Of course, in truth, it has never gone away. In one form or another, the issue has been with us since the rise of the nation state during the early part of the 18th century, but it really achieved public consciousness in the postwar period when a number of resource-rich African and Middle Eastern countries moved into a post-colonial phase. Subsequently, it has been linked to major political upheavals, ranging from the Suez Crisis, through to the military overthrow of Chile’s Allende government.
Now, a number of factors, including the rise of the BRIC economies, a prolonged commodities boom, and the depletion of the world’s easily-accessed oil reserves, have combined to raise the political profile of this issue.
For instance, part of the reason why many oil majors are transitioning themselves away from an integrated business model is that their relationship with oil producing countries is changing. Admittedly, the oil market has always had a political dimension, but rising energy costs are effectively pushing the nationalist agenda. The era of inexpensive hydrocarbons is at an end; so producer countries have become reluctant to allow foreign oil firms to simply bump-up their reserves to the perceived detriment of the host country.
Instead, oil-rich states, or at least those with large remaining conventional sources of petroleum, are reverting to licence structures which allow them to retain a higher proportion of the revenues generated. Let’s face it – if you had control over a commodity which increased in value in inverse proportion to its scarcity, you might feel slightly less inclined to opt for a fixed production royalty. This means that independent oil & gas companies will need to increasingly leverage their technical expertise in partnership with big state-owned oil & gas entities.
A gas spat
And, of course, resource nationalism isn’t just about re-defining the relationship between resource companies and client states; it’s also about projecting political power. You couldn’t find a better example of this than the disputes that have played-out between Russia’s biggest gas company Gazprom and the state-arm of the Ukrainian gas industry Naftogaz, which, amongst other things, served to highlight Europe’s vulnerability to a sudden cessation of supplies from Mother Russia. It’s probably fair to say that the boom in global energy prices has allowed the Kremlin to take a renewed hard line on certain foreign policy issues.
While Russia’s embrace of an aggressive form of resource nationalism is allowing it to partially re-establish its influence on the world stage, other resource-rich countries have been able to increase their regional influence markedly. Take, Brazil, for instance, which in the space of a decade has been able to grow its economy to become the world’s sixth-largest from what had seemed a state of perpetual, debt-laden torpor. Now, principally as a result of its longest period of post-war political stability, Brazil is threatening to supplant the US as the key investor in Latin America.
Black empowerment for the many?
Logic would suggest that anyone with a stake in mining stocks like Anglo American or Xstrata will need to re-evaluate their investments if ‘resource nationalism’ is, indeed, on the rise. But do recent events really point to a substantially increased risk factor, or is the issue just periodically trotted-out by politicians looking to enhance their standing through a populist cause?
Take last year’s decision by a disciplinary committee of the African National Congress (ANC) to suspend the controversial head of its Youth League, Julius Malema. The move might have played well with conservative ANC members, opposition parties, and even the poor Boers he advocated shooting, but the excitable Mr Malema has attracted genuine grassroots’ support for pursuing the same kind of ‘post-imperialist’ policies that are regularly touted by Robert Mugabe’s ZANU-PF party in neighbouring Zimbabwe; chief among them the nationalisation of the mining industry.
In 2008, Mugabe signed an ‘Indigenisation and Economic Empowerment Act’, which placed the onus on foreign-owned companies worth in excess of $500,000 (£313,000) to achieve at least 51 percent black ownership by 2013. Whether this legislation is ever actually enforced - or is even enforceable - is open to question, as are the underlying motives of ZANU-PF politicians pursuing it. However, despite his well documented repression of internal dissent, and the collapse of Zimbabwe’s economy, Robert Mugabe’s successful fight against Rhodesia’s minority white rule will always ensure that he is held in high regard by many African nationalists. Though perplexing to most outsiders, in some quarters, including the Youth League of the ANC, any pronouncement by ‘Uncle Bob’ is akin to a Papal bull.
The difficulty of operating in an unpredictable jurisdiction like Zimbabwe has been brought home by the recent experience of Aquarius Platinum - the fourth-largest producer platinum in the world - whose share price fell to a three-year low in Johannesburg, after Zimbabwean officials rejected a joint Aquarius-Implats proposal to meet the government’s local ownership rules.
While you could argue that selling the nationalisation agenda to people living in South Africa’s townships is a politically expedient option, it has certainly helped raise Malema’s stock amongst the ANC’s core vote. It’s probably understandable given that most are still locked into the same dreadful cycle of poverty that they were forced to endure under apartheid. Many of the country’s poorest citizens feel that they are no more prosperous after 18-years of majority rule, and there is a widespread view that only a small clique of businessmen with ANC links have benefited from the reforms brought about by the party’s ‘Black Economic Empowerment’ policies.
