State Enterprise in International Mineral Markets

Radetzki, M. (1983). State Enterprise in International Mineral Markets. IIASA Collaborative Paper. IIASA, Laxenburg, Austria: CP-83-035

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Abstract

This study explores the implications for the international non-fuel mineral markets of the rapid growth of state enterprise in the mining and processing of minerals in the less developed countries (LDC).

The first part defines state enterprise, and quantifies its prevalence and growth in LDC mineral industries. The particular characteristics of state enterprises are identified, and the implications of their behavior for international mineral markets are analyzed. In this regard, three hypotheses are formulated and assessed.

1) State enterprises are less flexible than private multinationals in adjusting capacity through the different phases of the business cycle. The increasing importance of state enterprises therefore results in greater price instability in international mineral markets.

2) State enterprises can disregard the political risk of explicit or covert nationalization. Ceteris paribus, the proliferation of state enterprise therefore results in more investment and capacity expansion in mineral rich LDCs that are considered especially "political risky" by the mining multinationals. Over time, this will lead to a closer geographical fit between geological potential and mineral extraction.

3) Takeovers by state enterprises of mineral activities in LDCs entails a substantial setting-up and learning cost. The widespread nationalizations of the 1960s and 1970s have typically been followed by extended periods of lesser efficiency, characterized by higher cost levels, and inability to operate the installations at full capacity or to establish new capacity. Output has been lower and prices higher during this learning period than they would have been under an uninterrupted private multinational regime.

The second part of the study considers the support for the above hypotheses provided by three detailed case studies of nationalized mineral industries -- Indonesian tin, Venezuelan iron ore, and Zambian copper. These cases cover a range of experience in terms of minerals, continents, and levels of economic development in host countries.

The third and final part of the study reviews the hypotheses in the light of the empirical work presented. Conclusions are formulated and generalizations derived from other countries and minerals.

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