The Race For Non Oil Minerals

Published Date: 02 Nov 2017

Abstract

The significance of minerals to states dates far back into history. They were primarily strategically important to equip the military. This is still the case, but over the last century, minerals have taken up a new and larger role for ensuring national security. World War II was attributed with Europe’s mercantilist rule which was strongly based on the realist ideology. After World War II, classical liberal theory presented the means to reduce armed conflicts by increasing economic inter-dependencies among nations and became the foundation of a new economic order with economic liberalization at its heart. Simultaneously, economic security gained growing importance relative to military security and; the definition and scope of critical minerals also reached new dimensions. Over the last few decades, economic liberalization has given way to new players gaining position in global markets. Their increased demand together with the already vast demands of industrialized nations has increased competition in securing critical minerals necessary for economic growth. Not only has economic liberalization led to a freer trade, but also to the deregulation of the financial market. This in turn has given way to more flexible financing methods in the minerals industry and inaugurated the consolidation of large firms. This paper explains the significance of non-oil minerals and discusses how economic liberalization has affected the demand and supply of minerals. It would go on to highlight emerging economies, especially China and examine if liberalization holds in the race for mineral resources or if it gradually crumple under the strain of securing them.

Introduction

Economic liberalization is a term that refers to fewer government regulations and restrictions in the economy in exchange for greater participation of private entities; this doctrine is associated with classical liberalism. Whereas realism recognises the political dominant over the economic domain, as well as the domestic separated from international realms in international relations, liberalism sees individuals as fundamental actors in international politics and when left free to interact as economic agents would ensure the most beneficiary distribution of welfare in an international system. [1] Mercantilism maximizes the state’s export through state licensed monopolies and subsidies, and minimises imports trough trade barriers. [2] It has often been accused as the ruling ideology for armed conflicts whereas economic liberalization has been argued to create interdependencies and reduce conflicts. For example, World War II has been recognised among others, to be a result of the mercantilist ideology ruling over Europe and the USA at that time. However, it also took a certain preference in German politics for Hitler to gain power and also convince the nation to march into war to secure "Lebensraum". [1] Liberal theory is based on several assumptions which set the background to reduce armed conflicts.

First assumption: States represent some subset of domestic society, on the basis of whose interests state offıcials define state preferences and act purposively in world politics. Sometimes, non-governmental organizations (NGOs) and other actors may form transnational alliances to assist social forces. "State-society relations"—the relationship between a state and its domestic (and transnational) society in which it is embedded—lies at the center of liberal theory.

Second assumption: Rather than treating preferences as a fixed constant, liberals seek to explain variation in preferences and its significance for world politics. States, liberals argue, orient their behaviour to the precise nature of these underlying preferences: compatible or conflictual, intense or weak; and their precise scope. A state needs a "social purpose" in order to pay any attention to international affairs, let alone to provoke conflict, inaugurate cooperation, or take any other significant foreign policy action. If there is no such interdependence among state objectives, a rational state will conduct no international relations, satisfying itself with an isolated and autarkic existence. Hence, conflictual goals increase the incentive for of political disputes whereas converging ones create the requirements for peaceful coexistence or cooperation. Added to that, state preferences cannot be reduced to some simple metric or preference ordering, such as seeking "security" or "wealth". States would strike a complex and varied trade-offs among economic, social and political goals.

Third assumption: The link between state preferences, on the one hand, and state behavior, on the other, is the concept of policy interdependence. Policy interdependence refers to the extent to which the pursuit of state preferences necessarily imposes costs and benefits (known as policy externalities) upon other states. The existence of some measure of divergent fundamental beliefs, scarcity of material goods, and inequalities in domestic political power among states and social actors renders inevitably some pluralism and competition among and within states. Liberals argue that each state seeks to realize distinct interests under constraints imposed by the different interests of other states. This distribution of preferences varies considerably. This variation is of decisive contributing importance in explaining state behavior. [3] 

