8. Impacts of commodity price volatility – structural effects
One way to reduce the susceptibility of a mineral-based economy to the effects of price volatility is to reduce its net dependence on the production and export of commodities by promoting a policy of diversification.
Some strategies for investing the rents from the mining sector are focused on upstream and downstream integration, which is to say, promoting the development of activities aimed at supplying the mining industry (with anything from equipment to catering services) and in processing the products of the mining industry (for example, through smelting and fabrication). Where these activities can be profitably undertaken locally, then it makes economic sense to do so. In doing so, it may be possible to build-up a cluster of mutually-supporting mineral-related activities. Such matters need to be treated on a case by case basis. What such investments do not do, however, is reduce the economy’s vulnerability to commodity price fluctuations.
Reducing an economy’s vulnerability to mineral price fluctuations requires diversification. To achieve this, governments need to use the rents from mining to promote development in activities not linked to the resources sector and which, ideally, will be able to continue to operate sustainably after the mineral resources have been depleted. Exactly what other activities might be suitable to fulfil this role will vary from place to place but might include agriculture, aquaculture, horticulture, forestry, tourism, manufacturing or service sector activities.
One way to promote diversification is for government to incentivise and support the development of non-resource activities through the provision of infrastructure, training and targeted financial support. There is significant potential in working with companies to ensure that, where possible, infrastructure built for mining operations – typically, roads, railways, ports and power plants – are multi-multifunctional and available for sharing with other users. To achieve this, it helps if mining projects can be placed into the framework of an integrated regional development programme so that these issues can be worked through between governments and companies in a systematic and comprehensive fashion.
QMM’s mineral sands operations near Fort Dauphin in Madagascar, which started production in 2009, involves a forestry project, a conservation area, a new port which can be used for fishing vessels, container ships and cruise liners, and a power plant which is supplying a 400 ha industrial park adjacent to the port. The road connecting the mining operations and Fort Dauphin is available to serve all these activities.
The establishment of sustainable, non-resource activities in mineral-based economies is not a simple matter and requires careful thought and sound planning. However, there are a few examples where it has been achieved, which demonstrate that it is possible. Through the 2000s, whilst Chile was establishing itself as the world leading copper miner, it was also building successful export industries in fruit production, wine making, fish and wood and wood pulp.
The graph of Chile’s exports by sector below illustrates the success of this strategy.