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Mining the Data: Investment dynamics in the Peruvian mining industry 1992- 2010


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Mining the Data: Investment dynamics in the Peruvian mining industry 1992- 2010

  1. 1. MINING THE DATA: INVESTMENT DYNAMICS IN THE PERUVIAN MINING INDUSTRY 1992- 2010. Alejandro Garay University of Missouri – Kansas City
  2. 2. 1. Introduction  After the neoliberal reforms of the early 1990s. Complete deregulation of the economy and the opening for foreign direct investment (FDI) especially in the extractive sector. Urban areas of the country are experienced a significant economic growth. Rural economies have become economically and environmentally unsustainable
  3. 3. 1. Introduction  Mainstream economists and international financial institutions have promoted a “model for investment”, which main aims are deregulation, tax exemptions, and “social-political” stability  The aim of this paper is to describe and explain the investment process for the mining industry. The period of analysis comprises the post neoliberal reforms of the early 1990’s until 2010
  4. 4. 2. Methodological issues  Following the principles of grounded theory I use an open non-deductive method (Lawson, 2003; Lee, 1998; Downward, 1999, 2007; Downward and Mearman, 2007; Finch, 2002; Scheibl and Wood, 2005; Laramie, Mair, & Miller, 2007). Quantitative data: Economic Commission for Latin American and Caribbean (ECLAC), Central Bank of Peru (BCRP), Ministry of Energy and Mining of Peru (MINAM), United Nations Conference for Trade and Development (UNCTAD), Metal Economic Group (MEG). Qualitative data: surveys, interviews, which were taken from previous studies published mainly in academic journals and/or public and private reports.  The method allows us to identify emerging analytical categories and their causal explanations. which in turn become the main sources for developing an analytical narrative of the investment process in mining industry from a heterodox perspective
  5. 5. 3. Some findings A. Qualitative and quantitative analysis  The period of analysis comprises the post neoliberal reforms of the early 1990’s until 2010. Transformation in the mining industry: from both small but numerous privately owned companies and few large state-owned firms to a highly concentrated industry with few large transnational companies playing the major roles. Between 1976 and early 1990's FDI (mining sector) was almost inexistent Between 2001 and 2003 more than 246 estimated projects Mineral exports accounted for more than 50% of total export eleven of the world’s top twenty mining corporations now have operations in Peru the social context in which the mining sector is operating is plagued by high levels of poverty
  6. 6. 3. Some findings A. Qualitative and quantitative analysis  The mining industry in the developing countries is characterized by its high concentration of capital (plants) among large transnational corporations.  The post neoliberal reforms allowed a greater concentration in the mining industry.  Level of concentration is also explained by the dynamic process of acquisitions, mergers and expansions within this industry.
  7. 7. (1) The percents were calculated from production in metric tons of fine content. (2) The percents were calculated from production in kilograms of fine content. Source: Mining Yearbook 2001, 2004, 2006, 2007, 2008, 2010. Minister of Energy and Mine,
  8. 8. 3. Some findings Copper sub-industry is one of the most concentrated within the industry. From the early 1990s to 2010 the Peruvian production of copper (2nd largest worldwide production) was dominated by the combination of two large-sized firms for the first decade - Southern Peru Copper Corporation and BHP Billiton-Tintaya (merger then with Xstrata) -, and the combination of two large-sized-firms for the last decade (Southern and Antamina). During the whole period of analysis these firms have controlled more than 80% of the overall production, which is equivalent to the 6% of the worldwide market demand (Minem, 2011).
  9. 9. 3. Some findings  The production of zinc shows clearly a similar trend Early 1990s, 87% percent of the market demand has been shared by 10 companies with the state-owned firm as the only major player From 2002 to 2010 the market has been controlled by two major players Volcan and Antamina.  The production of lead and silver shows a slightly different pattern. four large-sized companies have been controlling roughly 40% of the overall production and sales.  The gold sub-industry is perhaps the least concentrated within the industry measured in terms of its share of the overall production large and medium-sized firms controls 75% of production and sales. However, it has become more concentrated in the last year.
  10. 10. 3. Some findings  There is also a concentration across these sub-industries. Antamina, Volcan and Milpo operate in three of these sub-industries –zinc, lead, and silver. Antamina is by far the most important firm in the industry. B. Investment behavior in the mining industry  Even though the investment decision and its intensity vary across every particular firms (Scheibl & Wood, 2005), mining firms tend to share two common investment objectives/strategies: a) increase their productivity through the acquisition of new equipment, infrastructure, and equipment for the processing plants. B) increase their market share through a portfolio investment in exploration projects, the acquisition of medium and small-sized firms, and/or merging with large-size firms.
