dust that is thrown up by the lorries that ply up and down the road in front of the school, according to Sundaresh Kumar, the physical instruction teacher in the school.
"At least 2,000 lorries pass in front of the school every day," he said. "By the evening the children are covered in red dust."
Even as the mine owners turn from millionaires to billionaires, the mine workers - thousands of migrant agricultural workers among them - labour under the most appalling conditions. In the smaller and most often illegal "float-ore" mines, working families dig shallow pits to bring up lumps of iron ore that is then broken down by hand. At larger mines, they operate heavy machinery such as excavators and dumpers.
They drive the endless convoys of ore-laden lorries from work sites to ports in Mangalore, Karwar, Vishakhapatnam and Chennai. They work for over 12 hours a day in the lung-choking environment created by swirling ore-laden clouds of red dust that permeate even the small hovels that entire families crowd into to sleep. Their living quarters have no water, electricity or sanitation.
"There was no work for us in our village in Kushtagi [Raichur taluk]: here we get Rs.5 for every putti [iron basin] of ore we break down," said Sharadamma, an emaciated young mother of three, as she and her friends Padma and Shara pick up dry twigs from the roadside near Subburayanahalli village in Sandur, a region whose forested hillsides and fertile valleys are being fast denuded by uncontrolled private mining. She can break roughly 10 puttis on a good day of work. "The rate used to be Rs.8 for a putti, but now that so many people want work, the price has been pushed down. We are our own enemies."
The biggest wrongdoing committed by mining companies, with the exception of state-owned companies, is the gross exploitation of labour, including children, the class that creates their wealth. This is an issue that does not find a mention in the terms of reference of the Bhatt Commission of Inquiry, nor in any of the official reports on the mining sector. A report that investigates mining illegalities but which does not investigate the violations of labour rights will, indeed, be a partial one.
Sunday, November 9, 2008
Liquidity Problems of Mining Investments
On Aug. 22, 2008, Fitch Ratings published a special report entitled “Corporate
Liquidity: Bank Agreements and Refinancing Risk,” which discusses Fitch’s view of the
current credit market environment. The report emphasizes that Fitch’s ratings and
analysis of corporate liquidity are weighted more heavily on internal sources of funds:
cash holdings and cash generated from operations.
Since that time, the credit market tightened significantly raising the specter of a
consumer recession. Metal prices have fallen sharply and production and capital
expenditure cutbacks are being considered or announced. Demand from China and
other developing nations has driven strong growth in consumption and indications are
that growth will slow for at least the next 12 months. The HSBC North America Mining
Index, a capitalization weighted index, has halved since Aug. 22, 2008.
Steel, aluminum and copper prices are expected to trough in 2009. Coal prices and gold
prices are expected to hold up reasonably well over the next 12−18 months. Costs
should benefit from the decline in energy prices as well as production efficiencies.
While Fitch performs comprehensive ongoing liquidity surveillance as a function of our
core rating process, this report provides a more in-depth analysis of mining and metal
sector liquidity.
Key Conclusions
• Liquidity for the mining and metals sector is generally healthy. Most companies
have taken advantage of strong prices to improve their assets and capital structure.
• Free cash flow is highly influenced by capital spending programs, which can take
more than one year to complete. Curtailments in exploration and development to
conserve cash will result in short supply beginning in 2011 for copper, nickel and
zinc.
• Steam coal producers generally sell coal under long-term contracts where prices are
known for a period of three years. While volumes could be off from a very strong
2008, earnings should benefit from strong pricing momentum. Metallurgical coal
producers generally sell under annual contracts. Prices should benefit from fairly
tight markets over the next 12−18 months.
• Copper price swings are generally influenced by speculative demand and the recent
precipitous fall was accentuated by financial buyers unwinding positions.
• While some earnings are expected to decline in 2009 from robust 2008 levels, runoff
of working capital and active management of capital budgets should partially offset
the impact to free cash flow. Financial covenant levels should not constrain
borrowing under the revolving credit facilities over the next 12−18 months.
• On Sept. 30, 2008, Teck Cominco Ltd. signed definitive credit agreements totaling
$9.81 billion, which it plans to use for funding the cash portion of its takeover of
Fording Canadian Coal Trust. The agreements include a fully underwritten $4 billion
senior term loan and a $5.81 billion senior bridge loan.
Liquidity: Bank Agreements and Refinancing Risk,” which discusses Fitch’s view of the
current credit market environment. The report emphasizes that Fitch’s ratings and
analysis of corporate liquidity are weighted more heavily on internal sources of funds:
cash holdings and cash generated from operations.
Since that time, the credit market tightened significantly raising the specter of a
consumer recession. Metal prices have fallen sharply and production and capital
expenditure cutbacks are being considered or announced. Demand from China and
other developing nations has driven strong growth in consumption and indications are
that growth will slow for at least the next 12 months. The HSBC North America Mining
Index, a capitalization weighted index, has halved since Aug. 22, 2008.
Steel, aluminum and copper prices are expected to trough in 2009. Coal prices and gold
prices are expected to hold up reasonably well over the next 12−18 months. Costs
should benefit from the decline in energy prices as well as production efficiencies.
While Fitch performs comprehensive ongoing liquidity surveillance as a function of our
core rating process, this report provides a more in-depth analysis of mining and metal
sector liquidity.
Key Conclusions
• Liquidity for the mining and metals sector is generally healthy. Most companies
have taken advantage of strong prices to improve their assets and capital structure.
• Free cash flow is highly influenced by capital spending programs, which can take
more than one year to complete. Curtailments in exploration and development to
conserve cash will result in short supply beginning in 2011 for copper, nickel and
zinc.
• Steam coal producers generally sell coal under long-term contracts where prices are
known for a period of three years. While volumes could be off from a very strong
2008, earnings should benefit from strong pricing momentum. Metallurgical coal
producers generally sell under annual contracts. Prices should benefit from fairly
tight markets over the next 12−18 months.
• Copper price swings are generally influenced by speculative demand and the recent
precipitous fall was accentuated by financial buyers unwinding positions.
• While some earnings are expected to decline in 2009 from robust 2008 levels, runoff
of working capital and active management of capital budgets should partially offset
the impact to free cash flow. Financial covenant levels should not constrain
borrowing under the revolving credit facilities over the next 12−18 months.
• On Sept. 30, 2008, Teck Cominco Ltd. signed definitive credit agreements totaling
$9.81 billion, which it plans to use for funding the cash portion of its takeover of
Fording Canadian Coal Trust. The agreements include a fully underwritten $4 billion
senior term loan and a $5.81 billion senior bridge loan.
Thursday, November 6, 2008
Think Strategy and Quick Response
What goes up must come down. After a record-breaking 10-year boom for commodities, it was inevitable that prices would have to retreat—especially in the face of global financial turmoil and sagging economic growth. And retreat they have: The prices of some metals are down by more than 50% since the start of 2008, dragging with them shares in mining giants such as BHP Billiton (BBL) and Rio Tinto (RTP).
Is it the end of the party for natural resources? "We're definitely seeing a slowdown in the mining sector," says Iain Armstrong, divisional director at investment firm Brewin Dolphin in London. "Company [share] prices will remain weak, as we're past the best of the current commodity cycle."
But the downturn may be only temporary. Although 2009 is shaping up to be a tough year on the back of the current slowdown, demand from emerging economies should pick up again in 2010, potentially fueling another commodities boom. "Strong fundamentals underpin high commodity prices in the long run," says Jason Burkitt, a director in the mining practice at consultancy PriceWaterhouseCoopers (PWC).
Capital Spending Slowdown
That view is echoed by Tom Albanese, chief executive of Anglo-Australian mining company Rio Tinto, who briefed analysts Oct. 15 on the company's third-quarter results. "The Chinese economy is pausing for a breath," Albanese said. Although the company's iron ore production in the quarter rose 17% year-over-year, he conceded that future capital spending is now under review and production growth would be reduced "to fit current trends." Albanese remains confident of Rio Tinto's long-term growth prospects.
Analysts expect other companies, including Xstrata (XTA.L) and Anglo American (AAUK), to make similar statements about investment freezes when they announce third-quarter updates before the end of October. Aluminum giant Alcoa (AA) already said it would halt all noncritical capital expenditures when it announced on Oct. 7 a 52% yearly drop in third-quarter net profits, to $268 million.
It's unquestionably a new and different world than just a few months ago. For a decade, mining companies have ridden a wave of ever-expanding demand for natural resources from emerging economies, especially China and India. As prices for commodities—everything from oil and iron ore to precious metals such as platinum and silver—skyrocketed, so did profits and share prices. The SPDR S&P Metals & Mining stock index surged nearly 92% from the start of 2007 until its peak on June 27 of this year.
Now the economic turmoil is starting to bite, even in sizzling emerging economies. Analysts at UBS (UBS) expect gross domestic product growth in China—the world's largest iron ore consumer—to fall to 8% next year, compared with 12% in 2007. And Morgan Stanley (MS) recently cut its forecast for overall emerging-market GDP growth in 2009 from 6.2% to 5.5%. The slower-growing economies will need less metal to meet dwindling export demand and slackening local markets.
