JOHANNESBURG (miningweekly.com) – A globally increasing awareness of the benefits for countries of increased local content in industry is being further stimulated by the prospect of a double-dip recession.
Increased local content supply is widely held to result in more jobs and the growth or protection of local economies. However, as solutions provider Local Content Solutions director Dr Michael Warner points out, the million-dollar question on local content at the moment is whether more stringent local content regulations will stimulate greater competitiveness in the local supply industry or whether it will lead to uncompetitiveness and protectionism.
“It could go both ways, and no one is sure which way it will go,” he says.
Warner states the trend to increase local content is emerging as there are so many opportunities in the mining sector.
In mining, there is investment in equipment and materials on an ongoing basis, and the equipment will depreciate and deteriorate, which will then require maintenance or replacement.
This provides a fertile area for building national supply chain industries on the back of the mining sector over the long term.
“For successful local content in supply chains, there needs to be longevity of demand. Only a certain amount can be done with a spike in capital expenditure, but a lot more can be done if there are ongoing maintenance and equipment replacement requirements,” Warner explains.
He adds that this is what is making the mining sector quite exciting at the moment.
SOUTH AFRICA'S LOCAL CONTENT
South Africa has a considerable mineral resources base estimated at $2.5-trillion, excluding energy resources such as uranium and coal.
Mineral Resources Minister Susan Shabangu said at the Mining Ministers Forum in Tianjin, China, earlier this month, that the pattern of economic growth in South Africa has been fairly stable.
While the economy experienced a sharp slowdown during 2009, the consequent recession was short lived. The economy has registered sustained recovery since the first quarter of 2010 and indications are that it will reach a growth rate of 3% by year-end.
“An economic analysis suggests that the resources sector will remain a key anchor for growth and development of the economy for this period and for years to come,” Shabangu said.
She added that the South African government responded to the global economic crisis of 2008 by establishing a multistakeholder task team comprising government, business and organised labour to identify constraints.
These constraints range from a lack of infrastructure and beneficiation policy, skills shortages as well as regulatory issues. A set of interventions was subsequently put in place to address these and the work of the task team culminated in the finalisation of the strategy for the sustainable growth and meaningful transformation of the South African mining industry, which was approved by government as a plan for growing and developing the mining sector.
Further, South Africa’s Mining Charter has black economic-empowerment targets, which are the closest thing to local content regulations. The targets include local procurement expenditure of 40%, local consumable goods of 50%, local services of 70%, and where a supplier is a multinational, the multinational is required to contribute 0.5% of the amount paid by the local company to a social contribution fund.
University of Cape Town business–government relations professor David Kaplan is optimistic about South Africa’s ability to provide mining equipment and specialist services to the local and global mining industry.
“South Africa has a long history of mining experience and we have resources that pose unique technological challenges,” he explains.
“As a result, generic technologies have had to be significantly adapted for our mines. This localisation of knowledge has created a strong mining equipment and services industry in the country,” Kaplan adds.
The country has a significant amount of global patents in mining and mining-related activities. Complementing our technological know-how, we have a sophisticated mining equipment and specialist services industry, which is competitive on a global scale.”
Kaplan says South Africa has particular opportunities, notably in Africa, where mining is expanding significantly and where Southern African mining companies have been serviced by local mining equipment and services companies, which are increasingly active.
“I think that our particular advantage is that the African market is growing and there is a large mining boom, with signifi- cant growth expected in the sector. We will grow because the market is growing; however, we need better policies for mining development domestically and we need better support for export markets,” says Kaplan.
He believes that the technological competencies that have been developed in the mining equipment and specialist services supply industries should be enhanced and firms should be encouraged and incentivised to apply these competencies to develop new products and new markets apart from mining.
“It was South African mine shaft sinking technology that ultimately saved the lives of the miners who were trapped in an underground mine in Chile. There may be an opportunity to deploy these competencies into other areas, such as underground excavating for subway systems.
“We need to establish a method of encouraging these firms with proven technological competencies to get into new markets and new products – to what could be termed the lateral movement of those competencies,” says Kaplan.
AFRICAN AND INTERNATIONAL TRENDS
Meanwhile, Warner says the mining sector has been quite progressive in building up the skills base of local suppliers and increasing the creation of direct jobs within mining companies.
In Africa, there is a huge drive towards local content, with regulations only just emerging. Nigeria has a Local Content Development Act, which promotes local firms’ access to local construction contracts; Liberia has a petroleum law, which alludes to domestic preference and the hiring of locals; and Ghana has implemented some local content regulations as well.
