KWR Special Report

Japan's New "Element" Strategy and Mining Investment: The earthquake that struck in March may have a lasting effect on Japan's global investments in mining and natural resources

By Yuji Nishikawa, Metal Economics Research Institute of Japan

TOKYO (KWR) November 21, 2011 The massive earthquake and accompanying tsunami that hit the coast of Japan on March 11 damaged or destroyed many of the country's mineral refineries and industrial areas important for electronics and automobile parts manufacturing.

Restoration is underway and production is being restarted. It will take at least another six months, however, to completely restore the metals-to-processing-to-part production system that has been disrupted.

In addition, it was inevitable that the export of automobile parts and digital components would decrease, and this has now been holding up production in diverse manufacturing industries around the world.

Furthermore, it has been over six months since the disaster-induced meltdowns at the Fukushima nuclear power reactors, but there is still no resolution in sight and the facilities are being managed to prevent a deterioration of the current situation. Moreover, costs associated with the reactor accidents, such as the clean-up, restoration and compensation, will cost tens of trillions of yen. As a result, while we are now seeing some positive indicators, there is still no clear outlook for Japan's economic recovery from the tsunami and nuclear accident.

At the same time, acquisition of resources overseas by Japanese companies, which has focused mostly on sourcing and government-financed exploration and development activities, has not changed substantially as a result of the March 11 disasters.

It is now anticipated that Japanese production of metals will decline 5% and 10% this year. There will be no way to avoid reductions in corporate profits, and it is unlikely there will be an increase in overseas business activities. This is especially true for mining companies, which have focused on smelting and processing as the availability of capital for exploration and development has become limited, and it may be difficult even to maintain current investment levels.

Although trading companies have not been affected to the same degree as mining companies, there have been decreases in both the import and export of raw materials and manufactured products. This has presented corporate management with some complex issues that need quick resolution. As a result, the recent growth of investment in exploration and development projects will be difficult to maintain.

JAPANESE RESOURCES POLICY

Japan's overseas activity focuses on securing 'target resources', particularly iron ore, base metals, rare metals and rare earths, all of which are essential to maintain and develop its processing industries.

Until recently, Japan has made minimal effort in the exploration and development of gold resources.

The global situation for resource acquisition, in particular the escalating needs of China and the other BRIC countries, and the emergence of more rapidly industrializing countries, means that competition has become increasingly fierce for these target resources.

In recent years, Japanese resource acquisition activity has been undertaken through joint ventures between the government and the private sector, under policies directed at securing stable supplies of raw materials.

In 2009, with the goal of acquiring rare-metal resources in Africa, the Japan Oil, Gas and Metals National Corp (JOGMEC) began co-operative efforts with the Republic of Botswana. Memoranda of Understanding (M0Us) were also signed with the government of Uzbekistan for co-operative exploration and development of uranium and rare-metal resources.

More recently, Japan has had to reduce its dependence on rare earths from China, following China's limitations on export quotas. As a result, JOGMEC has had to allocate funds to seek sources of rare earths elsewhere.

Undersea mineral resource exploration is also being considered, and in 2011 a budget of more than US$100 million has been allocated for future acquisition of these resources.

This has increased the pace of exploration for undersea deposits, cobalt-rich crusts and other minerals in Japan's Exclusive Economic Zone. With this there is an accompanying trend towards investment in the technical development of exploration technologies.

However, it is not clear what affect the damage from the earthquake disaster and nuclear accident will have on such policies and budgets.

PRODUCTION ACTIVITIES

Until now, Japan has invested heavily in overseas mines, including over 40 iron, nickel, copper, zinc and gold mines in Southeast Asia, Australia, North and South America, and Africa. This has been part of its strategy for securing raw materials for Japanese smelters. Most of these investments have been made with the objective of securing a significant and influential, but a minority share of ownership in the target companies.

In addition to involvement by mining companies, such as Sumitomo Metal Mining Ltd, Mitsubishi Materials Corp, Mitsui Mining & Smelting Co Ltd and Pan Pacific Copper Co Ltd (owned by JX Nippon Mining & Metals Corp 66% and Mitsui Mining 34%), the main players include trading companies affiliated with their respective groups, such as Sumitomo Corp, Mitsubishi Corp and Mitsui & Co.

Japanese companies are also managing some mines in which they hold a majority investment share, including the Pogo gold mine in Alaska (Sumitomo Metal Mining), the San Cristobal zinc mine in Bolivia (Sumitomo Corp), the Panasqueira tungsten mine in Portugal (Sojitz), the Pallca zinc mine in Peru (Mitsui Mining & Smelting) and the Atacama Kozan coppermine in Chile (Nittetsu Mining Co).