  11. 11. 3. Some findings  It seems to be that in general, the first objective/strategy was dominant. Firms sough to “increase productivity” through the acquisition of new equipment, infrastructure, and equipment for the processing plants. This accounts approximately 55% of the overall investment during the period Large-sized companies invested mainly in infrastructure and equipment (Antamina, Southern, Xstrata) Small and medium-sized firms invested predominantly in exploration.
  12. 12. 3. Some findings  However, the process is quite complex and usually each company implemented a combination of both objectives/strategies. Therefore, there does not appear to be a general pattern for investment decisions.  The heterogeneity of the firm plays a major role in this process.  Moreover, the investment opportunities available to each firm are unique and vary according to multiple criteria Financial/organizational structure The role of the CEOs Relations with the neighboring communities Expectations about future prices. etc.  Even within the mining industry where firms produce homogeneous commodities there is considerable variation across firms regarding the investment decision.
  13. 13. 3. Some findings Table 03: Mining investment by investment strategies (in millions of US$) Year Equipments for the processing plants Equipments for production Exploration Infrastructure Others Total 1/ 2005 $30.46 $161.21 $83.71 $252.96 $306.90 $835.24 2006 $63.54 $124.09 $102.39 $640.63 $338.30 $1,268.94 2007 $63.77 $125.55 $136.59 $336.79 $248.10 $910.80 2008 $141.04 $176.69 $167.84 $321.48 $460.76 $1,267.81 2009 $319.75 $499.66 $393.14 $376.38 $700.78 $2,289.71 2010 $413.57 $517.03 $614.56 $809.24 $934.16 $3,288.57 Total $1,032.13 $1,604.23 $1,498.23 $2,737.48 $2,989.00 (1) The overall investment does not match with the figures of Table 04 because the "investment on exploitation was excluded for being technically "working capital" Source: Mining yearbook, 2008, 2009, 2010. Ministry of energy and mining - Minem, Peru
  14. 14. 3. Some findings  The mining industry has enjoyed large profits in the last decade as a consequence of drastic increases in the international prices of mineral commodities. This period of prosperity generated an increase in the level of investment. Investments and profits exhibit a pro-cyclical Kaleckian pattern. There is also a pro-cyclical pattern for investment expenditures and expected prices. Expectations of future price increases cause the overall level of investment expenditure to rise. For the period of analysis both investment expenditures and expected prices have similar trends for all of commodities.
  15. 15. 3. Some findings
  16. 16. 3. Some findings
  17. 17. 3. Some findings
  18. 18. 3. Some findings
  19. 19. 3. Some findings  The mining industry is characterized by a relatively “low average labor intensity”, which is even more pronounced in the exploration process.  Our findings show that most if not all investment expenditure in exploration is financed externally (Ees, Kuper, and Sterken 1997 find same results for chemical and rubber industries) The main reason seems to be the higher risk associated with exploration. However, since the financial crisis external funds are more difficult to acquire especially for risky investments. Corbert and Jenkinson (1997) find a similar pattern for the United Kingdom since 1980. They found a countercyclical trend between the level of internally generated investment expenditure and the business cycle. Mayer (1990) obtains similar results for 9 countries for 1970 to 1985.
  20. 20. 3. Some findings  Managers are aware of the importance of having different sources of financing. Profits as a source of finance for investment during periods of recession or crisis. “The global financial crisis will severely impact on the mining industry’s ability to finance its ongoing operations…” “…The industry should prepare itself for a “paradigm shift” in how exploration is funded”. (McMahon & Cervantes, 2009) (Fraser Institute Survey)  The results of interviews conducted by Lall (1986) showed that a major determinant of investing abroad were the “constrained effect of government policy”. However, in recent years these motivations have become more complex and firm-specific (Athukorala, 2009).  Among capital intensive firms (as in the mining industry) the “market-seeking motivation” is the dominant motivation (Sung Kwak, 2007).
  21. 21. 4. Concluding remarks  Heterogeneity is a structural feature of the mining firms, which defines the particular investment behavior of the firm. Even though mining firms produce homogeneous commodities, the way of how investment decision is done vary among every particular firm.  The post neoliberal reforms allowed a greater concentration in the mining industry. This concentration is reflected by the emergence of dominant companies in both the sub-industries and across them during the period of study.  There is a positive correlation between investment and profits, and investment and expected prices (quotations). In both cases the trend was upward, with some fluctuations during the period, but an overall
  22. 22. "Mineral expansion opens up theoretically urgent questions about neoliberalization, democracy and the state as well as the relationships between social movements and political economy.“ (Bebbington, 2008, pp. 889) Alejandro Garay University of Missouri – Kansas City