Perils of buying foreign mineral rights

This is flawed thinking. First, fears of the world running out of raw materials occur every few decades, and have always proved false. Second, even if some commodities do indeed get scarce, that will increase the chances of foreign investors being expropriated by the countries in which they have invested. Third, acquiring foreign assets for national security can lead to non-commercial deals that satisfy only empty ideology and the need of politicians for kickbacks.

The Korean War of 1950-53, sent commodity prices through the roof. Ideologues predicted doom for imperial powers dependent on raw material imports. But, like all booms, this one soon ended.

The 1970s witnessed another commodity boom, led by oil. The Club of Rome warned that the world was running out of raw materials. Many developing countries borrowed huge sums on the assumption that commodity prices would stay high. They suffered a severe debt crisis in 1982 when commodity prices collapsed.

Commodity prices have once again boomed since 2003. This is once again leading to notions of ever-rising scarcity.

So, high prices are being paid for acquiring mineral rights and mining companies the world over. This has been a profitable approach so far. But when the boom ends, many people currently admiring foreign acquisitions as high strategy will suddenly shout waste and corruption, and mount a campaign to find the guilty.

Some experts believe that, even if the world is not running out of oil, it is running out of cheap oil. Future oil may come from costly ultra-deep offshore fields, or from tar sands needing expensive distillation. Such experts favour grabbing all the oilfields available today.

But remember that in 1973-74, middle eastern countries expropriated the huge oilfields of MNC giants, with impunity. The world needed oil too much to boycott the expropriators, as might have happened in other industries.

History is now repeating itself. Russia has on bogus environmental grounds cancelled Shell\’s licence in the giant Sakhalin-2 oilfield, and now seeks to force British Petroleum out of the giant Kovykta gasfield. Venezuela has abrogated contracts with foreign oil companies and acquired majority rights in most oilfields. Bolivia has done the same.

This highlights the perils of strategic oilfield purchases, or oil diplomacy as it is sometimes called. If India acquires fields abroad and they turn out to be small, they achieve no strategic purpose. But if they turn out to be really large, they will probably be expropriated. Oil diplomacy, alas, can be practised only by sellers with muscle, not buyers. The Rostam and Raksh oilfields that India once owned in Iran were nationalised for a pittance in 1978.

Political risk explains why Exxon and other oil giants are returning high profits to shareholders through dividends and buybacks instead of investing in fresh acquisitions. Investing in oil is safe in Europe, North America and Australia, but perhaps nowhere else. China is buying oilfields abroad very aggressively, and is accused of purchasing the Angolan government through massive aid offers. Yet, the history of oil shows that foreign governments can renege on such agreements with impunity. In which case the purchasers will become suckers.

What about other minerals like coal and copper? These are competitive industries where the risk of expropriation is slight. That explains why Indian and Chinese companies are investing in a big way abroad. The Tatas have acquired coal mines in Indonesia; the Birlas have acquired copper mines in Australia, and Anil Aggarwal runs the biggest copper mine in Zambia.

These are commercial deals based on corporate strategy, not on concepts of national security. Companies may seek efficiency through vertical integration producing both inputs and outputs. This involves higher investment, but can reduce the volatility of input prices. Other companies regard vertical integration as inefficient. Each company should be free to choose its approach, and competition will decide which approach yields the best results.

But if companies are not already acquiring foreign mineral rights on commercial grounds, should governments do so on national security grounds? Surely not. Japan, Korea and Taiwan have no security of supply for raw materials, yet have generated economic miracles. Japan tried after 1973 to acquire large foreign oilfields and failed, but found that the failure was costless.

The notion of national security of supply is a largely a diplomatic fiction. Many miracle economies have proved that raw materials are always available at a price. Hence, owning foreign mines and oilfields is not more logical or profitable than buying commodities at the going price.

Now, corporations may nevertheless buy foreign assets to reduce the price volatility of imports. That is a commercial consideration. But it is not a national security consideration. I suspect that China will one day be exposed as having made some rather foolish deals in Africa.