Dr. Mohamed A. Ramady
Publication Date: 
Mon, 2006-04-24 03:00

With oil prices at record highs this year, touching $75 a barrel on Iran and Nigeria oil supply disruption fears, it is not surprising that oil producing countries should concentrate once more on this energy sector — either to try and produce more within agreements in organizations such as OPEC, or outside OPEC. The extra revenues are welcome to most of these countries, which had faced a sharp decline in their oil revenues only a few years ago.

The current oil producer’s preoccupation with increased production and investment in this sector should not be at the expense of countries that have the potential to develop a viable mining sector. Saudi Arabia is truly blessed in that in the hydrocarbon sector, besides having the largest oil reserves in the world, it also possesses the world’s fourth largest gas reserves.

However, to date, the Mining Sector has remained the untapped jewel in Saudi economic development, and it is here that Saudi investment efforts should be concentrated for a more viable and long-term sustainable economic growth.

The reasons are simple: Production of crude oil and selling it to consumers will always have producers at the mercy of erratic supply and demand forces and price movements. Energy sources are many, ranging from nuclear, to renewable and environmental friendly energy sources such as thermo power derived from underground hot water or sun and wind energy. While some of these technologies might be at their infancy, yet technology has a habit of making rapid advances in times of either human conflict or acute needs. Current high oil prices are creating a climate for potential future energy conflicts as well as a move away from oil” addiction “by consumer nations.

It is not surprising that the United States, China, India and other energy-consuming giants are eying each other nervously on who can enter into long-term energy supply agreements.

At the same time, countries such as Iceland are developing their huge hydrothermal energy sources, which could link the Scandinavian countries one day. Nuclear energy, after due safeguards, to avoid another Chernobyl and Three Mile Island type catastrophes, is being rapidly developed as a safe and renewable energy source. As such, it would be economically unwise for large oil producing countries like Saudi Arabia to continue to depend on one source of exports in the long run.

This is where the mining sector comes in. It is no coincidence that the recent economic growth posted by China and India has been fueled by a large demand for imported raw materials, ranging from iron, copper, zinc, aluminum and other mining ores. Countries such as Australia, Canada, Chile, and South Africa have seen a steady increase in their economic growth and standard of living based on their mineral resource economies, unlike the more erratic economic fortunes of the oil producing countries.

Extracting minerals is not just for exports, but can, and does, create clusters of industries that utilize these minerals into final products and generates larger employment than the more capital intensive oil industries. Valuable technical skills are gained and complementary industries arise that support each other in the mining sector. Unlike oil production which tends to be concentrated in few geographic locations, mineral resources can be found in more locations depending on a country’s geological structure, leading to more diverse job creation and economic growth in different parts of a country.

This is the case for Saudi Arabia, which is blessed with a wide range of minerals in the western and southern regions of the country to complement the oil and gas in the Eastern Province. Now is the time to ensure that a young generation of Mining and Mineral engineers graduates from Saudi universities, and for existing Engineering departments to revamp their curriculum to meet mining industry needs. What is also of more importance in the short term is for the private sector and the government to take the necessary steps to start establishing the basic infrastructure for mining operations — railways, refineries and ports.

This is both costly and it also takes time to develop a mining infrastructure. Unlike oil production, it can also be dangerous, especially for underground mining. Most Saudi mining is of the surface, open-cast type, and Saudi safety, health and environmental standards and regulations are world class to minimize accidents in the mining industry.

It is gratifying to note that the Saudi Mining Company (Maaden) recently announced that it was planning for a full privatization of its operations during 2007, and has been actively encouraging foreign direct investment in this sector of the economy, especially from companies and countries with long experience in mining.

A new mining law has been passed, granting licensing concessions on a more investor friendly basis, compatible with international concession agreements. Previously prohibited sectors such as gold mining have been eased. At the same time, bids have been received for building the necessary railway network to support the mining sector.

The issue is not finding the necessary funding for mining projects. How can this be, when recent IPO’s in Saudi Arabia and the Gulf have been so massively oversubscribed in companies with higher risk — return profiles compared to mining, a sector more essential to sustain the current commodity demand from the Far East and other emerging economies?

The question is educating domestic investors on the risk — return characteristics of a commodity based mining sector, and the longer term nature of such investment projects.

For those that take the plunge, the prospects are very exciting, as illustrated by the number of Saudi-foreign company mining joint ventures that have been established. While Saudi Arabia has significant mineral resources in bauxite, phosphate, iron ore, zinc, copper and gold, it also has the world’s largest tantalum reserves.

This is a prime input in the manufacture of electronic circuit boards and capacitors which are used in electronic devices such as DVD’s, digital equipment and cameras. A whole knowledge based economy can be built, just around this mineral resource alone, and again it is gratifying to note that a Saudi-foreign company joint venture has been established to exploit this valuable resource.

Further exploration could reveal other significant mineral finds. The world can always find energy substitutes for oil, but there are finite limits to mineral resources. It is essential that for more meaningful economic diversification of the economy to take place, the mining sector be given a higher priority in the Kingdom, and not be ignored as was the case in the earlier oil-fueled boom years.

(Dr. Mohamed A. Ramady is visiting associate professor of finance and economics at King Fahd University of Petroleum and Minerals.)

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