Rethinking Strategy
The impact is already being felt by BHP Billiton, Rio Tinto, and Brazil's Vale (RIO), which dominate global iron ore production and are the world's largest mining companies by market capitalization. After negotiating almost 100% price increases with their Chinese customers earlier this year, all three now are likely to see a 30% decline in iron ore prices in 2009 as demand declines, particularly from the troubled automotive sector. Steelmakers, including giant ArcelorMittal (MT), already have announced production cuts for 2009. Tighter credit also is making it tougher for mining companies, especially smaller ones, to finance new projects.
Analysts say mining companies will have to rethink their strategies based on the new pricing environment. "Most of the miners will have to look seriously at which metals they focus on in future investment," says Charles Cooper, an analyst at stockbroker Evolution Securities in London. "High-cost production, such as nickel and zinc, may have to be cut." Nickel and zinc prices have fallen 54% and 42%, respectively, so far this year.
The uncertainty also is wreaking havoc on merger and acquisition activity. Xstrata recently abandoned an attempt to buy platinum producer Lonmin (LMI.L), in part because of falling prices for the metal. The biggest question remains BHP Billiton's ongoing all-share takeover bid for Rio Tinto (BusinessWeek.com, 8/26/08), which may have to be renegotiated. Thanks to its falling share price, BHP's offer for Rio is now worth only $84 billion, vs. $147 billion early this year. Analysts say that smaller deals now stand a better chance of going through, as companies with deeper capital reserves snap up players who are finding it difficult to fund their operations in the current environment.
Production Cut Pitfalls
Companies must be careful not to cut production too much because it would undermine their long-term prospects. Unlike tapping oil and gas fields, extracting metals from the ground can't be easily stopped and restarted. That means any cutbacks over the next 12 months could slow commodity output over the next five years.
"Mining companies know they have to invest now to meet future demand," says Chris Thomas, a director on the metals and mining team at consultancy Deloitte. Most of the companies went through the commodity downturn in the late 1990s, which prompted a big cutback in capital investments. Many of them are still catching up from that freeze and don't want to suffer the same backlog this time around, Thomas adds.
That means mining companies must walk a difficult line between offsetting short-term falls in commodity prices and planning for improved metals demand from 2010 onwards. Those willing and able to invest during the slump could reap major rewards when the likes of China and India ramp back up again, says PWC's Burkitt. Companies that don't may see times even more difficult than today.
Is it the end of the party for natural resources? "We're definitely seeing a slowdown in the mining sector," says Iain Armstrong, divisional director at investment firm Brewin Dolphin in London. "Company [share] prices will remain weak, as we're past the best of the current commodity cycle."
But the downturn may be only temporary. Although 2009 is shaping up to be a tough year on the back of the current slowdown, demand from emerging economies should pick up again in 2010, potentially fueling another commodities boom. "Strong fundamentals underpin high commodity prices in the long run," says Jason Burkitt, a director in the mining practice at consultancy PriceWaterhouseCoopers (PWC).
Capital Spending Slowdown
That view is echoed by Tom Albanese, chief executive of Anglo-Australian mining company Rio Tinto, who briefed analysts Oct. 15 on the company's third-quarter results. "The Chinese economy is pausing for a breath," Albanese said. Although the company's iron ore production in the quarter rose 17% year-over-year, he conceded that future capital spending is now under review and production growth would be reduced "to fit current trends." Albanese remains confident of Rio Tinto's long-term growth prospects.
Analysts expect other companies, including Xstrata (XTA.L) and Anglo American (AAUK), to make similar statements about investment freezes when they announce third-quarter updates before the end of October. Aluminum giant Alcoa (AA) already said it would halt all noncritical capital expenditures when it announced on Oct. 7 a 52% yearly drop in third-quarter net profits, to $268 million.
It's unquestionably a new and different world than just a few months ago. For a decade, mining companies have ridden a wave of ever-expanding demand for natural resources from emerging economies, especially China and India. As prices for commodities—everything from oil and iron ore to precious metals such as platinum and silver—skyrocketed, so did profits and share prices. The SPDR S&P Metals & Mining stock index surged nearly 92% from the start of 2007 until its peak on June 27 of this year.
Now the economic turmoil is starting to bite, even in sizzling emerging economies. Analysts at UBS (UBS) expect gross domestic product growth in China—the world's largest iron ore consumer—to fall to 8% next year, compared with 12% in 2007. And Morgan Stanley (MS) recently cut its forecast for overall emerging-market GDP growth in 2009 from 6.2% to 5.5%. The slower-growing economies will need less metal to meet dwindling export demand and slackening local markets.
Rethinking Strategy
The impact is already being felt by BHP Billiton, Rio Tinto, and Brazil's Vale (RIO), which dominate global iron ore production and are the world's largest mining companies by market capitalization. After negotiating almost 100% price increases with their Chinese customers earlier this year, all three now are likely to see a 30% decline in iron ore prices in 2009 as demand declines, particularly from the troubled automotive sector. Steelmakers, including giant ArcelorMittal (MT), already have announced production cuts for 2009. Tighter credit also is making it tougher for mining companies, especially smaller ones, to finance new projects.
Analysts say mining companies will have to rethink their strategies based on the new pricing environment. "Most of the miners will have to look seriously at which metals they focus on in future investment," says Charles Cooper, an analyst at stockbroker Evolution Securities in London. "High-cost production, such as nickel and zinc, may have to be cut." Nickel and zinc prices have fallen 54% and 42%, respectively, so far this year.
The uncertainty also is wreaking havoc on merger and acquisition activity. Xstrata recently abandoned an attempt to buy platinum producer Lonmin (LMI.L), in part because of falling prices for the metal. The biggest question remains BHP Billiton's ongoing all-share takeover bid for Rio Tinto (BusinessWeek.com, 8/26/08), which may have to be renegotiated. Thanks to its falling share price, BHP's offer for Rio is now worth only $84 billion, vs. $147 billion early this year. Analysts say that smaller deals now stand a better chance of going through, as companies with deeper capital reserves snap up players who are finding it difficult to fund their operations in the current environment.
Production Cut Pitfalls
Companies must be careful not to cut production too much because it would undermine their long-term prospects. Unlike tapping oil and gas fields, extracting metals from the ground can't be easily stopped and restarted. That means any cutbacks over the next 12 months could slow commodity output over the next five years.
"Mining companies know they have to invest now to meet future demand," says Chris Thomas, a director on the metals and mining team at consultancy Deloitte. Most of the companies went through the commodity downturn in the late 1990s, which prompted a big cutback in capital investments. Many of them are still catching up from that freeze and don't want to suffer the same backlog this time around, Thomas adds.
That means mining companies must walk a difficult line between offsetting short-term falls in commodity prices and planning for improved metals demand from 2010 onwards. Those willing and able to invest during the slump could reap major rewards when the likes of China and India ramp back up again, says PWC's Burkitt. Companies that don't may see times even more difficult than today.
Thursday, October 30, 2008
Mining Rush and Dynamics in Central Asia and Players : Is responsible mining possible?
Kazakhstan
Eurasian Natural Resources Company, ENRC, the miner that entered the FTSE 100 , was in talks to buy its domestic rival Kazakhmys in a deal that would bring together Kazakhstan's two largest companies and create a central Asia mining giant. ENRC was forced by the Takeover Panel to issue a statement yesterday saying that it has held "informal dialogue" with Kazakhmys, one of the world's largest copper producers. It added that "no formal proposal has been made by ENRC and there can be no certainty that a formal proposal would be made". The announcement sent Kazakhmys shares to an all-time high, ending the day up 16 per cent at 1,780p, valuing it at £8.1bn.
The news brought out into the open a combination that has been a favourite topic of traders and is likely to be determined by hard-nosed negotiations between the handful of men that control the two companies. Nearly half of ENRC is owned by three billionaire oligarchs,Alexander Mashkevich, Alizhan Ibrahimov and Patokh Chodiyev, who each own a 14.6 per cent stake. Vladimir Kim, the billionaire chairman of Kazakhmys, owns just under 50 per cent of that company.
Adding a further wrinkle is the role that the Kazakh government would play in the talks. It owns 20 per cent of ENRC and it is thought to be keen amid the global mining consolidation frenzy to see the creation of a national champion that could roll up other companies throughout central Asia. "The idea that there would be two listed Kazakh miners in London in five years always looked like it would be one company too many," said an analyst. "It looks like it's going to happen much quicker than that, but there is certainly going to be an element of politics involved."
Speculation has simmered since Mr Kim took a 14.6 per cent stake in ENRC in 2006. But since its December stock market float, ENRC shares have skyrocketed. When Mr Kim bought his ENRC stake, which he later transferred to Kazakhmys, it was worth $800m (£395m). Today, it is worth $4.4bn, more than five times as much. This is due in large part to major expected price rises for the price of chromium, which ENRC mines and is used to produce stainless steel.
Power shortages in South Africa, home to the world's largest reserves of the metal, mean that prices, set quarterly, are expected to jump by as much as 50 per cent.
Analysts think a deal could still be long way off. "There are good reasons for them to get together, but we think this is less likely in the short term," said Charles Cooper, an analyst at Evolution Securities. Kazakhmys is cheap relative to sector rivals, he added, which would make price a sticky issue, and the outcome is likely to be heavily dependent on the personalities involved.
Mr Kim, who has built Kazakhmys through a series of acquisitions over the last decade, is likely to want to continue in a lead role at any combined entity.
