Downstream activities: The possibilities and the realities

Abstract

The paper discusses the practical possibilities of achieving increased downstream processing and the policies that are commonly used for this purpose. It reviews the reasons why forward vertical integration is not always an optimal choice for extractive industry companies. It finds little support for the argument that differences in market power dictate the geography of downstream processing. Tariffs on processed products may also play only a limited role. The degree of vertical integration varies and appears to be mainly driven by production economics. Market determined processing margins fluctuate, which raises the risks of investing in downstream processing capacity. Policies for downstream processing are discussed based on experiences in four countries: India, Indonesia, Zambia, and Tanzania. In most of these cases, a very limited amount of analysis appears to have been undertaken to design the policies. Results so far seem to indicate that a number of unintended consequences dominate the outcomes.

Extractive industries and development: Lessons from international experience for Mozambique

“…In particular, export restrictions introduced in 2009 and designed to protect the downstream steel industry's raw materials supply have had the unintended consequence of seriously jeopardizing the viability of the Indian iron ore-mining industry. Östensson and Löf (2017) conclude that the Indian policies of recent years have succeeded in badly damaging a once-successful export industry, while leaving the downstream steel industry in an uncertain situation with regard to its raw material supplies. Recent developments in Tanzania have shown similar policy tensions between the new, emerging industry of natural gas and the older, established activity of coal-mining.…”

“…Once again, much of this litany of issues has relevance to Mozambique. Trade barriers such as escalating tariffs, which have often been cited as a major problem, appear to play only a limited role, particularly when we take account of the preferences now accorded to developing countries under various international trade agreements (Östensson and Löf 2017).…”

Promoting downstream processing: resource nationalism or industrial policy?

“…It could be argued that government efforts to reduce transaction costs could result in improved conditions for The present article is a summary of a presentation made at the CEPMLP XV Mining Seminar,[5][6] April 2017, Dundee. It is partly based on Östensson and Löf (2017) and has been somewhat updated for the present publication. The author is grateful for several valuable suggestions by two anonymous reviewers.…”

“…Other countries, including India (iron ore) and Zambia (copper), have introduced export taxes on unprocessed commodities. Finally, some countries have resorted to outright bans on the export of unprocessed commodities, including Indonesia on bauxite, copper, nickel and tin from 2014 to the end of 2016 and Tanzania on copper and gold since March 2017 (Östensson and Löf 2017).…”

Resource rents in the diamond industry 2014–19: Rents, issues, methods, and data availability

“…It is not always the case that downstream processing increases the value, as discussed byÖstensson and Löf (2017), because of alternative costs.2 Wealth includes produced capital, natural capital, and human social and institutional capital. Changes in wealth can be used to measure the sustainability of development (World Bank 2011).3 Natural capital is defined in the World Bank report as agricultural land, protected areas, forests, minerals, and energy.…”