The introduction of economic liberalization into global politics

In 1944, policymakers met in Bretton Woods to address two major problems: rebuilding Europe after the war and setting up a framework that would avoid repeating the Great Depression of the 1930’s. Thus, the IMF (International Monetary Fund) and World Bank (originally called International Bank for Construction and Development) was created by 44 countries. The IMF was responsible for a stable exchange rate regime and provision of emergency assistance to countries with temporary balance of payment crisis. The World Bank was designed to reconstruct countries devastated by the war and revive their economies and trade. In 1945, 50 nations signed the United Nations Charter which embodied the ideals of the new world order which included political liberty and economic development. [4] Finally, the General Agreement in Tariffs and Trade (GATT) was signed as a forum for negotiations on trade liberalism. With the Marshall plan, whereby the US directed massive financial aid to Europe coupled with conditions; these became mainly Western bloc organizations which depended mainly on the US. [5] By then, the US had taken up hegemonic power. [6] The interwar period with its mercantilism has also been explained in terms of the absence of a hegemonic leadership. An economic liberal regime is of great advantage for a hegemon because it has an apparent superior competitive position in the international economic order. [7] 

About 25 years later, the US made the first break with the Bretton Woods system. Due to high military cost with the Vietnam War, Europe’s economic integration and the rise of Japan as an export nation, the US changed the International Monetary System in 1971. Government no longer converted gold at $35 per ounce. The US also added a 10 percent surcharge on import duties. [8] Notably, concern for long-term reliability and availability of foreign sources of oil and other energy and nonfuel mineral resources such as bauxite and cobalt started to grow during this time. This was not only due to the two decades of economic growth the US had experienced, but also because of the Europe’s economic growth and the new competition coming from Japan. [9] It is open for discussion if this new development was an important factor that caused the first break with the Bretton Woods system. As major industrialized countries failed to coordinate their exchange rates with the IMF framework, they decided to discuss monetary issues amongst themselves and called this new group "Group 7". The 70’s experienced a new wave of protectionism which violated the GATT principle of non-discriminating. This brought about dissatisfaction among developing countries. However they were unsuccessful in pushing for a new international economic order. [10] 

The 1980s was marked by a shift in US economic policy. Interest rates were raised dramatically to control inflation by reducing economic activity in the United States. The growth periods between the 1960s and 1970s had brought about a vast growth in global capital markets and financial flows. A lot of the money made its way to developing countries as loans. The sudden increase of interest rates made it impossible for these countries to pay back those loans. Many of the creditors were US based banks. To ensure that the developing countries do not default, the IMF was assigned with a new role to ensure structural changes within indebted countries. These changes should reduce inflation and government spending. The result was massive privatisation, deregulation and trade liberalization. These neoliberal [2] changes were contrary to the pre 1980s Keynesian growth policies where the government was actively involved in growth. GATT had failed to hinder protectionism and in affect a new World Trade Organisation (WTO) was established in 1995 with the aim to effectively enforce trade rules. [11] 

Minerals and the new world order

Minerals role in a nation’s security is that they are the key components for ensuring military, environmental and economic security. For the manufacturing and building industry they are the raw materials and therefore considered as important for strategic industries and development. For growth and development, they are needed as the basis for innovation especially in aspects of energy efficiency, substitution and production cost savings. The problem of mineral accessibility elevated as economic security equated national security. [12] The term "critical mineral" was introduced and is defined as those minerals for which a threat to supply from abroad could involve harm to the nation’s security. In this context, they are those on which the economic health and security of the nation resides. It can be considered to include civilian, industrial, and military use that could have severe effects on the nation’s security should supply of the material in question become restricted. [13] The criticality of a mineral for a state varies from country to country, though it converges in industries and is subjective to available technology for development and economic growth. So a mineral that is critical now for most industrial countries and economic development might not make that impact tomorrow. Access to such minerals continues to be a political process even after the post-World War II era of economic liberalism.

After the World War II, state ownership of the Western world increased in accordance to the Keynesian economic model these states pursued - a mixed economy with a significant role of government and public sector. Eastern European countries followed the same path as Soviet Union; and total share in mining controlled by national states increased. In the mid-70s, these countries controlled 20-25 percent of the production of most minerals and they were generally self-sufficient as demand equalled their supply. Between the late 1960’s and early 1970’s, developing countries were decolonised and a new wave of nationalisation swept over the mining industry. In both developing and developed market economies, state control continued to rise until the early mid-80. State control was tolerated in countries perceived as friendly, but not in those which were viewed as unfriendly such as Chile’s nationalization of copper. [3] As the general political climate changed with emphasis on "free market" and privatization, many developing countries sought foreign direct investment and started to privatize the industry. This new wave of privatization was also backed by increasing problems with ineffectiveness and poor management of state owned firms and the fall of mineral prices during the 1990s and early 2000s.