Armenia
Environmentalists campaigned fervently against plans to open a large tract of relatively untouched forest land to strip mining, only to watch the Armenian National Assembly approve the deal anyway. This spring, as the snows in the mountainous north began to melt and work started at the Teghut mine, a coalition of conservation groups renewed their push to have the government reconsider the approval of what they contend will cause irreversible damage to the nation's dwindling forestland.
More accustomed to setbacks than progress in dealing with political leaders in Yerevan, environmentalists got a shock when the country's new prime minister, Tigran Sargsyan, not only agreed to discuss their concerns, but seemed to cozy up to their arguments.
"We can't damage nature, because it'll cost our state and the people much more to repay," Sargsyan told a group of conservationists on 20 June. "And clearly, we need to take that into account from the very beginning and make balanced decisions. We need not be seduced by industry's statistics alone, but realize the importance of providing a proper living environment for people."
Environmentalists hailed as unprecedented the prime minister's decision to meet face-to-face and to openly discuss the government's controversial approval — even if the mining operations in northern Armenia's Teghut forest continue.
"This was the first serious meeting with a high-ranking official like the prime minister within the last 15 to 20 years," said Hakob Sanasaryan, chairman of the Greens' Union. "But the outcome of the meeting showed the discussion in fact was a formality. Maybe he will carry out serious reforms in other spheres, but not Teghut, I think."
Tatul Manaseryan, an economics professor at Yerevan State University and a former independent member of the National Assembly, believes the prime minister is trying to shake up the system and rattles off a long list of changes.
"The PM has started important reforms from his office: the work day starts at 9 a.m., the government sessions are as transparent as possible, he demands computer and other kinds of literacy from the ministers, organizes regularly scheduled meetings with citizens and actively responds to the questions raised, made a call for cooperation to the opposition and participated and spoke at the opposition congress, set a compulsory requirement for the ministries to work with non-governmental organizations, and so on," Manaseryan said.
Indeed, Sargsyan has been unafraid to criticize corruption, bribery, smuggling, and other problems — charges often made by monitoring organizations and citizens, but rarely from the mouths of senior politicians.
"The number one problem in the Republic of Armenia is not the problem of democracy, nor the lack of freedom of expression," Sargsyan recently told the National Assembly. "The number one problem is the corruption that hinders all our reforms. If we don't manage to create equal conditions of competition for economic entities, there won't be any democracy in Armenia. That is the basis and corruption is our number one enemy."
Eurasian Natural Resources Company, ENRC, the miner that entered the FTSE 100 , was in talks to buy its domestic rival Kazakhmys in a deal that would bring together Kazakhstan's two largest companies and create a central Asia mining giant. ENRC was forced by the Takeover Panel to issue a statement yesterday saying that it has held "informal dialogue" with Kazakhmys, one of the world's largest copper producers. It added that "no formal proposal has been made by ENRC and there can be no certainty that a formal proposal would be made". The announcement sent Kazakhmys shares to an all-time high, ending the day up 16 per cent at 1,780p, valuing it at £8.1bn.
The news brought out into the open a combination that has been a favourite topic of traders and is likely to be determined by hard-nosed negotiations between the handful of men that control the two companies. Nearly half of ENRC is owned by three billionaire oligarchs,Alexander Mashkevich, Alizhan Ibrahimov and Patokh Chodiyev, who each own a 14.6 per cent stake. Vladimir Kim, the billionaire chairman of Kazakhmys, owns just under 50 per cent of that company.
Adding a further wrinkle is the role that the Kazakh government would play in the talks. It owns 20 per cent of ENRC and it is thought to be keen amid the global mining consolidation frenzy to see the creation of a national champion that could roll up other companies throughout central Asia. "The idea that there would be two listed Kazakh miners in London in five years always looked like it would be one company too many," said an analyst. "It looks like it's going to happen much quicker than that, but there is certainly going to be an element of politics involved."
Speculation has simmered since Mr Kim took a 14.6 per cent stake in ENRC in 2006. But since its December stock market float, ENRC shares have skyrocketed. When Mr Kim bought his ENRC stake, which he later transferred to Kazakhmys, it was worth $800m (£395m). Today, it is worth $4.4bn, more than five times as much. This is due in large part to major expected price rises for the price of chromium, which ENRC mines and is used to produce stainless steel.
Power shortages in South Africa, home to the world's largest reserves of the metal, mean that prices, set quarterly, are expected to jump by as much as 50 per cent.
Analysts think a deal could still be long way off. "There are good reasons for them to get together, but we think this is less likely in the short term," said Charles Cooper, an analyst at Evolution Securities. Kazakhmys is cheap relative to sector rivals, he added, which would make price a sticky issue, and the outcome is likely to be heavily dependent on the personalities involved.
Mr Kim, who has built Kazakhmys through a series of acquisitions over the last decade, is likely to want to continue in a lead role at any combined entity.
Armenia
Environmentalists campaigned fervently against plans to open a large tract of relatively untouched forest land to strip mining, only to watch the Armenian National Assembly approve the deal anyway. This spring, as the snows in the mountainous north began to melt and work started at the Teghut mine, a coalition of conservation groups renewed their push to have the government reconsider the approval of what they contend will cause irreversible damage to the nation's dwindling forestland.
More accustomed to setbacks than progress in dealing with political leaders in Yerevan, environmentalists got a shock when the country's new prime minister, Tigran Sargsyan, not only agreed to discuss their concerns, but seemed to cozy up to their arguments.
"We can't damage nature, because it'll cost our state and the people much more to repay," Sargsyan told a group of conservationists on 20 June. "And clearly, we need to take that into account from the very beginning and make balanced decisions. We need not be seduced by industry's statistics alone, but realize the importance of providing a proper living environment for people."
Environmentalists hailed as unprecedented the prime minister's decision to meet face-to-face and to openly discuss the government's controversial approval — even if the mining operations in northern Armenia's Teghut forest continue.
"This was the first serious meeting with a high-ranking official like the prime minister within the last 15 to 20 years," said Hakob Sanasaryan, chairman of the Greens' Union. "But the outcome of the meeting showed the discussion in fact was a formality. Maybe he will carry out serious reforms in other spheres, but not Teghut, I think."
Tatul Manaseryan, an economics professor at Yerevan State University and a former independent member of the National Assembly, believes the prime minister is trying to shake up the system and rattles off a long list of changes.
"The PM has started important reforms from his office: the work day starts at 9 a.m., the government sessions are as transparent as possible, he demands computer and other kinds of literacy from the ministers, organizes regularly scheduled meetings with citizens and actively responds to the questions raised, made a call for cooperation to the opposition and participated and spoke at the opposition congress, set a compulsory requirement for the ministries to work with non-governmental organizations, and so on," Manaseryan said.
Indeed, Sargsyan has been unafraid to criticize corruption, bribery, smuggling, and other problems — charges often made by monitoring organizations and citizens, but rarely from the mouths of senior politicians.
"The number one problem in the Republic of Armenia is not the problem of democracy, nor the lack of freedom of expression," Sargsyan recently told the National Assembly. "The number one problem is the corruption that hinders all our reforms. If we don't manage to create equal conditions of competition for economic entities, there won't be any democracy in Armenia. That is the basis and corruption is our number one enemy."
Diamonds and Independence : Botswana ( South Africa! Where!)
Diamonds and Independence
Some of the most intriguing stories told by conference participants came from Botswana, believed to
have achieved the fastest growth in per capita income in the world, averaging 9% annually from
independence in 1966 until 1999. A panel on Botswana described an intriguing mix of good fortune and
shrewd decision-making that went into what has sometimes been termed "The African Miracle."
According to Scott Beaulier, an economics professor at Mercer University in Macon, Ga., who is an
expert on the country, the luckiest break was the fact that the country's wealth in diamonds was not
discovered until a year after it had been granted independence from Britain. The country's leaders
"thought they would have to make wealth out of sand," said Beaulier. John Moreti, deputy chief of
mission at the Botswanan embassy in Washington, agreed. Before the discovery of diamonds, "no one
was interested in us."
The landlocked, Texas-sized country is still heavily dependent on subsistence farming, noted Moreti,
pointing out that its cattle population of two million remains higher than its census figure of 1.8 million.
But he said it is also among the most progressive of African countries, aided by a history of peaceful
relations among its component tribes. "Like the Greek city-states, they found a need to deal with each
other." He and Beaulier also cited a tolerance and openness toward foreigners -- a policy Moreti
described as "Let's keep the experts around" -- and a relative lack of corruption as positive economic
forces.
Both men also emphasized, however, that the country faces serious hurdles in continuing its rapid
growth. "We don't have an entrepreneurial culture," said Moreti. He cited, in particular, the failure to
invest in agriculture as an export crop, comparing the country unfavorably with Israel, which also has a
hot climate and sparse rainfall. In addition, the country has been less successful developing its copper
and coal reserves than it has diamonds. And although per capita income has risen from $80 at
independence to some $2,600 now, Moreti said, the poverty rate is about 40% and unemployment almost
21%.
Mountains to Scale, and For Sale
The panel on which Hesse and Oyebode appeared, entitled "Entrepreneurship and Leadership," also
discussed the multiple facets of business life on the continent. Moderator Robert J. Chalfin, a Wharton
lecturer who heads a New Jersey-based planning and consulting firm, expressed concern about areas
subject to rapid currency fluctuations. Yet in Nigeria, according to Oyebode, problems have actually
become less severe with a less heavily regulated economy. "We bill in dollars, not in local currency,"
added Hesse, noting that he also invests heavily in land: "I bought two mountains. Problems look like
opportunities to me."
