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The dangers of Quebec's resource nationalism

Appeared in the Montreal Gazette
Release Date: June 5, 2012

With the launch of the Plan Nord, the Quebec government, provincial political parties, and society in general appear to consider mining as a financial windfall and the public debate is now about how to allocate the spoils. Yet we should keep in mind that there is an alternative to this rosy scenario where the commodity "super-cycle" comes to an end and the windfall evaporates. That’s why Quebec politicians should rethink the assumptions contained within their mining policy.

The industrialization and urbanization of China and other emerging countries are the source of soaring demand for commodities, which suppliers are struggling to meet. This has caused prices of non-oil commodities to triple in the past decade and reinforced the view that a commodity "super-cycle" has replaced the volatile market of old.

Higher profits accruing to miners have spurred governments around the world to try and increase their share of this windfall through higher taxes, royalties or even nationalization.

Quebec is no stranger to this evolution. The Plan Nord that will be carried out over a period of 25 years is based on the assumption of rising metals prices and revenues and politicians are busy looking for ways to take advantage of the "mining bonanza."

Following on the suggestions of mining activists and Jacques Parizeau, former premier of Quebec, the Parti Québécois and the Liberal government have given in to the lure of resource nationalism. The official opposition is calling for higher royalties and replacing the current profit-based mining rights with a royalty based on the gross value produced plus a tax on « excess profits ». The PQ also advocates direct equity investments in strategic mining projects. In the same vein, the Quebec government’s latest budget contained ill-advised plans to take equity interests in mining projects.

Investments in mining are very risky. It takes a long time for mining investments to pay off – the process of exploring, developing and bringing a deposit to market can last 20 years. That is why investments have usually been made by the private sector. This new policy of public investment in private projects is definitely not in the interest of Quebecers, especially if metal prices start to go down.

This wave of resource nationalism is based on the premise that the consumption of industrial metals in China and other emerging economies will remain high for a long time. Virtually all who favor higher royalties in Quebec point to the rising price of minerals as a reason for increasing the government’s share of mining revenue.

But is the premise correct and will the mining boom be sustained? Unfortunately there is no guarantee this is the case.

Mining has traditionally been subject to wide swings in commodity prices and experience tells us that there is a definite possibility that the current boom could fade in the future. A recent study by Credit Suisse even wonders if the commodity super-cycle is over. Why?

The super cycle is based almost entirely on Chinese demand, with that country being the largest consumer of almost every metal. China’s share of global consumption in 2011 was 38.6% for copper, 36.7% for nickel, 41.4% for zinc and 43.7% for aluminum. Now China is entering a transition phase from a resource-intensive growth model based on investment in infrastructure and exports to a model based on domestic consumption driven by efficient, value-adding industry and services in which the economy will slow down and metals consumption will be lower. There is obviously a lot of uncertainty as far as the future course of the Chinese economy is concerned. But, if achieved, such a development could affect the global price of metals and, in the long run, has the potential to put an end to the commodity super-cycle.

The imbalance between demand and supply has played into mining suppliers’ interests so far but what will happen if demand decreases and global mining capacity is much higher in 20 years than it is today?

Metals are not an inexhaustible source of income. Quebecers should realize that metals are not like oil; their prices are not set by a cartel but reflect the global supply and demand. Non-oil commodity prices have traditionally fluctuated greatly and, even if the recent super-cycle has been unusual, the old normal may eventually return.

In this context of high uncertainty, demands to increase the government of Quebec’s slice of the profit pie may prove to be dangerous policy for the future of the province’s mining industry.