Neither right nor wrong!
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Gemstones are minerals found in Sri Lanka.
Ryan started his story: “Everything around us is made of what was either grown-up or dug-up”. In fact, he quoted it from Lang Hancock, an Australian mineral business tycoon who discovered the world’s largest iron ore deposit in Australia in 1952.
“Really? That’s interesting!”
I responded.
Ryan Rockwood is a professional in the mining industry with Cambridge University qualifications and international experience in many different countries. He is now the General Manager of Puttalam Ilmenite Ltd. Some time ago, I happened to be seated next to him at a conference venue. Our intermittent conversations that day ended with an agreement to meet again.
And as I realised, he had a fascinating story to tell me about the mining industry in Sri Lanka. And I was eager to listen to him too, although it was an “unknown territory” for me to walk into.
One fine evening, as agreed, we met at the Colombo Swimming Club for our free conversation on the topic – the mining industry. Although I am not jumping into any conclusions, which might easily go wrong too, it is absolutely worthwhile listening to an expert on the subject, like Ryan. Towards the end of this column, you may understand why!
Risky business sector
I decided to write today’s column with extracts from Ryan’s analysis, after seeing in last week’s Sunday Times two important news reports from the mining industry. One was about a British mineral sands company going to Sri Lanka’s Appeal Court against the country’s mineral sector regulator – Geological Survey and Mines Bureau (GSMB). The case is related to the GSMB’s unexpected cancellation of the company’s industrial mining licence, reportedly acquired after an investment of around US$ 11 million on preparatory activities.
The second news report was about a demand by the Chamber of Mineral Exports from the Sri Lankan government to reform its contradictory policies over the mineral industry. The issue is that the government wants to make the mineral industry a thrust sector, but the government’s own “red tape” dampens the industry development.
Unlike most of the other industries, perhaps, mineral industry requires a massive investment over a long period of time for preparation, while it has a relatively shorter time period of operation to generate income. The operational stage is about one-third of its lengthy life cycle which may take about 15–25 years.
The initial stages of the life cycle of a mining business runs into about 10 years, incurring only costs with no incomes for exploration time, permits and feasibility time, and construction time. Then only the business can start operations and generate income and profit. After completing mineral extraction too, then there is closing time, which also incurs costs only.
Therefore, when things go wrong half-way through, it only brings about costs to whoever the party that has to bear the costs – the investor or the government or the economy! This points to another important issue; mining is relatively more risky than any other business.
Shelf life of mineral deposits
“Yes, everything!” Ryan looked around the room where we were seated – ceiling, floor, walls, doors and windows, furniture, and things on our table – our coffee cups, hand phones and my notebook!
“Yes, everything that we produce! For example, this coffee mug…!” he pointed to the cup of the coffee that I was sipping. “…All the material that has been used to make this cup should have come from the earth, and they have been dug-up”.
He continued further: “The notebook you are using, from a plant that has grown-up. The shoes you are wearing…! It could be leather from an animal or natural rubber from a plant, both are grown-up things. If it’s synthetic rubber, obviously its material has been dug-up from the earth.”
Ryan made the point that he wanted to get across: “The problem is that what is grown-up can be grown again. But what is dug-up is dug-up and gone forever. There we have no option, because there is no reproduction for what is being dug-up.”
Therefore, naturally there is a perception that we must protect our mineral deposits. And that perception has influenced overwhelmingly to shape our policies and regulations, environmental lobbying, and social disapproval over the mining industry. Sometimes we choose to keep our mineral deposits buried under the ground without using them. For instance, we like to keep our Eppawala phosphate deposit underground as it is, while we continue to import urea fertiliser for our agriculture.
Although we think we can keep it buried as a treasure, we must also know that everything has a “shelf life” – the period of time that it has a usable value. Shelf life of mineral deposits too become redundant when there are better substitutes discovered or invented. It has happened throughout our human history, and it is happening even at a faster rate now.
Policy thrust and value addition
Sri Lanka has three types of mineral deposits; mineral sands, graphite and phosphate. In spite of rich geological deposits with world-class high value, the whole mining sector contribution has been no more than 2 per cent of GDP, while mineral exports which are mostly in raw material form account for less than 0.5 per cent of total exports.
Fully government-owned Pulmoddai mineral sands company has been extracting, sorting and exporting the same raw material for the past 65 years. The graphite story is even more pathetic than mineral sands. Ceylon graphite has been world famous in the 19th century, when Sri Lanka used to be the world’s largest graphite supplier exporting about 30 per cent of world demand. Today, with only its two graphite mines still functioning out of about 40 mines which existed in the early 20th Century, Sri Lanka exports less than 1 per cent of world supply.
At almost every policy forum dealing with industrialisation and development of the country, promoting “value addition” in the mineral sector is highlighted. The government effort and public interest both are to discourage mineral exports in raw material form, but to add high value at the downstream processing, which has so far been hardly realised.
It is easier to say than to work on it, because unlike many other industries promoting the mineral industry as a “value-added” sector has to overcome many detrimental challenges. In the first place, further processing for value addition in Sri Lanka lacks essential chemical inputs, stable power supply, knowledge and skills, technology, and large capital investment. It shows that, it is necessary for Sri Lanka to depend on foreign investment partnerships. Moreover, mineral extraction should take place on a large scale in order to derive economies of scale as anticipated by the foreign investors.
Against all these requirements, there are protests by the political, environmental and social lobbing groups. Value addition itself generates a large stock of hazardous residuals from the mineral industry, while Sri Lanka does not have a standard waste disposal mechanism.
The world’s biggest iron ore and mineral sand producer, Australia has not chosen to engage in downstream processing rather than exporting the output in raw material form. It is not because the country doesn’t have the investment capital, technology, knowledge and skills, but largely because of the hazardous waste disposal issue. When Australia has 7.8 million square km of land mass including vast deserts, what do we say about the small island of Sri Lanka with 65,000 square km?
Rich, but poor
The mineral sector is highly regulated all over the world, but such regulations should not deter private investment and should not create business uncertainty. However, when the regulations turn to be “red tape” we won’t be able to make use of our rich mineral deposits for our benefits either.
And, of course, the more the regulatory hassles, the greater would be the room for corruption as well. In a country where rule of law is weak, the room for corruption becomes ever bigger.
Ultimately we have been sitting on a treasure but continued to live and die as a poor nation. You might ask the question so what’s my point. There is no right or wrong answer to the question. The point is that we must make better use of the country’s rich mineral deposits as a thrust sector, but the decisions should be evidence-based and research-based, rather than be driven by political motives or opinions and perceptions.
(The writer is a former Professor of Economics at the University of Colombo and can be reached at sirimal@econ.cmb.ac.lk and follow on Twitter @SirimalAshoka).
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