After the collapse of the Soviet Union, the demand from the military complex also basically ceased to exist. Mining companies were privatised and into the 21st century production once again increased. During that time, the US hegemony was undisputed and its position was seen as a guarantee for resource availability for its allies. Though state ownership has decreased considerably since its peak in the mid-80s, it is not a past trend. Table 1 gives an overview of the development of state control in mining. [14] 

Table 1: State Shares of Global Metal Mine Production Value (% of total value)

Since 1978, the Chinese government not only exported raw minerals, but also started to undertake their exploration and development through joint ventures with private foreign firms. [15] Since the mid-2000s, a rise in state controlled mining has again occurred with the growth of Chinese mine production. Even though there have been several partial privatizations successfully carried out in recent years, the central, regional, and local governments certainly maintain the ultimate control over the companies in question. This is also true even when the provision of capital is shared with other investors. This trend of state control will most likely continue as Chinese policy is to secure control over natural resources both domestically and abroad through state ownership. [16] 

Nationalization

The new millennium started with new nationalization plans in southern African countries. This region has high concentrations of platinum group metals (PGMs) - ruthenium, rhodium, palladium, osmium, iridium, and platinum. Most production of PGMs originates from only two countries - Russia and South Africa. Exploration activities for PGMs in Russia largely go unreported because Russian PGMs data are treated as a state secret. Exploration activities by Western [4] companies increased briefly after the fall of the Soviet Union in 1991. In recent years, however, Russian economic difficulties, lack of capital, and territorial disputes have increased the risk for exploration in Russia, and many Western companies have withdrawn. Western states now even more depend on South Africa’s minerals for their industries; also the US defence industries rest on the free trade of these minerals for the manufacture of aircraft, aerospace systems, ships, and high technology components. [17] African resource nationalism could drive down production and supply. Nationalization of mines has been suggested in several African countries, not just in South Africa. These countries promise job creation, social benefits and hope for better cuts in profits. [18] 

South Africa is responsible for over 70 and 35 percent of the world Platinum and Palladium supply respectively. [19] It alone contains 89 percent of world PGMs reserves. [20] Nationalization talks and discussions to stockpile resources to ensure price stability and encourage greater "beneficiation" inside South Africa have been of recent concern for investors. The basis of the ANC government’s resource nationalism lies in the history of the mining industry in which whites dominated and blacks were exploited as unskilled labourers. How far nationalization would come to pass is still uncertain as mining industry experts point out that nationalization without compensation would mean that mineworkers would lose their pensions. [21] 

From 2000 to 2008, Zimbabwe posed serious risks for mining investors and for the flow of strategic minerals, including PGMs and chromium. In 2007, an "Indigenization" law was passed in anticipation of 2008 elections, which mandated the transfer of 51 percent of mine ownership to local entities. Chinese companies have been exempted from the law, which can be seen as Zimbabwe’s "look east" policy. Chinese monopolization of these minerals will dry up future free market supply for the United States and its allies. The beneficiaries of uncertainty in Africa are likely to be Chinese companies. [22] 

The general increase in demand and prices in minerals has spurred these African governments to nationalize their resources with the promise to make higher cuts in profits. Example, the price for platinum and palladium has risen over the last decade and managed to recover brief pitfalls as shown in Figure 2. Platinum especially has shown an immense increase in price; in March 2000, the average price was $485. Ten years later had risen to $1601 which is a price increase of 330 percent. [23] 

Figure 2: Platinum and Palladium prices 2000 - 2011

Source: Platinum Today (Values are average prices of each December)

Copper has made similar developments over the last decade.

Figure 3: Copper stocks and prices 2000 - 2010

Source: Global Commodities Forum, (2010). Situation & Prospects for Copper, Nickel, Lead and Zinc.