Disincentive warnings
The only answer, according to the ANC’s young firebrand, is for Anglo American et al, to simply relinquish their South African assets, without any recourse to compensation, and hand them on to an as-yet unspecified body for “redistribution”.
Of course, this stance is somewhat at odds with official government policy, although the ruling ANC party has commissioned a task force to investigate the relative merits and effects of various nationalisation policies that have been implemented in other resource-rich economies. Nevertheless, South Africa’s Mineral Resources Minister, Susan Shabangu, has recently been doing the rounds in both Australia and the UK to allay investor anxieties over the issue.
The mining industry currently invests around $48bn into South Africa’s economy each year, and it’s far from clear how this would be maintained even if South Africa’s government was to introduce a watered-down indigenisation scheme. Cynthia Carroll, Anglo American’s chief executive has warned that “mining companies simply will not invest if they cannot be assured that the assets they create will be secure. In ignoring this truth, the false prophets who argue for nationalisation are advocating the road to ruin”.
Chile reception in Santiago
Indeed, Cynthia Carroll is being forced to fight the good fight on several fronts at the moment. Anglo American is now in dispute with Chile’s giant state-owned copper miner Codelco over an option agreement on the sale of a 24.5 per cent stake in Anglo’s Chilean unit - Anglo American Sur - to Japan’s Mitsubishi Corp. for $5.4bn. Essentially, the dispute is about whether Anglo is justified in moving ahead with the sale, or whether a pre-existing option gives Codelco the rights to 49 per cent of the shares.
Predictably, the spat quickly took on a political dimension as it emerged that Guido Girardi, the president of Chile’s senate, threatened to take legislative action to preserve Codelco's right to buy Anglo’s assets. So, what is, in effect, a dispute over contractual law is being presented as some kind of an affront to Chilean sovereignty, with Anglo American decried by opportunistic politicians as a rapacious interloper. It probably wouldn’t seem quite so cynical were it not for the fact that Anglo American has been operating in the country for over 40-years, and has pumped billions into its Chilean unit’s chief asset, the Los Bronces copper mine, in order to double its output in the near-term.
The green & gold
Of course, investors with interests in emerging markets might reasonably expect a rough ride from local authorities, but what is one to think when it happens in one of the world’s most prosperous economies? Last year, Australia’s lower house passed a bill that would lead to the introduction of a 30 per cent tax on the country’s biggest iron ore and coal producers. Between them, BHP Billiton, Rio Tinto and Xstrata can expect to pick-up the tab for around three-quarters of the estimated A$11.2bn in additional charges generated over the first three-years of the tax - STREUTH! And don’t forget, this is in addition to the country’s new Carbon Tax, which recently gained final legislative approval from the Federal Senate. In the past, Australian governments, whatever their hue, have been quick to modify legislation once it became apparent that the mining industry was prepared to play hardball on a given issue, but at the last election, the Australian Green Party secured the balance of power in the Federal Senate. So, until the next general election, all bets are off.
Many Australians, or at least those of a certain vintage, will recall that an earlier push towards resource nationalism was an indirect factor in the collapse of the Whitlam government in 1974. The issue still rankles downunder, particularly because of the role played by Her Majesty’s representative Sir John Kerr, but if the then government had have been successful in effectively bringing large parts of Australia’s mining industry under state-control, it’s highly doubtful that the country would have benefited from the enormous levels of inward investment in the intervening period.
Latin grab
A prime example of what can happen as a result of over-enthusiastic expropriation by the state is provided by present-day Venezuela. While it’s true that Hugo Chavez has introduced micro-reforms that have certainly helped the lot of the country’s poor, his doctrinal approach to economic policy has already resulted in a dramatic fall-away in foreign direct investment in Venezuela, placing it well below most other Latin American countries. The problem accelerated during 2010, which featured a record number of state expropriations that affected the petroleum, steel, tourism, agribusiness, and banking industries.
Venezuela’s problems, though wholly avoidable, demonstrate that the desire to repatriate an ever greater share of the wealth derived from a country’s resource sector needs to be set against the imperative to attract a steady stream of direct investments from abroad. It represents an increasingly problematic risk factor for miners, especially given that emerging economies like China take a unilateral approach to securing key industrial inputs, regardless of international conventions.
