It is predicted that nearly half of the world’s countries will produce natural resources by 2030, and it is expected that this will lead to a rise in resource nationalism, US-based consultancy firm McKinsey asserted in a new report. According to McKinsey, as most new resource exporters will be low-income exporters, shifting resource exploration into developing countries, foreign companies will need to develop a new approach to collaborating with foreign governments.
Rising demand for natural resources, particularly from countries such as China and India, will likely be met by new natural resource finds in a growing cohort of countries, but McKinsey warned in its report that growing local pressure on developing country governments to share the proceeds of resources exports with their citizens means that extractive firms’ relationships with host governments will be increasingly characterised by tension
“Historically speaking, 90% of natural resources investment had gone into high-income and upper-middle-income countries,” said Fraser Thompson, a senior fellow at McKinsey. “Yet going forward, the share of resource investment outside these two groups – to low-income and lower-middle-income countries – could almost double. More than half of the world’s reserves are in places beyond the OECD [Organisation for Economic Co-operation and Development] and OPEC [Organisation of the Petroleum Exporting Countries]. So the challenges of operating in these environments will be a lot more stringent than they have been in the past.
"An additional source of tension is that resource price volatility is at an all-time high and this puts pressure on the relationship between extractive companies and governments, because when prices significantly increase the governments can feel cheated if their tax return does not go up at the same rate. Another issue is the geological and political risk context in these countries. A lot of these new deposits are in very challenging places to operate.”
Growing uncertainty over whether foreign governments will be more likely to withdraw their exploration licenses or renegotiate existing contracts means that foreign extractive firms will have re-frame their investment strategy in a way that aligns more with local government goals. Also, while growing global demand for natural resources presents substantial commercial opportunities for resources firms, the lack of supportive infrastructure in many developing economies mean that extractive companies will be expected to invest up to $2000bn in infrastructure, to support their resource exploration projects.
While the operating environment of natural resources exporters in the developing world is expected by McKinsey to become increasingly risky, firms that switch their investment strategies from simple extractive activities, to developing more complex partnerships with their host governments that tackle areas such as local employment and local supply chains will secure the most competitive advantage.
“Our research into future resource demand reveals that by 2025 an additional 1.8 billion people will join the global consuming class,” explained Mr Thompson. “This will drive the growth of natural resources demand. Yet extraction companies face the challenge of how to deal with this, in the context of resource nationalism, as they must also make investments that generate the right returns to shareholders.
"We found that after firms decided to invest, there was often a misalignment of companies’ priorities on local economic development with their host government’s priorities. We saw cases where some firms put a lot effort on their environmental performance, yet the host government was more concerned with local job creation. Another issue was that these companies were not effectively communicating some of their innovative practices to the local population. So even if they had some innovative policies on job creation and infrastructure, the local population viewed the firm less favourably.”