Such commodity booms induce "Dutch disease" and shift the terms of trade against non-resource sectors. Often the result is a foreign direct investment (FDI) enclave, without any employment, technology or wealth spillover to the rest of the economy, but with big profits distributed among corrupt local businesses and the political elite. [24] Many African countries dependent on mineral resources have interest-group constellation that misuse rents from resource booms, instead of spreading wealth and improve governance and institutions. Past experiences do show that returning to protectionism would however make matters worse. [25] Other countries like Chile managed to successfully exploit their comparative advantage in resources (mainly copper) through liberal trade policies, while diversifying the economic base and improving institutions. [26] 

Economic liberalization policies have opened up mining operations to the influence of FDI and benefited through technological transfer and growth in operations and rents. Extractive industries account for the bulk of inward FDI of many low-income, mineral-rich countries. [27] Since the 1990’s, there has been a predominant increase in International Investment Agreements (IIAs) coupled to FDI. There has been growing dissatisfaction among governments concerning these agreements. IIAs are treaties negotiated between governments which set legal standards of protection for FDI. Its main function is to ensure that foreign investors will not suffer expropriation or nationalization without financial compensation. IIAs also protect foreigners against being treated less favorably than local businesses or investors from other foreign countries. The treaties also ensure that foreign investors can transfer cash and profits out of a host country; however, many treaties fail to specify that governments hold the right to impose limits on capital flows in financial emergencies or balance of payment crises. [28] 

Investors may sue states for cash damages when any of these treaty protections are perceived to have been breached. Apart from the legal protections offered by IIAs, a major attraction of these agreements is their capacity to remove legal disputes with host governments from domestic courts, and to elevate them to international arbitration. The investor determines whether to resort to international arbitration. In contrast to most domestic legal systems, governments have no right to disclose information regarding the arbitration on their own. Investors filing arbitrations are also under no obligation to reveal the existence of such lawsuits, the claims being made and arguments being presented. [29] 

There have been controversy surrounding treaty provisions because they are said to restrict government ability to use capital controls in financial emergencies or in a balance of payments crises. There is vigorous debate as to where arbitrators should draw the line between legitimate government regulation and those interferences which are so destructive for an investment that they amount to expropriation for which financial compensation must be paid. In the absence of such clarity, there is also debate as to whether this uncertainty will make governments hesitant to pursue liberalization policies. Besides, most of such agreements require that the terms apply for a minimum period of time after the treaty’s entry into force, for example 15 or 20 years. Even after the treaty is over and withdrawn, there is a further period during which pre-existing investments will continue to benefit from the treaty’s protections. This can go on for up to 20 years after the treaty has been withdrawn. [30] New government will then have to comply with IIAs of former administrations and are limited in policy reforms such as the quest for land-reform in some African countries. [31] 

Even though economic liberalization revived the African mining industry through the influx of capital and know-how, these countries now aim for higher profit cuts through nationalization. On the other hand, state sovereignty is being challenged by IIAs limiting policy power.

Emerging markets

Since World War II, the mineral industry has generally been dominated by the US Since minerals are a key to economic and military power, the most powerful countries of the capitalist world normally control a large share of the mineral industry. It is therefore no surprise the US with a hegemon position in the international political and economic order also dominated the mineral industry. [32] The US remains an important producer of mineral resources, but the extraction and production of mineral resources overall is shifting away from the US toward other nations; US import dependence for many commodities has increased and has raised concerns about reliability of the foreign supply. [33] These concerns are also shared with other industrialized countries of the West.

As trade became more liberalized, economies flourished and new players emerged who also started to compete for strategic and critical mineral resources. Since the 1970s, the nature of the concerns shifted from the short- to the long-term reliability and availability of foreign sources of minerals. Emerging markets and developing country economies (henceforth emerging economies) played a growing role in the 2003-2008 mineral price boom and continue to do so. Mineral commodity prices have been relatively high for the first extended period since the 1970s, driven primarily by unexpectedly large demand growth of emerging economies. [34] 

Particularly China has become a leading global consumer of products such as cell phones, televisions, and refrigerators and will soon surpass the US in the consumption of personal computers and automobiles in absolute terms. Figure 4 highlights the associated growth in consumption of some base metals over 15 years. The US trade deficit with China indicates that China is not only a consumer nation, but also a producer of export goods. [35] 

Figure 4: World growth in consumption of some base metals, 1990-2005

Source: Streifel, World Bank 2009.