Hesse's story about developing a software program that could be used by less skilled -- and lower paid
workers -- reflected the varying effects of the "brain drain." Referring to Africans who have left for
other areas, he provoked laughter from the audience by saying, "You wouldn't believe the opportunities
you have created." As Oyebode put it, "It may be better to be one of 30,000 lawyers (in Nigeria) than to
be one of several million in the U.S." Those who have remained or who never left, Hesse said, can enjoy
a lifestyle that is more upscale than the lifestyles of executives holding similar positions in the developed
world. He and other panelists predicted that the brain drain would reverse as more firms begin
outsourcing to Africa.
As for addressing the pervasive problem of poverty in Africa, Nduom said that the government in Ghana
had based its strategy for reducing poverty on five "pillars":
· Development of infrastructure, including roads, water, electricity and communication technology
· Modernization of agriculture
· Enhanced health and education
· Good governance
· Private sector development
The country has, in recent years, introduced a fully flexible exchange rate, lowered tariffs, fully or
partially privatized some 225 state-owned enterprises and introduced a value added tax, he noted. Private
banks have been authorized to operate since 1988, and deregulation of the petroleum sector of the
economy began in 2004.
Behind Closed Doors
One theme that ran through the conference was the idea that economic growth in Africa would tend to
occur more rapidly in an atmosphere of reduced government regulation and greater political reform.
Oyebode, for example, predicted that there would be greater opportunities for business in Liberia
following recently held elections to replace the authoritarian government of former president Charles
Taylor.
The changing political climate was a major topic of Nduom's keynote address. "When Africa's heads of
state get together these days," he said, "the agenda includes ... adhering to provisions of constitutions, the
rule of law and fiscal responsibility. It is true that not every African head of state or country believes and
practices all of this. But what is happening is a good beginning.
"Peace-making is in, military coup-making is out; lifetime presidencies are out, term limits for heads of
state are in. We should encourage our leaders to broaden these [efforts]. That is the best way to guarantee
the prosperity of the African people. That is the exciting challenge on the continent of Africa."
Nduom conceded that there have been clear exceptions. He criticized Uganda's refusal to allow
independent political parties and described as "unfortunate" the authoritarian rule of President Robert
Mugabe in Zimbabwe. He said that one solution in these and similar cases was for heads of more
democratic states to make their case privately, rather than in international forums. "It may be better done
behind closed doors," he said, adding that leaders in these states are becoming more willing to do this.
"Some countries are ready for change and are indeed implementing reform. Others need to be
encouraged," he noted. "We have a small group of countries that need to be dragged along. And that
must happen. We have come to understand that we cannot achieve accelerated national development,
create wealth and eradicate poverty without reforming the public sector." In his own country, a new
constitution was introduced in 1992 followed shortly by the country's first multi-party elections.
Elections for local assemblies were held in 2002. "Our leaders have understood that it is only through
good governance and the rule of law" that conditions for reducing poverty will occur.
The move toward more open societies has also been spurred by the growth of information technology. In
Ghana, Nduom said, "The influence of the media, particularly the private radio stations" and increased
accessibility of cell phones "cannot be overemphasized. The combination of radio and mobile phones has
given Ghanians tremendous voice and space [in] matters of political, economic and social interest. The
role of radio stations in enhancing debates during election campaigns has helped promote lively and
constructive political competition, and enhanced transparency during vote counting and declaration of
results. Society is a lot more informed."
On a personal note, Nduom said it was this commitment to political reform that led him to return to
Africa and, once there, to leave the private sector for government. He came to the United States in 1970
as an exchange student, completing high school in a small town in Minnesota, then returned in 1973 to
get his bachelor's, master's and doctoral degrees from the University of Wisconsin in Milwaukee. He
joined Touche Ross in 1981 and became a partner in 1985, one of five blacks out of some 1,000 partners.
He later returned to the continent with the firm, which had become Deloitte and Touche, and started a
new management consulting practice for them.
He said it was his country's "commitment to good governance that attracted
professionals like me to move back to Africa in the first place. But it is the
need to accelerate the pace of reforms and strengthen democracy and the rule
of law that has attracted me to go into politics. I enjoyed working and living in
the United States. But my father always said that however big I became in the U.S., I would be better off in my own country. For sure, it was easier for me to live and make a decent living in America. But it is more satisfying when I am able to make something work in Africa."
Some of the most intriguing stories told by conference participants came from Botswana, believed to
have achieved the fastest growth in per capita income in the world, averaging 9% annually from
independence in 1966 until 1999. A panel on Botswana described an intriguing mix of good fortune and
shrewd decision-making that went into what has sometimes been termed "The African Miracle."
According to Scott Beaulier, an economics professor at Mercer University in Macon, Ga., who is an
expert on the country, the luckiest break was the fact that the country's wealth in diamonds was not
discovered until a year after it had been granted independence from Britain. The country's leaders
"thought they would have to make wealth out of sand," said Beaulier. John Moreti, deputy chief of
mission at the Botswanan embassy in Washington, agreed. Before the discovery of diamonds, "no one
was interested in us."
The landlocked, Texas-sized country is still heavily dependent on subsistence farming, noted Moreti,
pointing out that its cattle population of two million remains higher than its census figure of 1.8 million.
But he said it is also among the most progressive of African countries, aided by a history of peaceful
relations among its component tribes. "Like the Greek city-states, they found a need to deal with each
other." He and Beaulier also cited a tolerance and openness toward foreigners -- a policy Moreti
described as "Let's keep the experts around" -- and a relative lack of corruption as positive economic
forces.
Both men also emphasized, however, that the country faces serious hurdles in continuing its rapid
growth. "We don't have an entrepreneurial culture," said Moreti. He cited, in particular, the failure to
invest in agriculture as an export crop, comparing the country unfavorably with Israel, which also has a
hot climate and sparse rainfall. In addition, the country has been less successful developing its copper
and coal reserves than it has diamonds. And although per capita income has risen from $80 at
independence to some $2,600 now, Moreti said, the poverty rate is about 40% and unemployment almost
21%.
Mountains to Scale, and For Sale
The panel on which Hesse and Oyebode appeared, entitled "Entrepreneurship and Leadership," also
discussed the multiple facets of business life on the continent. Moderator Robert J. Chalfin, a Wharton
lecturer who heads a New Jersey-based planning and consulting firm, expressed concern about areas
subject to rapid currency fluctuations. Yet in Nigeria, according to Oyebode, problems have actually
become less severe with a less heavily regulated economy. "We bill in dollars, not in local currency,"
added Hesse, noting that he also invests heavily in land: "I bought two mountains. Problems look like
opportunities to me."
Hesse's story about developing a software program that could be used by less skilled -- and lower paid
workers -- reflected the varying effects of the "brain drain." Referring to Africans who have left for
other areas, he provoked laughter from the audience by saying, "You wouldn't believe the opportunities
you have created." As Oyebode put it, "It may be better to be one of 30,000 lawyers (in Nigeria) than to
be one of several million in the U.S." Those who have remained or who never left, Hesse said, can enjoy
a lifestyle that is more upscale than the lifestyles of executives holding similar positions in the developed
world. He and other panelists predicted that the brain drain would reverse as more firms begin
outsourcing to Africa.
As for addressing the pervasive problem of poverty in Africa, Nduom said that the government in Ghana
had based its strategy for reducing poverty on five "pillars":
· Development of infrastructure, including roads, water, electricity and communication technology
· Modernization of agriculture
· Enhanced health and education
· Good governance
· Private sector development
The country has, in recent years, introduced a fully flexible exchange rate, lowered tariffs, fully or
partially privatized some 225 state-owned enterprises and introduced a value added tax, he noted. Private
banks have been authorized to operate since 1988, and deregulation of the petroleum sector of the
economy began in 2004.
Behind Closed Doors
One theme that ran through the conference was the idea that economic growth in Africa would tend to
occur more rapidly in an atmosphere of reduced government regulation and greater political reform.
Oyebode, for example, predicted that there would be greater opportunities for business in Liberia
following recently held elections to replace the authoritarian government of former president Charles
Taylor.
The changing political climate was a major topic of Nduom's keynote address. "When Africa's heads of
state get together these days," he said, "the agenda includes ... adhering to provisions of constitutions, the
rule of law and fiscal responsibility. It is true that not every African head of state or country believes and
practices all of this. But what is happening is a good beginning.
"Peace-making is in, military coup-making is out; lifetime presidencies are out, term limits for heads of
state are in. We should encourage our leaders to broaden these [efforts]. That is the best way to guarantee
the prosperity of the African people. That is the exciting challenge on the continent of Africa."
Nduom conceded that there have been clear exceptions. He criticized Uganda's refusal to allow
independent political parties and described as "unfortunate" the authoritarian rule of President Robert
Mugabe in Zimbabwe. He said that one solution in these and similar cases was for heads of more
democratic states to make their case privately, rather than in international forums. "It may be better done
behind closed doors," he said, adding that leaders in these states are becoming more willing to do this.
