Factors to Consider in Deciding Whether to Enter into Refining and Further Downstream Technologies

  • In deciding whether to move downstream, policymakers should be aware that very few countries that export raw materials also successfully export their processed products, and very few raw materials-producing countries have been successful in promoting downstream activities; this is true of both developed as well as developing countries.
  • Countries that have the skills and capabilities in the production of the raw materials do not inherently have the capabilities, skills, and market access required for successful downstream production.
  • Whatever options a government considers to support attempts at downstream beneficiation of domestically produced oil and gas or minerals, decisions need to be informed by a full understanding of what makes economic sense in the short and long-term.
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[1] ‘The principal resource endowment opportunities are…Downstream value addition: The use of the locational advantage (CIF-FOB) of producing crude resources to establish resource-processing industries (beneficiation) that could then provide the feedstock for manufacturing and industrialisation’.  African Union, African Mining Vision, (2009), 13

[2] See Annex 1: Export taxes and export controls applicable in African countries (p. 55-61), ECPDM paper for complete list of export restrictions applied by African countries. Isabelle Ramdoo and San Bilal, Extractive Resources for Development: Trade, fiscal and industrial considerations. Discussion Paper No. 156,  (Maastricht: ECDPM, 2014), 55-61

[3] Republic of South Africa. Department Mineral Resources. Amendment of the Broad-Based Socio-economic empowerment charter for the south African mining and mineral industry (September, 2010), s 2.3 [note a new version of the charter has been under development and debate since 2017)

[4] Republic of South Africa, The Department of Trade and Industry, Industrial Policy Action Plan, 2016/17-2018/19, (Pretoria: The Department of Trade and Industry, 2016)

[5] Wilda Asmarini and Bernadette Munthe, “Indonesia eases export ban on nickel ore, bauxite”, Reuters, January 12, 2017

[6] B. FitzGerald, “Troubled BHP plant faces closure, The Age, November 12, 2004

[7]  Peter Klinger, “Rio Terminates Kwinana HIsmelt plant”, The West Australian. January 19, 2011

[8] Olle Ostenson and Anton Loft, Downstream Activities. The Possibilities and the Realities. WIDER Working Paper 2017/113, (Helsinki: UNU-WIDER, 2017), 13

Key Resources

Topic Briefing

Government support for downstream production in countries producing minerals and oil and gas is widespread and is further supported by key policy frameworks including the Africa Mining Vision.[1] For example, almost all African countries have policy measures in place which are designed to encourage further beneficiation of their natural resources. All African countries apply some form of export control measures on the raw materials that they produce. Only five countries, namely Burundi, Egypt, Lesotho, Mauritius, and Rwanda, currently do not apply any export taxes, although all of them apply some measures that could potentially have similar effects on exports.[2]Some examples of countries that prioritize downstream production include:

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  • 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] and the Industrial Policy Action Plan 2016/17 has a focus on beneficiation of platinum group metals and fuel cells, steel and resource-linked capital goods.[4]
  • Indonesia: A ban was imposed on unprocessed ore exports in 2014 to spur higher value smelting industries; this ban was recently modified due to accepted lack of success in bringing on new refining capabilities.[5]

In deciding whether to move downstream, policymakers should be aware that very few countries that export raw materials also successfully export their processed products and very few raw materials-producing countries have been successful in promoting downstream activities. Moreover, this is true of developed countries as well as developing countries. For example, in iron and steel, Australia sought to develop a hot briquette iron plant and a pig iron smelter in the 1990s. However, neither venture was profitable and eventually had to be shut down.[6][7]

On the other hand, Japan and South Korea are amongst the lowest cost producers of steel and yet they have none of the raw materials; “[e]ven 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.

It is important to recognize that as 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 – successful pots and pan production requires different skills, capabilities, and access to markets than are required to produce iron and steel. Countries that have the skills and capabilities in the production of the raw materials do not inherently have the capabilities, skills, and market access required for successful downstream production.

In contemplating whether to have a policy to promote downstream activities, policymakers should interrogate the following questions:

  1. Why is downstream processing not taking place 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 government will 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 options a government considers to support attempts at downstream beneficiation of domestically produced oil and gas or minerals, decisions need to be informed by a full understanding of what makes economic sense in the short and long-term.