Key to the growth of emerging economy mining companies has been the widespread market liberalization and privatization in the 1980s which accelerated with the collapse of the Soviet Union in the early 1990s. [36] 

Moreover, emerging economies now also play an increasingly important role in supplying minerals. Under state control, many mining companies in emerging economies were effectively restricted to gradual and local growth by their lack of access to capital and skills and their lack of knowledge and experience of the industry beyond their borders. The suspension of state controls opened the door to an inflow of entrepreneurial talent and a more commercial and expansive set of objectives. These economies now contribute with increasing growth in supply of minerals exceeding that of the advanced economies in almost every commodity. [37] Figure 5 shows the growth of supply of emerging economies in global mineral production

Figure 5: Percentage of global growth over 2000-2007

Source: World steel, UNCTAD, WBMS, Brook Hunt

The emerging economies currently count among their number the world’s largest producer of iron ore (Brazil), the largest producer of aluminium (China), the largest producer of copper (Chile), the largest producer of silver (Peru), the largest producer of gold (China), the largest producer of platinum (South Africa), and the largest producer of diamonds (Botswana). [38] 

The most prominent emerging economy is China. Whereas in 1973 the United States was the world’s leading nonfuel mineral producer, today China is the world’s leading producer and consumer of minerals, but it no longer has the domestic capacity to satisfy its demands for minerals such as iron ore, nickel, copper, and cobalt. China’s dominance as a global mineral supplier, coupled with its own demand for minerals, gives it a very direct global market influence on the supply of minerals. [39] Very strong trade and FDI liberalization took place in the 1990s and China partially privatized its mining industry as full privatization was perceived as a potential threat to national security. The lack of foreign experience was perhaps the most important hindrance for a smooth and quick expansion of Chinese foreign mining activities. The partial privatization of their industry did provide needed experience for their own investment ventures abroad. By partially privatizing their industry, China also benefited from deregulated financial markets which allowed immediate cash injections for expansion. The number of privately, so far mostly small, held mining companies is increasing, partly because of privatizations, but most importantly, because of the ever growing demand for mineral resources by the manufacturing industry. [40] Yet, industrial-policy interventions and restrictions on foreign investment have marginally increased. [41] 

As China can no longer cover its demand by domestic supply, it has tended to focus the resources of other emerging economies. This is explained partly by the fact that this is where the undeveloped resources tend to be but also by the fact that emerging economies are often receptive to China’s less conditional approach. [42] A prominent example is the agreement with Congo DR; the agreement offers Congo transportation infrastructure, mining investments and other financial transfers in exchange for long-term deliveries of metals to China. This minerals-for-infrastructure agreement certainly reminds of colonial and post-colonial relations, and it mobilizes geopolitical reasoning in third party headquarters. After China and Congo DR made the big infrastructure-for-minerals deal, the IMF protested against some of the conditions and held back proposals to reschedule Congo’s foreign debt. This intervention led to the China-Congo deal being considerably reduced. [43] 

In respect to China’s relation to Africa, it can be expected that the former may attempt to handle her own and fast-growing import dependency in several base metals by exercising Hirschman [5] power. This development has already caught on by Western media and concerned African state authorities. However, how far this kind of relationship with Africa is accomplished depends on the development of the export-import relationship between African and Western countries with which China competes. As already mentioned in this paper, China is favored by African States because unlike with Western states, their investments are not conditioned with political reforms. China claims its relationship with Africa purely commercial and not a geopolitical, [44] but its dealings can also be interpreted as a strategic move to be more competitive among other importer.

Geo-economically, historical monopsony structures are being challenged by China and to some extent by other emerging economies. Simultaneously, the structure of key geo-economics locations is also evolving. As Brazil becomes an increasingly important supplier, South Africa dwells on nationalization and industrial development makes rare earth elements (REE) a strategically and critical resource with China being the monopoly supplier. REE are widely used for consumer goods and in military equipment. According to one expert assessment about 25 percent of new technologies rely on REE and its demand is exponential. [45] There is little room for the Western states to exercise Hirschman type of power as there are no substitutes for REE. Its enormous usage and the constraints on supplies have made REE highly critical and brought about a new wave of stockpiling in 2012. [46] 

However, China is not the only country with known deposit of REE reserves. According to calculations by the US Geological Survey the United States has 13 percent, Russia and Central Asia 19 percent, Australia 5.5 percent and several other countries including France 22 percent of known reserves, while China has 36 percent. [47] On the other hand, mining them would be uneconomical as they are not found in high concentrations and in China’s Bayan Ono mine. Hence China dominant position as supplier (Figure 6). However, demand is expanding so fast, that China will be unable to cover it in future. [48] 

Figure 6: Country shares in world production of REEs 2008

Source: Papp et al 2008.