"Some countries are ready for change and are indeed implementing reform. Others need to be
encouraged," he noted. "We have a small group of countries that need to be dragged along. And that
must happen. We have come to understand that we cannot achieve accelerated national development,
create wealth and eradicate poverty without reforming the public sector." In his own country, a new
constitution was introduced in 1992 followed shortly by the country's first multi-party elections.
Elections for local assemblies were held in 2002. "Our leaders have understood that it is only through
good governance and the rule of law" that conditions for reducing poverty will occur.
The move toward more open societies has also been spurred by the growth of information technology. In
Ghana, Nduom said, "The influence of the media, particularly the private radio stations" and increased
accessibility of cell phones "cannot be overemphasized. The combination of radio and mobile phones has
given Ghanians tremendous voice and space [in] matters of political, economic and social interest. The
role of radio stations in enhancing debates during election campaigns has helped promote lively and
constructive political competition, and enhanced transparency during vote counting and declaration of
results. Society is a lot more informed."
On a personal note, Nduom said it was this commitment to political reform that led him to return to
Africa and, once there, to leave the private sector for government. He came to the United States in 1970
as an exchange student, completing high school in a small town in Minnesota, then returned in 1973 to
get his bachelor's, master's and doctoral degrees from the University of Wisconsin in Milwaukee. He
joined Touche Ross in 1981 and became a partner in 1985, one of five blacks out of some 1,000 partners.
He later returned to the continent with the firm, which had become Deloitte and Touche, and started a
new management consulting practice for them.
He said it was his country's "commitment to good governance that attracted
professionals like me to move back to Africa in the first place. But it is the
need to accelerate the pace of reforms and strengthen democracy and the rule
of law that has attracted me to go into politics. I enjoyed working and living in
the United States. But my father always said that however big I became in the U.S., I would be better off in my own country. For sure, it was easier for me to live and make a decent living in America. But it is more satisfying when I am able to make something work in Africa."
'The Resource Curse': Why Africa's Oil Riches Don't Reach Poor.How long we will be conveniently silent !
Africa is cursed -- with riches. In an era of rising petroleum
prices, African oil is drawing new interest from major
companies around the globe, says John Ghazvinian, author of Untapped: The Scramble for Africa's Oil
Untapped: The Scramble for Africa's Oil. They see the continent
as the most promising place in the world for new production. It
doesn't have the huge deposits that the Middle East and Russia
do, but what it does have is accessible and largely unexploited.
And the oil's high quality makes it relatively inexpensive to
refine.
"Since 1990 alone, the petroleum industry has invested more
than $20 billion in exploration and production activity in
Africa," writes Ghazvinian, a visiting fellow at the University of
Pennsylvania, who spoke at a recent event sponsored by the
Wharton African Students Association. "A further $50 billion
will be spent between now and the end of the decade, the largest investment in the continent's history."
But most Africans are seeing little benefit from this influx of oil drillers and investment. In fact, because
of an economic paradox known as the "Resource Curse," they are often hurt by exports of their
countries' oil. "Between 1970 and 1993, countries without oil saw their economies grow four times faster
than those of countries with oil," Ghazvinian notes, adding that oil exports inflate the value of a country's
currency, making its other exports uncompetitive. At the same time, workers flock to booming
petroleum businesses, which saps other sectors of the economy. "Your country becomes
import-dependent," he says. "That decimates a country's agriculture and traditional industries."
Consider Gabon, which produces about 300,000 barrels of oil a day. "It's covered with tropical rainforest,
but it's hard to find bananas that are grown there. They are mostly imported from Cameroon. At one
point, Gabon was the world's largest per-capita importer of champagne." The oil -- and the champagne --
will eventually run dry. Gabon, with relatively small reserves, is already coming to terms with that
possibility. By then, much of the rest of the country's economy may have atrophied, Ghazvinian says.
Economists also call this phenomenon "the Dutch Disease" because it was observed in the Netherlands
after natural gas was discovered in the 1960s in that country's portion of the North Sea. The Dutch
manufacturing sector withered as the gas industry grew.
In addition, oil money tends to corrupt politicians. They end up vying to pocket a share of the finite
petroleum riches, rather than looking for ways to invest in their country's long-term prosperity. "The
governments aren't dependent on income taxes and therefore don't have to do what the citizens want," he
says. "The state isn't an engineer of economic growth, but a gravy train. None of the money gets down to
the people."
Some Westerners chalk up all of Africa's problems to corruption, thus absolving themselves of any
responsibility, he suggests, adding that the truth is often far more complicated. Some local leaders do
abscond with ill-gotten funds, but they then stash that money in Western banks where the bankers look
the other way. Western governments, too, overlook bad behavior, as long as the oil flows reliably
through the pipelines. "There are incentives on both ends. At the moment," Ghazvinian says, "there are
This is a single/personal use copy of
Knowledge@Wharton. For multiple copies,
custom reprints, e-prints, posters or plaques,
please contact PARS International:
reprints@parsintl.com P. (212) 221-9595 x407.
All materials copyright of the Wharton School of the University of Pennsylvania. Page 1 of 3
'The Resource Curse': Why Africa's Oil Riches Don't Trickle Down to Africans: Knowledge@Wharton
(http://knowledge.wharton.upenn.edu/article.cfm?articleid=1830)
no incentives for the resource-rich governments to do the right thing."
Living in the Stone Age
An historian by training and a journalist by trade, Ghazvinian isn't an anti-corporate crusader or an
oil-industry apologist. Rather, he set out to portray a region that, thanks to its oil riches and its
debilitating poverty, is increasingly occupying a place in economic and political debates in developed
nations.
Africa's oil belt lies mainly along its Western coast in the countries abutting the Gulf of Guinea. "One
third of the world's new discoveries of oil since 2000 have taken place in Africa," Ghazvinian notes.
The world's two most energy-hungry economies, the United States and China, are vying to stake out
spheres of influence in the oil-producing areas. Chinese oil firms, which typically don't face the same
quarterly earnings pressure that Western ones do, are pouring billions into all sorts of infrastructure
projects across the continent, Ghazvinian says. At the same time, politicians like Tony Blair, Britain's
former prime minister, and activists like Bono, singer for the rock band U2, and Jeffrey Sachs, an
economist at Columbia University, are calling for multinational efforts to relieve African poverty and
kick-start the continent's oft-sputtering economies.
Some commentators have pointed to Norway as a possible example of the way in which Africa's oil-rich
countries might conduct themselves. Norway, the world's third largest oil exporter behind Saudi Arabia
and Russia, salts away a large share of its wealth in a national pension fund, now worth more than $300
billion. The fund is expected to grow to about $900 billion in the next decade and invests only passively,
in non-Norwegian stocks and bonds. That limits the temptation of politicians to use the money for
pork-barrel projects. It has been nicknamed "the future-generations fund."
Ghazvinian doubts whether a comparable vehicle would work in Africa. Norway is a small,
homogeneous country of about five million people that was relatively advanced when its oil began to
gush, he points out. It already had the sorts of public institutions that enabled it to prudently manage its
newly found wealth. "I'm not sure that a future-generations fund can be airlifted to Chad. You would
need a lot of healthy, functioning civil institutions before you could do that. Chad is one of the world's
poorest countries," with 80% of its citizens living below the poverty line.
Even Nigeria, where the oil industry has operated for decades, probably wouldn't be able to adapt the
Norwegian model, he says. While its oil wealth is vast -- it has the world's 10th largest reserves -- so are
its problems. It's both an enormous country, with about 135 million people, and an ethnically diverse one,
with hundreds of distinct ethnic groups. And its reserves lie in the poor, rural Niger Delta. "People in the
Niger Delta live almost as if it's the Stone Age," Ghazvinian says. "They live in stick huts on little
islands in the mangrove swamps. Many of the villages are accessible only by boat. Nearby, you will
have these multibillion oil facilities, with executives being dropped in by helicopter."
Little of the oil wealth gets invested back into the delta and few of the companies employ local people,
he points out. That has contributed to civil unrest and lawlessness. "A thousand people a year are killed in
small-scale guerilla warfare in the delta," he says. "Boys will drill holes in the pipelines at night and suck
out the oil: 100,000 to 200,000 barrels a day were disappearing like this at one point. The money is
siphoned off to arm the guerilla groups."
The situation in other African oil-producing countries is just as difficult. Equatorial Guinea is "a family
business masquerading as a country," Ghazvinian quips. "It's one of the most closed societies on earth."
$15,000-a-Month Rentals
As he researched his book, Ghazvinian visited all of the major sub-Saharan oil producers and typically
found the same situation in each. The sizzling oil sector was enriching a clique of politically connected
people and creating boomtowns catering to the industry but seldom providing much wider economic
benefit or even employing many local people. "It's a capital-intensive industry, not a labor-intensive one,"
he points out. "So they don't need to hire a lot of people, and the ones they do hire are petroleum
engineers. You have local people hired to be security guards, but that's about it."
All materials copyright of the Wharton School of the University of Pennsylvania. Page 2 of 3
'The Resource Curse': Why Africa's Oil Riches Don't Trickle Down to Africans: Knowledge@Wharton
(http://knowledge.wharton.upenn.edu/article.cfm?articleid=1830)
On top of that, the flow of oil riches can create bizarre contrasts. Luanda, the capital of Angola and also
the center of its oil industry, is just one example. Luxury high-rises are being built there despite the
country's extreme poverty, and oil companies are paying $15,000 a month to rent apartments for their
employees. For expatriates, "it's one of the most expensive cities in the world," he says. "The disparity
between rich and poor there is like nowhere else in the world." Oil companies are flocking to the country
because its reserves lie offshore, allowing for safer drilling than in, say, the Niger Delta.
