Economies Of Scale Driving Mining RegulationMon, 10/22/2018 - 16:30
When seeking to attract more FDI to the mining industry the main driver is not the policy of the country but the scarcity shaping markets, says Alfredo Álvarez, Energy Segment Leader Mexico and Central America at EY. Market dynamics are changing the industry’s concentration share and the prevailing model is that which considers economies of scale. “As long as compliance with antitrust policies is met, the economic trend favors bigger the better,” he says.
The nature of economies of scale is to generate big players. The mining industry worldwide is already dominated by major companies and Mexico is no exception. While in economics fewer larger players dominating the market is generally negative for competition, mining may be an exception. “Mining depends on commodity prices and this means healthy competition will always exist,” he explains. “No company, regardless of how big, will control the price of a given metal.”
To attain higher scales, technology becomes the game changer for the mining industry, leading the way to be better prepared today for the mine of tomorrow. “Mines that have meaningfully invested in technology are reaping results beyond expectations,” says Álvarez. “The availability of accurate information allows taking the right decision at the correct time, minimizing costs and investment.”
But more technology also carries the generalized concern for workforce displacement. Álvarez believes that technology does not necessarily mean fewer jobs but more meaningful ones and with better conditions. With today’s technology, mining can do things that it could not even imagine before. “This does not necessarily mean fewer employees,” he explains. “On the contrary, it can improve their quality of living and pay better wages as employees are more productive. Imagine giving workers more challenging jobs that can also add more value to the industry.”
Ultimately, mining is a tough industry with a lot of controversy and social impact, but also with a significant economic role. Álvarez believes that technology can be a way to enhance the positives and edge out the negatives. To adapt to this changing landscape, he recommends flexibility. “I advise companies to be as flexible as possible to better adapt to communities and changing environments,” he says.
Adaptability is also beneficial when adjusting to regulatory and fiscal changes. While he says that regulations are not the main driver for the industry’s attractiveness, he admits that the better the regulations, the more FDI. Security and corruption appear to be the main problems in Mexico according to the Fraser Institute Index; tackling these would make all industries flourish. “Security has been a key factor for investment in Mexico. But in the end, if commodity prices go up, so does investment,” he says.
To make the industry flourish, he says Mexico also needs to share the wealth from extractive industries with people affected by its operations so communities can feel ownership over the project and pride that mining companies are working alongside them. “It is in the best interest of mining companies to have communities onside, as locals will be the first to protect the source of the wealth that they are getting from mining operations,” he says.
As a strategy to give back to local communities, taxes are meant to redistribute mining wealth. “The Mining Fund aims to use resources to generate infrastructure and goodwill in the communities that mining operates,” says Álvarez. But there is a lot of controversy on how resources are used and if they are really going to the right place. He says companies should take ownership of the process and work to assure that every penny that they pay goes to the right beneficiaries. “Mining companies will be the best overseers to ensure that the funds do not end up in the wrong hands,” he says.