The West sees China aspiring to superpower status, with growing military resources for power (although still far from those of the US). The Chinese mining industry is seen as a strategic tool for acquiring this power. This is because of its policies concerning its mining industries; especially its state influence and foreign activities such as in Africa and export restrictions on critical minerals. Many view free trade as a clear case of a shared interest: all nations that open their markets are said to benefit. Although free trade is not a public good (it is rival and excludable), the enforcement of trade rules – the Most-Favored-Nation principle of nondiscrimination and unconditional reciprocity is WTO and IMF. These are perceived as public goods available only to their members. [49] China is apparently free-riding the system: it became a WTO member in 2001 and has lately been accused for damaging others by limiting access to its markets. China has also not integrated itself into global governance since then (e.g. "no strings attached attitude in Africa") and remains mostly neutral to global policy; however it benefits economically from global policies.

China’s tightened export restriction has brought about tension between the US and its allies. The US, the EU and Japan filed a case against China at the WTO in March 2012 concerning China’s export restrictions on REE and other critical minerals necessary for the electronic industry. The US and Mexico had filled a case against China before because of other raw material, however China did not respond to the ruling and wider export restrictions remain. [50] There is doubt that China will conform to a WTO ruling once the case against its export restrictions is through, even though it benefits from liberal trade agreements through increasingly exporting manufactured goods. China’s current growth in exports in manufactured goods is greater than the GDP of the rest of the world. It is unlikely that the rest of the world can absorb China’s exports in the near future. This implies that there significant increase in the degree of economic integration and mutual interdependence between China's economy and that of the rest of the world, including the leading capitalist powers. The REE restriction can be interpreted as a strategic move to secure consumer markets. Whereas electronic consumer goods produced in the developing countries will increase in price due to the restrictions and high tariffs set by China, China can sell its goods cheaper on the market and increase its global market share. It must be noted that a high degree of economic integration and mutual dependence between politically independent countries is unproblematic only if the countries involved have similar economic and political institutions. [51] If that is not the case, then the high degree of mutual economic dependence that would arise with such a trading relationship can turn out to be problematic. This is the case with China; even though it has dismantled central planning, and private companies now produce a majority of its output, it remains a country in which a Communist Party controls the state. Also, the state still plays a very active role in guiding the economy, and state enterprises continue to play an important role in key sectors. With China’s export restrictions on REE and its growing share of world exports of consumer goods, it is almost certain that protectionist sentiments toward Chinese imports will become politically dominant. [52] Considering that the Western economies are also dependent on Chinese imports it is fair to say that a trade war would harm everyone.

Meanwhile the US geopolitical power as hegemon state is seemingly being challenged by China. A country would be perceived as a geopolitical challenge by the West if it occupies a strong market position (geo-economic variable), is an established or aspiring political and military power in its region, is perceived as politically-ideologically different, has a state exercising a dominant or strong influence over economic policy, and is likely to pursue conflict more than (or as much as) collaborative strategies towards other powers. This is a simple account of the way China is perceived in US and its allies, especially now with the dispute over the REE export restrictions. However, if one views the US as a hegemon, there are good reasons to seek to contain China. These reasons are much less evident if one accepts that the world is becoming more multipolar, and that China is a legitimate regional power. [53] 

Russia is also to some extend seen as a geopolitical challenge, but other emerging countries like Brazil and India do not fall into this category. Added to that, other emerging economies who also happen to be BRICS countries would most likely not act as a collective in mineral markets as the conditions to do so do not exist. India and Brazil have been subject to privatization and in political and ideological terms they as well as South Africa are clearly different from China and partly also Russia.

