August 2012

Supply Side

Mining supply: local content or international competition?

By Jon Baird

Most Canadian companies supplying goods and services to the global mining industry have learned that having a local partner makes good business sense. It means they have an advocate who can speak the local language, understand commercial practices and provide after-sales service close to the decision-maker. Indeed, some Canadian firms selling to the global mining industry have dozens of local representatives around the world.

However, there is a growing trend in many countries to force mining companies operating in their jurisdictions to source goods and services locally, which could have severe implications for Canadian supply companies. One of the most protectionist jurisdictions in this respect is Argentina.

In May 2012, Argentina’s Mining Ministry ordered mining companies to prioritize the purchase of local products and services, as well as to seek prior government approval 120 days before making overseas purchases. More than 600 product types now require an import licence, including mining machinery and chemicals. As of the announcement, mining companies have to submit quarterly estimates of their purchasing needs, which will be approved by a special working group at the ministry. It is feared the government review process may delay the deliveries of mining inputs by six months.

Brazil is also seeking to apply local supplier requirements to new mining contracts. The measures would require companies exploring and producing minerals to spend a certain percentage of their investments with local businesses. Simultaneously, they are also endeavouring to develop local industries that can supply the goods and services needed to extract and transport oil and minerals as outputs rise. Brazilian oil producers already have to buy as much as 70 per cent of goods and services locally.

South Africa’s Mining Charter has black economic-empowerment targets that are akin to local content regulations. These targets require a total local procurement expenditure of 40 per cent, with local consumable goods at 50 per cent and local services at 70 per cent. Meanwhile, multinational suppliers are required to contribute 0.5 per cent of the amount paid by the local company to a social contribution fund.

Elsewhere in Africa, local content regulations are emerging, although they do not appear to be aimed at the mining sector. Nigeria has a Local Content Development Act that promotes local firms’ access to construction contracts, Liberia has a petroleum law that alludes to domestic preference and the hiring of locals, and Ghana has also implemented some local content regulations.

Australia has implemented an incentive scheme that allows mining corporations some tariff exemptions and increased government grants. Earlier this year, The Australian reported on the “Buy Australian” rules announced by Australian Prime Minister Julia Gillard for firms seeking government grants and tariff exemptions, after union complaints that big miners were bypassing local suppliers. The Australian went on to report that the government would force firms seeking tariff exemptions to provide additional evidence, to be posted on a government website, that Australian firms received an equal chance at securing project contracts. However, the Australian mining industry continues to reject calls for reforms to mandate the local content requirement. The Minerals Council of Australia claims that in 2009, the mining industry’s total demand for goods and services was $85.7 billion, of which $75.8 billion (88 per cent) was supplied by local industry.

For local content to be successfully integrated into supply chains there needs to be longevity of demand. In mining, there tends to be an initial influx of investment in services, equipment and materials during the construction phase. After that, deteriorating equipment will require maintenance or replacement on an ongoing basis, and additional services will be required. This provides a fertile area for building national supply chain industries based on mining sector business over the long term.

A central question regarding the trend towards more stringent local content regulations is whether it will stimulate greater competitiveness in the local supply industry or whether it will lead to uncompetitiveness and protectionism.

What is the lesson for Canadian mining supply firms exploring international markets? They should strengthen their activities to select, motivate and control local business partners. They should also build into their tendering process provisions to harness and expand engineering and other capabilities indigenous to the countries they wish to supply.

Jon Baird, managing director of CAMESE and the immediate past-president of PDAC, is interested in collective approaches to enhancing the Canadian brand in the world of mining.

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