These same firms often argue that their role in Africa is simply getting oil out of the ground, maximizing
profits and paying taxes. Politicians, they contend, are responsible for investing the tax revenues in
education and infrastructure.
"The oil companies will often say that they would like to invest in infrastructure or schools, but they
don't have the expertise," Ghazvinian notes. "That's glib. Exxon Mobil is making billions and can hire
consultants. They could do more. They don't have to usurp the role of government to do something
useful in the countries where they are operating." At the very least, he adds, the oil companies might
come together and fund some sort of petroleum engineering university so more Africans could work in
the industry.
This is a single/personal use copy of Knowledge@Wharton. For multiple copies, custom reprints, e-prints, posters
or plaques, please contact PARS International: reprints@parsintl.com P. (212) 221-9595 x407.
All materials copyright of the Wharton School of the University of Pennsylvania. Page 3 of 3
'The Resource Curse': Why Africa's Oil Riches Don't Trickle Down to Africans: Knowledge@Wharton
(http://knowledge.wharton.upenn.edu/article.cfm?articleid=1830)
Readers' comments
#1 Why Africa's Oil Riches Don't Trickle Down to Africans
I lived and worked in Angola for over a year providing private network telecom services to oil exploration and oil services firms. I formed a company, having to give up 49% equity to a shell company owned by the country's president and his cronies. I saw underwater siphening pipelines connected to private oil company pipelines. These lines siphened off crude and took it directly to the state owned oil company's storage. This, in addition to the fact that 80% of the private company's reported production became property of the state as part of the concession agreement. I saw container ships with cargo marked as belonging to UNICEF (presumably, corn meal and rice shipments to feed the hungry and impoverished) being cleared at the port of Luanda by Angolan military personnel and then transported to feed military troops. Public school teachers had not been paid salaries in five years.
Do not lay this level of corruption and abuse of power on the oil companies. If you are poor in this part of the world, you have found the ninth circle of Dante's Inferno.
By: Henry Pedroso,
Sent: 07:40 AM Thu Nov.01.2007 - -
#2 Africa's OIl - atrophying industries in lopsided econcomies
Oil is doing to these economies the same thing heroin production did in Columbia and Afghanistan for many years.
By: Claire Felong,
Sent: 03:08 PM Thu Nov.01.2007 - US
#3 Solution to Nigeria's Resources Curse
I'm a 28-year-old Nigerian male living in the country's federal capital, Abuja. This is probably the first place you will hear this; but you're going to be hearing a lot of it in the future. Sooner or later, oil production will be stopped onshore in the Niger delta region, and exploration and production will be limited to offshore areas. The costs at the moment far outweigh whatever income the government gets; there are serious environmental problems, and the violence is spiralling out of hand. So-called militants have used the cover of "freedom fighters" to perpetuate economic and human rights crimes that make Sierra Leonean blood diamonds seem like child’s play. Kidnapping of expatriate oil workers is now a booming industry, probably larger than Mexico’s or Columbia’s. In time, it would seem the only wise thing to do is to shutdown the oil rigs on land and declare the area a protected watershed or wetland. Then nobody will justify the actions of those fighting for "their share" of the oil wealth.
By: ik okechukwu, Abuja Property Development Co.
Sent: 04:17 PM Thu Nov.01.2007 - -
#4 Where do we stand in this matter of the stolen wealth of Africa.
I am an Accountant and a Stock broker in Lagos Nigeria.
My take on the stolen wealth is that:
1. Crude is a unique commodity that we can trace from the production to the last buyer. The buyers know when they buy the stole crude and can identify their suppliers; the thief.
2. Like the Angolan case of the state stealing from the private explorers', the explorers are aware of the robbery by the state, but because they are "taking more than was allotted and paid for," they are not bothered: or who would incur such heavy cost on exploration and encourage a mere greedy idiot to steal from his labour.
3. In the case of Nigeria, all those involved are under the illusion of money. Otherwise, what is the use for stealing when you can not enjoy any peace or freedom with it. You spend and live all under cover.
Now, leadership is not understood, riches are misconceived, the people are living without a vision for their individual lives, and this means the whole nation where wealth is continually stolen by the state and a few people in power have no vision. they live by the day.
Let the leaders of the people stop conniving with the cheats of the West, who lure them with money, and see life as that to be enjoyed with others and not in isolation. Let us all realize that it is only when we share that we can multiply successfully and not by the evil design of stealing from each other.
Thank you for this opportunity.
By: Remi Akinwale, First Call Investment Options Limited
Sent: 02:38 PM Fri Nov.02.2007 - -
#5 africa's oil
I live in Uganda (East Africa) where new oil discoveries have been found. I don't think Ugandans will benefit in this oil due to our corrupt leaders. Even the systems in place do not favour us. And I also don't think that "a future generation fund can be airlifted to Uganda!"
In order for Ugandans to benefit from Africa's oil, we need committed leaders who love their country and want to see it move an extra mile.
By: ALEX NANYONGA, Administrator
Sent: 12:42 AM Mon Nov.05.2007 - US
#6 Transparency is part of the solution
I recently traveled to Nigeria and spoke with Niger Delta Development Commission and government officials. One step to help maintain accountability for government and stakeholders alike is to enable shared visibility of funds provided against respective infrastructure programs. This is one way of enhancing accountability to support needs of the oil bearing communities in the Niger delta. See more at the SAP Public Security Blog. https://www.sdn.sap.com/irj/sdn/weblogs?blog=/pub/u/251723409
By: Anthony McKinney, SAP/ Director Public Security
Sent: 04:10 PM Sat Nov.10.2007 - US
#7 The Resource curse - Africa's oil
It is fashionable for some economists to lament the fate of Africans and the 'resource curse' inflicted on them by the abundance of natural resources. It is not only about oil but others like diamonds, minerals and ores. Paul Collier of Oxford University, formerly with the World Bank, has produced some papers. So has Arvind Subramanian.
They portray a situation where rebels seize control over resources and fund their internecine warfare. Indeed, this is so. But they fail to go into the historical background which led to it and the current global context which sustains it.
Exploitation of natural resources is not new to Africa. The occupation of Africa and the scramble for Africa among the European powers in the 19th century were the consequence of resource abundance. Until African countries were liberated around the 1960s, European powers controlled them by force and their companies exploited the resources to feed their mills back home. The African people had no share in them except the low wages as sweated labour. There was apparent political stability ensured by the colonial powers. Except for a handful of countries, no country in Africa had acquired the administrative capability to govern itself. Most of them had very low levels of literacy. Congo, for example, had twelve graduates when the Belgians left.
When the colonial powers departed, internal fissures developed among the tribes, clans and other groups. A good deal of this was also the consequence of the artificial borders which the colonial powers had drawn to divide the Continent among themselves. These began to take a toll on the political stability of the newly independent countries.
The Cold War created another aberration. Dictators who were friendly to the West, especially the U.S., had their total support through military and other forms of aid. Congo's Mobutu was the classic creation of the Cold War. American policy strongly favoured authoritarian regimes in Africa to fend off communism and Soviet influence. Western companies could continue to operate under the umbrella of these dictators and the paternal protection of governments like the U.S., U.K. or Belgium.
With the collapse of the Soviet regime and end of the Cold War, the African dictators were abandoned and had to fend for themselves. Political rivalry turned violent and rival groups had to get arms in pursuit of their goals.
In countries rich in natural resources, oil or other resources, the rival groups had to seize control over them to finance their operations. Western companies began to operate under the 'protection' of regional despots. Sierra Leone was the worst example which stirred the global conscience. Natural resources, instead of being a boon to promote economic growth, turned into a 'curse.' Corruption, siphoning of funds, etc. are the seamy side of this scenario and flow out of control over resources and their sharing with MNCs from the west. African countries and leaders are critcised for all the sins - not a word is uttered about the Western companies which bribe them and gain ultimately from the sale or utlisation of natural resources in other parts of the globe.
Those who propagate and lament the curse of natural resources in Africa send out a wrong message - some of them are well meaning economists who are sympathetic to African countries and people. They should rather try to provide alternative arrangements for the extraction and utilisation of these resources and how to turn them into a boon. This is a very complex issue and calls for regional and global cooperation. If there is a genuine will to promote African development, it is not difficult to arrive at solutions.
By: Kandaswami Subramanian, Not employed
Sent: 12:56 AM Mon Nov.12.2007 - AU
#8 The Resource curse - Africa's oil
In my earlier comments, I failed to draw attention to the scourge of private military corporations (PMCs). These modern equivalents of buccaneers loom large in the African continent -- as the novelist Frederick Forsythe ably described in his popular nove, "The Dogs of War." They are engaged by rebel groups who seize power and also by MNCs to safeguard their interests. PMCs are paid out of the sales proceeds of natural resources. There is an unholy alliance between rebel groups, MNCs and PMCs.
There has been no progress in global negotiations in the U.N. to ban PMOs. Western countries find them to be of great help in their strategic objectives whether in Iraq or elsewhere. African resources will continue to remain a 'curse' as long this nexus is not broken up. How many of the economists who bemoan the natural resource 'curse' have taken note of this factor?