Mergers and acquisitions

While OECD countries have progressively liberalized their FDI regimes, increasing cross-border Mergers and acquisitions (M&A) activity by emerging economies has added a new importance to foreign takeovers. Over the last five years the acquisition volumes of emerging economies have had vast increases. China still has the highest acquisition volume and represent close to half of emerging market led deal activity in 2011. Overall, annual Chinese buying volumes increased 40 percent over the 2006 market peak volumes. The high growth levels of Brazil and India are also distinctive (see table 2 below); both countries like China also have vast populations with high commodity consumption capacities and hence so increasing demand for minerals. [54] There has also been a general increase in M&A activities as shown in Figure 7.

Table 2: Global mining M&A transactions led by key growth market Buyers

Acquisition

Volumes bn$

(2006

market peak)

Acquisition

Volumes bn$

(2011)

Change %

Brazil

8

20

150

Russia

74

90

22

India

12

26

117

China

146

205

40

S. Africa

22

33

50

Source: On the road again, Global-mining, Deals Review 2011 and Outlook PWC 2012.

Figure 7: Value and volume of deals by size (2000–2011)

Source: Recognizing value in volatility, Ernst & Young 2012.

In 2011, emerging economies led only 17 percent of acquisitions (by volume) in the mining sector. Canadian-led M&A, alone, outstripped the entire growth world score. Indeed, the top 10 cross-border acquisitions by volume in 2011 were by Western countries. [55] 

Economic liberalization enables cross-border mergers. An advantage for target countries, especially developing ones, is that they get an influx of knowledge and capital. For much of history, the development of the resources of these economies has been hindered by inadequate geological knowledge, poor infrastructure, inconsistent and ineffective government policies, and the lack of capital. [56] 

Yet, cross-border takeovers are often hindered because the commodity in question is argued of strategic nature for national security. The importance attached to strategic industries is not just an offshoot of defense and industrial policies. Domestically owned firms are deemed to be more easily influenced by the government than foreign-owned firms. [57] This is the case in China which has only partially privatized the industry.

China’s M&A activities are largely interpreted as an instrument of industrial policy and growth strategy. The most spectacular attempt was hindered. After taking a minority share in Rio Tinto Zinc in 2008, RTZ management in 2009 declined a 20 billion USD bid by Chinalco to acquire substantial share that would have resulted in a place on the RTZ board. The reason Chinalco failed is apparently because of political opposition in Australia. [58] 

In the long run, mergers and acquisitions may reduce the number of market actors and may lead to a concentrated oligopolistic market structure type with high entry barriers. This will increase the market power of the large mining corporations, tightening supply and thus affect prices upwards. M&A creates a paradox which allows the growth of market imperfections while pursuing a strategy of creating perfectly competitive markets. Cross-border mergers and acquisitions have the obvious effect of creating global monopolies and hence strategic economic power centers. [59] This could explain why China’s cross-border M&A activities have been under much scrutiny.

Conclusion

With economic liberalization, economic security grew relative in importance to military security and minerals necessary in achieving national security expanded. Since Bretton Woods and the introduction of economic liberalization western nations have shared a common base for their policies – liberalization and closely compatible fundamental beliefs. A threat of US economic security caused the first break in the Bretton Woods’ liberal system in 1971 which caused global economic problems. Since then, economic liberalisation had been recognised as a means for economic security and growth.

As the demand of minerals in old industrialized countries has grown over the four decades and emerging economies have shown extreme growth in demand the last decade, there has been much ado about securing minerals necessary for economic growth. Economic liberalization has brought about economic growth for emerging economies for the last two decades. Even so, some economies are turning back to nationalization or setting up tariffs and trade restrictions because of economic, political or geopolitical reasons.

Economic liberalization does give way to free riding and may also bring about contradicting outcomes as could be the case with M&A. The benefits of economic liberalization to one and all are easy to demonstrate when total free trade is achieved which is not the case and has never been so. Nor are the benefits gained by free trade equally distributed to all participants. No nation is currently actually practicing free trade, although nations differ greatly in the extent to which and the ways in which they carry out their trade.

Increasing scarcity of minerals, and inequalities in domestic political power among states has rendered inevitable competition among states. Economic liberalization has not only heightened the importance of economic security and also has brought about new powerful players in the global economy which are challenging the balance of power.