Mining News

The Plan Nord’s hoped-for cash windfall is far from a sure thing

Posted by Alana Wilson on 6/7/2012 10:41:30 AM

Op-Ed by Jean-François Minardi, associate director of the Fraser Institute’s Global Natural Resource Policy Centre. Originally published June 4, 2012 in The Montreal Gazette.


With the launch of the Plan Nord in May 2011, the Quebec government, provincial political parties and society in general appear to consider mining as a financial windfall, and the public debate is now about how to allocate the spoils. Yet we should keep in mind that there is an alternative to this rosy scenario, one in which the commodity “super-cycle” comes to an end and the windfall evaporates. That’s why Quebec politicians should rethink the assumptions contained within their mining policy.


The industrialization and urbanization of China and other emerging countries are the source of soaring demand for commodities, which suppliers are struggling to meet. This has caused prices of non-oil commodities to triple in the past decade (The Economist, 2011) and reinforced the view that a commodity “super-cycle” has replaced the volatile market of old.


Higher profits accruing to miners have spurred governments around the world to try to increase their share of this windfall through higher taxes, royalties or even nationalization (Ernst & Young, 2011).


Quebec is no stranger to this evolution. The Plan Nord that will be carried out over a period of 25 years (Quebec, 2011) is based on the assumption of rising metal prices and revenues, and politicians are busy looking for ways to take advantage of the “mining bonanza.”


Following on the suggestions of mining activists and Jacques Parizeau, the former premier of Quebec, the Parti Québécois and the Liberal government have given in to the lure of resource nationalism. The official opposition is calling for higher royalties and replacing the current profit-based mining rights with a royalty based on the gross value produced plus a tax on “excess profits” (Journet, 2012). The PQ also advocates direct equity investments in strategic mining projects (Parti Québécois, 2012). In the same vein, the Quebec government’s latest budget contained ill-advised plans to take equity interests in mining projects (Bachand, 2012).


Investments in mining are very risky. It takes a long time for mining investments to pay off; the process of exploring, developing and bringing a deposit to market can last 20 years. That is why investments have usually been made by the private sector. This new policy of public investment in private projects is definitely not in the interest of Quebecers, especially if metal prices start to go down.


This wave of resource nationalism is based on the premise that the consumption of industrial metals in China and other emerging economies will remain high for a long time. Virtually all who favour higher royalties in Quebec point to the rising price of minerals as a reason for increasing the government’s share of mining revenue (Parti Québécois, 2012).


But is the premise correct, and will the mining boom be sustained? Unfortunately, there is no guarantee that this is the case.


Mining has traditionally been subject to wide swings in commodity prices, and experience tells us that there is a definite possibility that the current boom could fade in the future. A recent study by Crédit Suisse (2012) even wonders if the commodity super-cycle is over. Why?


The super-cycle is based almost entirely on Chinese demand, with that country being the largest consumer of almost every metal. China’s share of global consumption in 2011 was 38.6 per cent for copper, 36.7 per cent for nickel, 41.4 per cent for zinc and 43.7 per cent for aluminum (Mohr, 2011).


Now China is entering a transition phase from a resource-intensive growth model based on investment in infrastructure and exports to a model based on domestic consumption driven by efficient, value-adding industry and services in which the economy will slow down and metals consumption will be lower (Credit Suisse, 2012 : 6). There is obviously a lot of uncertainty as far as the future course of the Chinese economy is concerned. But if achieved, such a development could affect the global price of metals and, in the long run, has the potential to put an end to the commodity super-cycle by reducing the structural pace of commodity consumption in the main market: China (Credit Suisse, 2012 : 6).


The imbalance between demand and supply has played into mining suppliers’ interests so far. But what will happen if demand decreases and global mining capacity is much higher in 20 years than it is today?


Metals are not an inexhaustible source of income. Quebecers should realize that metals are not like oil; their prices are not set by a cartel but reflect global supply and demand. Non-oil commodity prices have traditionally fluctuated greatly and, even if the recent super-cycle has been unusual, the old normal may eventually return.


In this context of high uncertainty, demands to increase the government of Quebec’s slice of the profit pie may prove to be dangerous policy for the future of the province’s mining industry.


Jean-François Minardi is associate director of the Fraser Institute’s Global Natural Resource Policy Centre.


Show References

References

Bachand, Raymond (2012). Budget Speech. Speech delivered before the National Assembly [Quebec City], [March 20]. http://www.budget.finances.gouv.qc.ca/Budget/2012-2013/en/documents/speech.pdf, as of May 18, 2012.

Credit Suisse (2012, March 19).China: Is the commodity super-cycle over? Securities Research & Analytics. https://doc.research-and-analytics.csfb.com/docView?language=ENG&format=PDF&document_id=955907241&source_id=em&serialid=MR0yEwEMzvUvGRTeDObs7Q7rDc3HnFI8S2OhMVxOD%2bA%3d, as of May 18, 2012.

Economist (2011, September 24). Commodities. Crowded out. Economist.

Ernst & Young. (2011). Business risks facing mining and metals 2011-2012. EYGM Limited. http://www.ey.com/Publication/vwLUAssets/Business_risks_facing_mining_and_metals_2011-2012/$File/Metal_Mining_paper_02Aug11_lowres.pdf, as of January 23, 2012.

Journet, Paul (2012, March 2). Pauline Marois réclame des élections pour débattre du Plan Nord. La Presse.

Mohr, Patricia M (2011). Analyzing commodity and currency volatility as business risks in the mining industry. Unpublished speech, given at Mining Business Risks Summit 2011 [Toronto], [October 25].

Parti Québécois (2012). Développement de nos ressources naturelles: le Parti Québécois propose une stratégie pour s’enrichir collectivement. http://pq.org/actualite/communiques/developpement_de_nos_ressources_naturelles_le_parti_quebecois_propose_une_stra, as of June 7, 2012.

Québec, Ministère des Ressources naturelles et de la Faune (2011). FAIRE LE NORD ENSEMBLE Le chantier d’une generation. http://plannord.gouv.qc.ca/documents/plan-action.pdf , as of June 7, 2012.




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