- Forward Linkages (Supplying Extractives’ Downstream Sectors)
- Factors to Consider before Moving Downstream
Factors to Consider before Moving Downstream
At a Glance
When considering whether or not to move downstream, policy makers should be aware that very few countries that produce or export raw materials also successfully export their processed products. This is true of developed as well as developing countries.
The skills and capabilities needed to produce raw materials are not the same as those required for successful downstream activities. Market access is another important factor.
Policy makers serious about investing in the downstream processing of domestically produced oil and gas or minerals would do well to consider what makes economic sense in both the short and long term.
- Downstream Activities: The Possibilities and the Realities (Anton Lof, Olle Ostensson)
- Examining Beneficiation (Ricardo Hausmann, Bailey Klinger, Robert Lawrence)
- Rio Terminates Kwinana Hismelt Plant (Peter Klinger)
- Troubled BHP Plant Faces Closure (The Age)
- Extractive Resources for Development: Trade, Fiscal and Industrial Considerations (San Bilal, Isabelle Ramdoo)
This article discusses the termination of the Kwinana Hismelt plant in Rio de Janeiro, Brazil. ...
This article discusses the closing of the BHP plant in Port Hedland in Western Australia due to safety and environmental concerns. ...
This report discusses how developing nations can leverage extractive industries to meet the Sustainable Development Goals (SDGs), primarily ...
This resource provides information on the possibilities and realities of increased downstream processing. Related policies are analyzed ...
This resource discusses beneficiation in light of the country context, to show that forward linkages should not always be the policy focus. ...
This Highgrade interview features Olle Östensson discussing beneficiation, or forward linkages, in both the mining and oil and gas ...
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. For example, almost all African countries have policies designed to encourage the beneficiation of their natural resources. And all such countries apply some form of export control measures on the raw materials that they produce. Only five, do not apply any export taxes, although all apply measures that could have similar effects.
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.” The Industrial Policy Action Plan 2016/17 focuses on the beneficiation of platinum group metals and fuel cells, steel, and resource-linked capital goods.
- 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.
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.
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”. 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:
- 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?
- 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?
- 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.
 “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 industrialization.” African Union, African Mining Vision (African Union, 2009), 13.
 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, European Centre for Development Policy Management (ECDPM), Maastricht, 2014, 55–61.
 Republic of South Africa, Department of Mineral Resources, Amendment of the Broad-Based Socio-Economic Empowerment Charter for the South African Mining and Mineral Industry (Pretoria: Department of Mineral Resources, September 2010), s 2.3 [note a new version of the charter has been under development and debate since 2017].
 Republic of South Africa, Department of Trade and Industry, Industrial Policy Action Plan, 2016/17-2018/19 (Pretoria: Department of Trade and Industry, 2016).
 Wilda Asmarini and Bernadette Munthe, “Indonesia Eases Export Ban on Nickel Ore, Bauxite,” Reuters, January 12, 2017.
 B. FitzGerald, “Troubled BHP Plant Faces Closure,” The Age, November 12, 2004.
 Peter Klinger, “Rio Terminates Kwinana HIsmelt Plant,” The West Australian, January 19, 2011.
 Olle Östenson and Anton Löf, “Downstream Activities: The Possibilities and the Realities,” WIDER Working Paper 2017/113, World Institute for Development Economic Research,(UNU-WIDER), Helsinki, 2017, 13.