“Localisation in Africa is focused on local employment and the procurement of goods and services from local companies; however, there does not seem to be clearly defined local content regulations specifically aimed at the mining sector in most African territories. The South African Mining Charter appears to be the best evidence of stipulations around local procurement targets,” says consulting firm Deloitte Consulting manager Genevieve de Carcenac.
She believes there will be an increased focus on local content regulation, not only in Africa but in all developing economies globally. Such regulations may be positive for any country, as it could boost skills development, employment growth as well as demand from local suppliers. This could result in further growth for local companies and enable them to become more competitive in the global market.
Australia, for example, has implemented an incentive scheme, which allows mining houses some tariff exemptions and increased government grants. Australian newspaper The Australian reported last month that Australian Prime Minister Julia Gillard announced the ‘Buy Australian’ rules for firms seeking government grants and tariff exemptions, after union complaints that big miners were bypassing local suppliers.
It further reported that the government would force firms seeking tariff exemptions to provide additional evidence, to be posted on a government website, that Australian firms received an equal chance at securing project contracts.
However, the Australian mining industry continues to reject calls for reforms to mandate the local content requirement, claiming that that the sector already supports about 90% of domestic manufacturing.
“Potentially, mining companies should benefit in the medium to long term on cost and delivery from the use of local content, because of the logistics and the possibility of shorter distances over which the materials and equipment are transported, as well as on total cost of ownership and on average yearly costs over about ten years. There would be the expected benefits of lower labour costs; however, the same level of productivity would need to be achieved,” says Warner.
Meanwhile, suppliers should see more business opportunities and higher local content would increase labour and skills require- ments and opportunities to grow and expand the company. Further benefits for the economy will be seen, particularly through the increase of supply industry competitiveness.
LOCAL CONTENT REGULATION
Warner believes that the most important factor is how a country’s government decides to handle local content and the implementation of local content regulations. “Policymakers need to determine what investment, employment, industrial and revenue raising policies the country aims to achieve with its mining industry and then establish local content regulations that deliver these policies.”
He adds that government also needs to decide on the most significant challenge facing the country, and push that particular aspect, working in conjunction with local mining companies to determine what is possible and what is not possible.
“Both need to work in a coherent way, because simply telling mines to use local content may simply increase already rising costs for the mining industry, which may not be advantageous to inward investment or future national revenues,” Warner explains.
Further, he notes that the international outlook has also changed, as mining companies in all countries have had to pledge to do more than they have done before with regard to local content.
Warner says that more balanced and optimised local content regulations could be beneficial to mining companies, providing clear direction to what should be procured locally and what should remain imported, and incentives for programmes that identify potential local candidates, and providing support to encourage their development.
“As long as local suppliers are efficient, or can become efficient, the mines will prefer to buy locally. There is indeed a shared interest between mining companies, government and local business.”
Meanwhile, investment company Pan African Capital CE Dr Iraj Abedian believes that central to the local content debate is the notion of beneficiation. “This is something that is bandied about without much context,” he says.
He adds that beneficiation is not only about the downstream application of mineral resources, as important as that might be, but far more significant than that is the integration of all possible economic multiplier effects that could be derived from the national endowment of the country’s mineral wealth.
“Local content needs to be located within this paradigm,” Abedian states.
However, Kaplan believes that is an entirely different issue and that a country that produces a raw material should not necessarily need to create the end product from that material.
A report from the Centre for International Development, entitled ‘Policy Brief – Examining Benefits’, states that the general- isation that countries should beneficiate as a development strategy is rejected by a large international data sample drawn over the past 25 years.
It suggests that, rather than presuming that beneficiation provides an appropriate devel- opment path, those advocating such an approach in any given situation need to provide a case-by-case justification of their reasoning.
Without such justification, beneficiation could prove extremely costly. The report goes on to say that government does not have limitless capacities and resources, so any focus on one set of activities may come at the expense of others.
“Concentrating on beneficiation may also lead policymakers to overlook more attractive lateral development opportunities,” the report states.
Capabilities developed in mining may lead more naturally to other types of engineering, than to downstream mineral processing – for example, the report argues that, for these reasons, beneficiation is a bad policy paradigm and should be dropped from South Africa’s development strategy.
However, a beneficiation strategy has been developed by the South African government, which was approved in June this year. It aims to provide a framework to translate South Africa’s comparative advantage, conferred by its vast mineral endowment, into a competitive advantage for the downstream mineral bene-ficiation industries.
Five different value chains have been prioritised for the commodities that are selected in the strategy. The Department of Mineral Resources will work with other relevant stakeholders to come up with an implementation plan for the five prioritised value chains.
These value chains include the iron and steel, energy commodities, auto catalytic converters and diesel particulate filters, pigment and titanium metal production and jewellery manufacturing.