Factors to Consider before Moving Downstream

South Africa and Indonesia offer key examples of how countries prioritize downstream production:

• In South Africa, the Broad-Based Socio-Economic Empowerment Charter for the South African Mining and Minerals Industry (the 2010 “Mining Charter”) states “Beneficiation seeks to translate comparative advantage in mineral resources endowment into competitive advantage as [a] fulcrum to enhance industrialisation in line with State developmental priorities.”^[3] The Industrial Policy Action Plan 2016/17 focuses on the beneficiation of platinum group metals and fuel cells, steel, and resource-linked capital goods.^[4]
• In Indonesia, a ban was imposed on unprocessed ore exports in 2014 to spur higher-value smelting industries. This ban was later modified because it had not succeeded in bringing on new refining capabilities.^[5]

As noted above, the capacity to produce and even export raw materials does not translate into a capability to successfully promote downstream activities. For example, in the case of iron and steel, Australia sought to develop a hot briquette iron plant and a pig iron smelter in the 1990s. Neither venture was profitable and both eventually had to be shut down.^[6][7]

On the other hand, Japan and The Republic ofare among the lowest-cost producers of steel in the world and yet they have none of the raw materials. Olle Östenson and Anton Löf state;

“Even discounting the influence of China, a very high proportion of iron ore production has traditionally been exported because the steel markets of most large iron ore producing countries are far too small to accommodate processing of more than a share of the iron ore output”.^[8] Sweden is another example of a developed country producing iron ore that has not developed an extensive steel industry.

The difference between production and beneficiation may be illustrated as follows. Physical objects, a pot or a pan, for example, are logical extensions of iron and steel. But, looked at as a set of economic activities, pots and pans differ radically from iron and steel—the successful production of pots and pans requires different skills, capabilities, and access to markets than are required to produce iron and steel. That a country has the skills and capabilities to produce raw materials does not imply that it will be successful in downstream production.

In contemplating whether or not to promote downstream activities, policy makers would do well to ask the following questions:

1. Why is downstream processing not taking place already, in the absence of government intervention? In the terms used by economists, what is the market failure that is preventing private investors from making these investments?
2. What are the resources that the government would need to commit in order to render downstream activity viable, and for how long would such a commitment be required?
3. What are the government’s objectives in committing to downstream production?

Whatever the options that policy makers consider to support the downstream beneficiation of domestically produced oil and gas or minerals, it is important to understand what makes economic sense in the short and long term.