By: Kandaswami Subramanian, Not employed
Sent: 11:17 PM Wed Nov.14.2007 - AU
#9 More than meets the eye?
Reading the article 'The Resource Curse...' and the comments, especially Kandaswami's, it seems to me that there is more than meets the eye to resource exploitation in Africa. Apparently, mining/oil giants and foreign governments have found it advantageous to engage in a 'divide and rule by proxy' policy that, through its control over African governments, warlords, militias and mercenary group, suppresses the development and exploitation of mineral resources. This policy impoverishes African nations and forecloses their future while serving interests of capitalists and the foreign policy goals of the western world. This confluence of capitalistic exploitation and neo-colonial political strategy will result in the economic enslavement of an entire continent. Is anyone taking heed?
By: Prasad Rao, http://myprofile.cos.com/gangar
Sent: 02:33 AM Thu Mar.06.2008 - AU
prices, African oil is drawing new interest from major
companies around the globe, says John Ghazvinian, author of Untapped: The Scramble for Africa's Oil
Untapped: The Scramble for Africa's Oil. They see the continent
as the most promising place in the world for new production. It
doesn't have the huge deposits that the Middle East and Russia
do, but what it does have is accessible and largely unexploited.
And the oil's high quality makes it relatively inexpensive to
refine.
"Since 1990 alone, the petroleum industry has invested more
than $20 billion in exploration and production activity in
Africa," writes Ghazvinian, a visiting fellow at the University of
Pennsylvania, who spoke at a recent event sponsored by the
Wharton African Students Association. "A further $50 billion
will be spent between now and the end of the decade, the largest investment in the continent's history."
But most Africans are seeing little benefit from this influx of oil drillers and investment. In fact, because
of an economic paradox known as the "Resource Curse," they are often hurt by exports of their
countries' oil. "Between 1970 and 1993, countries without oil saw their economies grow four times faster
than those of countries with oil," Ghazvinian notes, adding that oil exports inflate the value of a country's
currency, making its other exports uncompetitive. At the same time, workers flock to booming
petroleum businesses, which saps other sectors of the economy. "Your country becomes
import-dependent," he says. "That decimates a country's agriculture and traditional industries."
Consider Gabon, which produces about 300,000 barrels of oil a day. "It's covered with tropical rainforest,
but it's hard to find bananas that are grown there. They are mostly imported from Cameroon. At one
point, Gabon was the world's largest per-capita importer of champagne." The oil -- and the champagne --
will eventually run dry. Gabon, with relatively small reserves, is already coming to terms with that
possibility. By then, much of the rest of the country's economy may have atrophied, Ghazvinian says.
Economists also call this phenomenon "the Dutch Disease" because it was observed in the Netherlands
after natural gas was discovered in the 1960s in that country's portion of the North Sea. The Dutch
manufacturing sector withered as the gas industry grew.
In addition, oil money tends to corrupt politicians. They end up vying to pocket a share of the finite
petroleum riches, rather than looking for ways to invest in their country's long-term prosperity. "The
governments aren't dependent on income taxes and therefore don't have to do what the citizens want," he
says. "The state isn't an engineer of economic growth, but a gravy train. None of the money gets down to
the people."
Some Westerners chalk up all of Africa's problems to corruption, thus absolving themselves of any
responsibility, he suggests, adding that the truth is often far more complicated. Some local leaders do
abscond with ill-gotten funds, but they then stash that money in Western banks where the bankers look
the other way. Western governments, too, overlook bad behavior, as long as the oil flows reliably
through the pipelines. "There are incentives on both ends. At the moment," Ghazvinian says, "there are
This is a single/personal use copy of
Knowledge@Wharton. For multiple copies,
custom reprints, e-prints, posters or plaques,
please contact PARS International:
reprints@parsintl.com P. (212) 221-9595 x407.
All materials copyright of the Wharton School of the University of Pennsylvania. Page 1 of 3
'The Resource Curse': Why Africa's Oil Riches Don't Trickle Down to Africans: Knowledge@Wharton
(http://knowledge.wharton.upenn.edu/article.cfm?articleid=1830)
no incentives for the resource-rich governments to do the right thing."
Living in the Stone Age
An historian by training and a journalist by trade, Ghazvinian isn't an anti-corporate crusader or an
oil-industry apologist. Rather, he set out to portray a region that, thanks to its oil riches and its
debilitating poverty, is increasingly occupying a place in economic and political debates in developed
nations.
Africa's oil belt lies mainly along its Western coast in the countries abutting the Gulf of Guinea. "One
third of the world's new discoveries of oil since 2000 have taken place in Africa," Ghazvinian notes.
The world's two most energy-hungry economies, the United States and China, are vying to stake out
spheres of influence in the oil-producing areas. Chinese oil firms, which typically don't face the same
quarterly earnings pressure that Western ones do, are pouring billions into all sorts of infrastructure
projects across the continent, Ghazvinian says. At the same time, politicians like Tony Blair, Britain's
former prime minister, and activists like Bono, singer for the rock band U2, and Jeffrey Sachs, an
economist at Columbia University, are calling for multinational efforts to relieve African poverty and
kick-start the continent's oft-sputtering economies.
Some commentators have pointed to Norway as a possible example of the way in which Africa's oil-rich
countries might conduct themselves. Norway, the world's third largest oil exporter behind Saudi Arabia
and Russia, salts away a large share of its wealth in a national pension fund, now worth more than $300
billion. The fund is expected to grow to about $900 billion in the next decade and invests only passively,
in non-Norwegian stocks and bonds. That limits the temptation of politicians to use the money for
pork-barrel projects. It has been nicknamed "the future-generations fund."
Ghazvinian doubts whether a comparable vehicle would work in Africa. Norway is a small,
homogeneous country of about five million people that was relatively advanced when its oil began to
gush, he points out. It already had the sorts of public institutions that enabled it to prudently manage its
newly found wealth. "I'm not sure that a future-generations fund can be airlifted to Chad. You would
need a lot of healthy, functioning civil institutions before you could do that. Chad is one of the world's
poorest countries," with 80% of its citizens living below the poverty line.
Even Nigeria, where the oil industry has operated for decades, probably wouldn't be able to adapt the
Norwegian model, he says. While its oil wealth is vast -- it has the world's 10th largest reserves -- so are
its problems. It's both an enormous country, with about 135 million people, and an ethnically diverse one,
with hundreds of distinct ethnic groups. And its reserves lie in the poor, rural Niger Delta. "People in the
Niger Delta live almost as if it's the Stone Age," Ghazvinian says. "They live in stick huts on little
islands in the mangrove swamps. Many of the villages are accessible only by boat. Nearby, you will
have these multibillion oil facilities, with executives being dropped in by helicopter."
Little of the oil wealth gets invested back into the delta and few of the companies employ local people,
he points out. That has contributed to civil unrest and lawlessness. "A thousand people a year are killed in
small-scale guerilla warfare in the delta," he says. "Boys will drill holes in the pipelines at night and suck
out the oil: 100,000 to 200,000 barrels a day were disappearing like this at one point. The money is
siphoned off to arm the guerilla groups."
The situation in other African oil-producing countries is just as difficult. Equatorial Guinea is "a family
business masquerading as a country," Ghazvinian quips. "It's one of the most closed societies on earth."
$15,000-a-Month Rentals
As he researched his book, Ghazvinian visited all of the major sub-Saharan oil producers and typically
found the same situation in each. The sizzling oil sector was enriching a clique of politically connected
people and creating boomtowns catering to the industry but seldom providing much wider economic
benefit or even employing many local people. "It's a capital-intensive industry, not a labor-intensive one,"
he points out. "So they don't need to hire a lot of people, and the ones they do hire are petroleum
engineers. You have local people hired to be security guards, but that's about it."
All materials copyright of the Wharton School of the University of Pennsylvania. Page 2 of 3
'The Resource Curse': Why Africa's Oil Riches Don't Trickle Down to Africans: Knowledge@Wharton
(http://knowledge.wharton.upenn.edu/article.cfm?articleid=1830)
On top of that, the flow of oil riches can create bizarre contrasts. Luanda, the capital of Angola and also
the center of its oil industry, is just one example. Luxury high-rises are being built there despite the
country's extreme poverty, and oil companies are paying $15,000 a month to rent apartments for their
employees. For expatriates, "it's one of the most expensive cities in the world," he says. "The disparity
between rich and poor there is like nowhere else in the world." Oil companies are flocking to the country
because its reserves lie offshore, allowing for safer drilling than in, say, the Niger Delta.
These same firms often argue that their role in Africa is simply getting oil out of the ground, maximizing
profits and paying taxes. Politicians, they contend, are responsible for investing the tax revenues in
education and infrastructure.
"The oil companies will often say that they would like to invest in infrastructure or schools, but they
don't have the expertise," Ghazvinian notes. "That's glib. Exxon Mobil is making billions and can hire
consultants. They could do more. They don't have to usurp the role of government to do something
useful in the countries where they are operating." At the very least, he adds, the oil companies might
come together and fund some sort of petroleum engineering university so more Africans could work in
the industry.
This is a single/personal use copy of Knowledge@Wharton. For multiple copies, custom reprints, e-prints, posters
or plaques, please contact PARS International: reprints@parsintl.com P. (212) 221-9595 x407.
