Our client, a leading International Financial Institution, was tasked with providing guidance on the development of a sector strategy for the economically critical resources industries within a central Asian country.
The primary goal of this project was to provide guidance to both the national authorities as well as officials working with them within the international agency to better understand the barriers and policy levers to enhanced economic and broader societal contribution of the mining industry. The client engaged CRU to support an open and informed debate on some of the available policy options (and associated risks and trade-offs) as part of preparations for an actionable reform agenda, including with regards to the following questions:
- What is the outlook for sector development by commodity, sub region and project?
- What are the principal drivers and barriers to enhanced sector development?
- What could be the role of infrastructure enhancements in unlocking economic value from the mining sector and crowding in additional investment?
- To what extent does the energy transition present risks and opportunities to the domestic mining sector?
- What are the implications of current fiscal policy choices on project government revenues and industry investment?
Our recommendation
We found the domestic mining industry to be competitive across a range of products, with market access and economic outcomes heavily determined by development and policy choices in China. Key barriers to capacity expansion included access to water, access to power, transport costs, governance and the fiscal regime, and social and environmental issues. Infrastructure investments, particularly in railways and to a large extent in water distribution, were found to substantially benefit the mining sector in terms of increased profitability, market access and investment. The implications of low carbon transition for the mining industry appears mixed, with clear upside for base metals demand and downside for coal. However, the implications for steel raw materials demands were found to be limited given the high grade, moderate production costs and sound access to key regional markets in China.
CRU Consulting also analysed key infrastructure bottle necks, and their implications for future industry development. This is illustrated by the chart below which shows the changes in production between the base case and transport scenario case, as well as the % of local water supply consumed from the mining industry in the region. One of our key findings was that long-term supply is constrained by present infrastructure limitations such as water access.
Our analysis further found that fiscal policy was broadly in line with mainstream international practice, but identified significant trade-offs involved in arranging alternative equity structures for key strategic assets. Recovering the loss of revenue from dividend streams would typically require a range of invasive policy measures, though CRU also identified a variety of actionable institutional options available to reduce downside on existing assets. Rearranging state ownership of key strategic assets is at the heart of the policy choices facing the government.
Our methodology
Drawing on CRU’s market leading cost benchmarking tools which are widely used to guide private sector investment decisions, this section presents our inhouse view of the cost position of national mining operations. In particular, our analysis compared the cost structure of domestic miners against global peers, including both on-site costs and a high-level comparison of freight costs. This flow chart of provides a high level overview of CRU’s Consulting’s approach to scenario modelling for this project.
We subsequently undertook a detailed diagnosis of barriers to asset development on a case by case basis. The aggregated economic and sector outcomes were subsequently “risked” using sophisticated methodologies to explore the implications of various infrastructure investments, fiscal policy changes, and shifts in demand and market access associated with low carbon transition. Particularly for fiscal policy changes, the sensitivity analysis proved insightful.