TheMetalsAndMineralsSector:An UnderexploredGoldMineForLocal Content?

Contributor:TimHadar,DrMichaelWarner

Whenwethinkoflocalcontent,theconversationnaturallyturnstodevelopmentsinthe globaloilandgassector,whichhashadestablishedandrigidlocalcontentregimesfor manyyears. However,theworldwidemetalandmineralssectorisanotherglobalindustrythathas followedadivergentevolutionwithrespecttolocalcontent,andmaywellhavemoreof animpactonfosteringindigenousindustry. Oilandgasexcellinginlocalcontentcompliance Theupstreamoilandgasindustryhasbeenparticularlyeffectiveinseveralareasof fulfillingitslocalcontentobjectives. Firstly,oilandgascompaniesareparticularlywelladaptedtodealingwiththestringent regulationsthatareimposedwithregardstolocalprocurementtargets.Forinstance, theBrazilianstateownedenergygiantPetrobrashasalocalprocurementplanrequiring 55%to65%localcontentforthegeneralconstructionofdrillingrigs,and20%to40% domesticcontentpolicyfordrillingequipment. Whereasmanybusinessesmightchoosetoconcentratetheirlocalcontentofferingsin particularareasofprocurement,oilandgasentitiesaregenerallyaheadofthecurve withrespecttoconceivingandrollingoutlocalcontentstrategiesthatspanthewhole gamutofexpendituresfocusingnotonlyontheprocurementofcapitalequipment,but alsoeverythingfromfoodstuffstoclothing. Incentivisinglocalparticipation

Theoilandgasindustryhasbeenaforthrightproponentofbuildingdomesticindustrial capabilitiesandfurthertothat,incentivisingtheirmajorcontractingpartnerstobuild intotheirtenderingprocessprovisionstoharnessandexpandindigenousengineering capabilities. AnexampleofthisisSubsea7'srecentlyawardedbilliondollardevelopmentofthePre SaltdeepwaterGuarandLulaNEAreas,locatedintheSantosBasin.Therigidpipelines necessaryfordeepwaterhydrocarbonexploitationwillbemanufacturedatapipeline fabricationspoolbasewhichSubsea7areconstructingfromscratchatParanaguin Brazil'sParanstate. Theminingsectordiggingdeepinthelocalcommunity Thehydrocarbonindustriesmaybesignificantlymoredevelopedwhenitcomestolocal contentdrivenprocurementtargets,butthemetalsandmineralssectormayhavethe upperhandwithregardstothebuildingofskillsandmanagementcapabilitiesofdirect nationalemployees. Thisismostlydowntomanpower.Aminingoperationwillemployasmanyasthreeto fourtimesasmanypeopleasanupstreamoilandgasoperator,simplybecausethe needtophysicallyhavea"manontheground"orunderneaththegroundisgreater necessityinaminingcontext. Forthisreason,metalsandmineralscompanieshaveextensivecareerdevelopment programmesinwhichhomenationalsareprogressedupthecorporatehierarchyforthe benefitofcompanyandcommunityalike. Communitybuildinganonshorephenomenon? Thephysicalnatureofamineisalsooneoftheprimaryreasonswhymetalsand mineralscompaniesareexpertsindevelopingthecapabilitiesoflocallybasedsuppliers ofgoodandservices. Whereasthemajorityofoilandgasassetsarebasedoffshore,miningispredominantly anonshorebusiness,surroundedbyanddrawingonapermanentlocalcommunityfor itsneeds.Dedicationtocommunitycontent,orlocallocalcontentasitissometimes known,isthereforeparamounttothelongevityandintegrationofaminingprojectinto thenationalfabric. WhynationalgovernmentsareattractedtoMiningforthedevelopmentoflocal suppliers

SpeakingtoOil&GasiQ,DrMichaelWarner,DirectorofUKbasedconsultancyLocal ContentSolutionssaid:"Itcouldwellbethattheminingsectorhasevenmoreto contributetodevelopinglocalcontentthantheupstreamoilandgasindustry. "Unlikeoilandgas,manyminingoperationshaveconsiderable'rolling'capital expenditure,whereonaperiodicbasiscompanieswillhavetoreplacecapital equipmentforexampleheavyvehiclesandexcavationequipment" Asopposedtotheoilandgasindustry,wheretheretendstobeaspikeofcapital spendingatthebeginningofaprojectthatrapidlydeclinesaftertheassethasgonelive toasignificantlylowerlevelofoperationalexpenditure,theminingindustrywill experiencethatsameinitialspikebutalsosubsequentandsustainedcapitalspendingas equipmentisreplacedandoperationsareexpandedaboveorbelowgroundovertime. "Theattractionofthisrollingcapitalexpenditureforgovernmentsisthatitpresentsa longtermopportunitytobuilddomesticcapabilityandcompetitivenesstosupplythe miningsector,especiallyinmaterialsandmanufacturing"saidWarner. Aggregatetocapitalisepoolingresourcestoreaprewards "Anotherattractionoftheminingsectortonationalgovernmentsisthepotentialfor aggregatingsuppliermarkets"affirmsDrWarner. "Miningcompaniesparticularthoselocatedinthesamegeographicalsubregionmay beabletoaggregatepartsoftheirprocurementexpenditure,therebyincreasingthe overalldemandforcertaingoodsandservices.Thisthenincreasestheincentivesfor domesticsupplierstoinvestinnewcapabilityandimprovesthechancesoftheirability toraiseriskfinance." WecanseethisaggregationstrategyperfectlyplayedoutintheZambiancopperbelt, whereminingcompanieshavecometogethertoaggregatedemand,thusincentivising domesticsupplierstoinvestinbuildinguptheircapability. Wheretheoilandgasindustryhasbeenamajorharbingerofdomesticdevelopment,it seemsthatthemetalsandmineralssectormayprovetobeanevenricherveininthe localcontentfield.