All materials copyright of the Wharton School of the University of Pennsylvania. Page 3 of 3
'The Resource Curse': Why Africa's Oil Riches Don't Trickle Down to Africans: Knowledge@Wharton
(http://knowledge.wharton.upenn.edu/article.cfm?articleid=1830)
Readers' comments
#1 Why Africa's Oil Riches Don't Trickle Down to Africans
I lived and worked in Angola for over a year providing private network telecom services to oil exploration and oil services firms. I formed a company, having to give up 49% equity to a shell company owned by the country's president and his cronies. I saw underwater siphening pipelines connected to private oil company pipelines. These lines siphened off crude and took it directly to the state owned oil company's storage. This, in addition to the fact that 80% of the private company's reported production became property of the state as part of the concession agreement. I saw container ships with cargo marked as belonging to UNICEF (presumably, corn meal and rice shipments to feed the hungry and impoverished) being cleared at the port of Luanda by Angolan military personnel and then transported to feed military troops. Public school teachers had not been paid salaries in five years.
Do not lay this level of corruption and abuse of power on the oil companies. If you are poor in this part of the world, you have found the ninth circle of Dante's Inferno.
By: Henry Pedroso,
Sent: 07:40 AM Thu Nov.01.2007 - -
#2 Africa's OIl - atrophying industries in lopsided econcomies
Oil is doing to these economies the same thing heroin production did in Columbia and Afghanistan for many years.
By: Claire Felong,
Sent: 03:08 PM Thu Nov.01.2007 - US
#3 Solution to Nigeria's Resources Curse
I'm a 28-year-old Nigerian male living in the country's federal capital, Abuja. This is probably the first place you will hear this; but you're going to be hearing a lot of it in the future. Sooner or later, oil production will be stopped onshore in the Niger delta region, and exploration and production will be limited to offshore areas. The costs at the moment far outweigh whatever income the government gets; there are serious environmental problems, and the violence is spiralling out of hand. So-called militants have used the cover of "freedom fighters" to perpetuate economic and human rights crimes that make Sierra Leonean blood diamonds seem like child’s play. Kidnapping of expatriate oil workers is now a booming industry, probably larger than Mexico’s or Columbia’s. In time, it would seem the only wise thing to do is to shutdown the oil rigs on land and declare the area a protected watershed or wetland. Then nobody will justify the actions of those fighting for "their share" of the oil wealth.
By: ik okechukwu, Abuja Property Development Co.
Sent: 04:17 PM Thu Nov.01.2007 - -
#4 Where do we stand in this matter of the stolen wealth of Africa.
I am an Accountant and a Stock broker in Lagos Nigeria.
My take on the stolen wealth is that:
1. Crude is a unique commodity that we can trace from the production to the last buyer. The buyers know when they buy the stole crude and can identify their suppliers; the thief.
2. Like the Angolan case of the state stealing from the private explorers', the explorers are aware of the robbery by the state, but because they are "taking more than was allotted and paid for," they are not bothered: or who would incur such heavy cost on exploration and encourage a mere greedy idiot to steal from his labour.
3. In the case of Nigeria, all those involved are under the illusion of money. Otherwise, what is the use for stealing when you can not enjoy any peace or freedom with it. You spend and live all under cover.
Now, leadership is not understood, riches are misconceived, the people are living without a vision for their individual lives, and this means the whole nation where wealth is continually stolen by the state and a few people in power have no vision. they live by the day.
Let the leaders of the people stop conniving with the cheats of the West, who lure them with money, and see life as that to be enjoyed with others and not in isolation. Let us all realize that it is only when we share that we can multiply successfully and not by the evil design of stealing from each other.
Thank you for this opportunity.
By: Remi Akinwale, First Call Investment Options Limited
Sent: 02:38 PM Fri Nov.02.2007 - -
#5 africa's oil
I live in Uganda (East Africa) where new oil discoveries have been found. I don't think Ugandans will benefit in this oil due to our corrupt leaders. Even the systems in place do not favour us. And I also don't think that "a future generation fund can be airlifted to Uganda!"
In order for Ugandans to benefit from Africa's oil, we need committed leaders who love their country and want to see it move an extra mile.
By: ALEX NANYONGA, Administrator
Sent: 12:42 AM Mon Nov.05.2007 - US
#6 Transparency is part of the solution
I recently traveled to Nigeria and spoke with Niger Delta Development Commission and government officials. One step to help maintain accountability for government and stakeholders alike is to enable shared visibility of funds provided against respective infrastructure programs. This is one way of enhancing accountability to support needs of the oil bearing communities in the Niger delta. See more at the SAP Public Security Blog. https://www.sdn.sap.com/irj/sdn/weblogs?blog=/pub/u/251723409
By: Anthony McKinney, SAP/ Director Public Security
Sent: 04:10 PM Sat Nov.10.2007 - US
#7 The Resource curse - Africa's oil
It is fashionable for some economists to lament the fate of Africans and the 'resource curse' inflicted on them by the abundance of natural resources. It is not only about oil but others like diamonds, minerals and ores. Paul Collier of Oxford University, formerly with the World Bank, has produced some papers. So has Arvind Subramanian.
They portray a situation where rebels seize control over resources and fund their internecine warfare. Indeed, this is so. But they fail to go into the historical background which led to it and the current global context which sustains it.
Exploitation of natural resources is not new to Africa. The occupation of Africa and the scramble for Africa among the European powers in the 19th century were the consequence of resource abundance. Until African countries were liberated around the 1960s, European powers controlled them by force and their companies exploited the resources to feed their mills back home. The African people had no share in them except the low wages as sweated labour. There was apparent political stability ensured by the colonial powers. Except for a handful of countries, no country in Africa had acquired the administrative capability to govern itself. Most of them had very low levels of literacy. Congo, for example, had twelve graduates when the Belgians left.
When the colonial powers departed, internal fissures developed among the tribes, clans and other groups. A good deal of this was also the consequence of the artificial borders which the colonial powers had drawn to divide the Continent among themselves. These began to take a toll on the political stability of the newly independent countries.
The Cold War created another aberration. Dictators who were friendly to the West, especially the U.S., had their total support through military and other forms of aid. Congo's Mobutu was the classic creation of the Cold War. American policy strongly favoured authoritarian regimes in Africa to fend off communism and Soviet influence. Western companies could continue to operate under the umbrella of these dictators and the paternal protection of governments like the U.S., U.K. or Belgium.
With the collapse of the Soviet regime and end of the Cold War, the African dictators were abandoned and had to fend for themselves. Political rivalry turned violent and rival groups had to get arms in pursuit of their goals.
In countries rich in natural resources, oil or other resources, the rival groups had to seize control over them to finance their operations. Western companies began to operate under the 'protection' of regional despots. Sierra Leone was the worst example which stirred the global conscience. Natural resources, instead of being a boon to promote economic growth, turned into a 'curse.' Corruption, siphoning of funds, etc. are the seamy side of this scenario and flow out of control over resources and their sharing with MNCs from the west. African countries and leaders are critcised for all the sins - not a word is uttered about the Western companies which bribe them and gain ultimately from the sale or utlisation of natural resources in other parts of the globe.
Those who propagate and lament the curse of natural resources in Africa send out a wrong message - some of them are well meaning economists who are sympathetic to African countries and people. They should rather try to provide alternative arrangements for the extraction and utilisation of these resources and how to turn them into a boon. This is a very complex issue and calls for regional and global cooperation. If there is a genuine will to promote African development, it is not difficult to arrive at solutions.
By: Kandaswami Subramanian, Not employed
Sent: 12:56 AM Mon Nov.12.2007 - AU
#8 The Resource curse - Africa's oil
In my earlier comments, I failed to draw attention to the scourge of private military corporations (PMCs). These modern equivalents of buccaneers loom large in the African continent -- as the novelist Frederick Forsythe ably described in his popular nove, "The Dogs of War." They are engaged by rebel groups who seize power and also by MNCs to safeguard their interests. PMCs are paid out of the sales proceeds of natural resources. There is an unholy alliance between rebel groups, MNCs and PMCs.
There has been no progress in global negotiations in the U.N. to ban PMOs. Western countries find them to be of great help in their strategic objectives whether in Iraq or elsewhere. African resources will continue to remain a 'curse' as long this nexus is not broken up. How many of the economists who bemoan the natural resource 'curse' have taken note of this factor?
By: Kandaswami Subramanian, Not employed
Sent: 11:17 PM Wed Nov.14.2007 - AU
#9 More than meets the eye?
Reading the article 'The Resource Curse...' and the comments, especially Kandaswami's, it seems to me that there is more than meets the eye to resource exploitation in Africa. Apparently, mining/oil giants and foreign governments have found it advantageous to engage in a 'divide and rule by proxy' policy that, through its control over African governments, warlords, militias and mercenary group, suppresses the development and exploitation of mineral resources. This policy impoverishes African nations and forecloses their future while serving interests of capitalists and the foreign policy goals of the western world. This confluence of capitalistic exploitation and neo-colonial political strategy will result in the economic enslavement of an entire continent. Is anyone taking heed?
By: Prasad Rao, http://myprofile.cos.com/gangar
Sent: 02:33 AM Thu Mar.06.2008 - AU
Subscribe to:
Posts (Atom)