The operation of San Cristobal and Panasqueira by trading companies marks a recent development for Japanese companies compared to the past, when trading companies would be involved with only a subordinate/minority investment.

Today, Japanese trading companies tend to hold more rights and interests in mines than Japanese mining companies, further illustrating how deeply these trading companies are involved in mining activity.

This style of investment in mines abroad shows the extent, on the production side, to which Japanese steel mills and smelters have become self-sufficient in iron, copper and zinc supply, with investment in mining operations ranging from 30% to 70%.

However, investment in the mining of rare metals to support Japan's high-tech industries is still limited to a few mines, mainly tungsten and molybdenum.

Japanese and Korean smelters, Japanese trading companies and JOGMEC have recently decided to form a consortium to invest US$1.8 billion for a 16% share in a niobium mine in Brazil. Japan and South Korea have similar processing-type industries at the foundations of their respective economies. If international competition for acquiring resources further intensifies, there will likely be a proliferation of such alliances to secure future resource needs.

PROJECT PROGRESS

Japan's overseas exploration and development activities have become more focused in conjunction with the rise in resource prices that has occurred since the financial crisis that began in 2008. These activities in North and South America, Asia and Australia are being undertaken by JOGMEC, mining companies and trading companies. In higher-risk exploration projects, at the initial stage JOGMEC engages in joint-venture agreements with the junior companies that own the concessions.

As JOGMEC is a government-related organization, the rights to its acquired projects are transferred to mining and trading companies when positive results are obtained within a three-year exploration period. It then provides financial support to help private-sector companies that have acquired the rights to procure capital for exploration and development.

To provide a stable supply of raw materials for their own smelters, mining companies have been promoting exploration and development projects around the world to find mineral deposits.

Meanwhile, Japan's trading companies have been taking minor shares in exploration and development projects aimed at providing Japanese companies with raw materials such as iron, base metals and rare metals.

One recent project to have reached the development stage is the Esperanza copper project in Chile (30% investment by Marubeni Corp), which began production this year.

Construction is also progressing toward copper production at other facilities, such as Caserones (100% owned by Pan Pacific Copper and Mitsui), the Quechua mine in Peru (100% owned by PPC), and the Similco mine in Canada (25% by Mitsubishi Material).

For zinc, there is the Rasp mine in Australian mines (wholly owned by Toho Zinc Co Ltd), which is expected to produce ore in 2012.

Other projects that are at the construction stage of development include the Ambatovy nickel project in Madagascar (27.5% investment by Sumitomo), the Rossing South uranium project in Namibia (10.3% investment by Itochu Corp) and the Dong Pao rare-earth project in Vietnam (49% investment by Toyota Tsusho and Sojitz).

Against this backdrop, there has been a recent push to acquire other major shareholdings. Exploration-stage projects for copper, zinc, nickel, rare earths, tungsten, platinum, uranium and titanium are being developed with the involvement of Japanese interests elsewhere in the world.

JOGMEC has started preliminary exploration for copper, molybdenum and gold in the northwest of Laos; zinc and gold in the east of Cambodia; and copper and rare earths in the northwest of Vietnam. Exploration is also underway for mineral sands in Australia and rare earths in Canada. Exploration in platinum-group metals in South Africa is also progressing.

Japan is also helping to identify potential projects in Uzbekistan, Namibia and Mozambique, where intergovernmental MoUs have been signed for co-operative exploration and development of mineral targets.

By co-operating, Japan's government, mining firms and trading companies are all playing their role in procurement of raw materials for the future.

RESOURCE CONFLICT

Being resource-poor, Japan must rely on overseas sources for raw materials for its processing industries.

However, resource suppliers are now becoming resource consumers as economic growth in countries such as China and India shifts to acquisition, creating the possibility of resource conflict.

It has become difficult to forecast the outlook for stable supplies of raw materials. To control supplies, companies are inevitably forced to shift from directly purchased ore/raw materials to financial participation and ownership of mines. Already, the stage has been reached in negotiations for purchasing copper concentrates in which the mining company has the upper hand and the smelting company has little room for price negotiation.

The side that owns and controls resources now has the power to control prices, as is evident, for instance, in the oligopolistic supply structure for iron ore and Chinese restrictions on rare-earth exports.

Given Japan's current condition and the global situation, it is essential to secure raw materials and build and strengthen integrated systems of mining-smelting processing to maintain the country's processing industries.

Therefore, Japan's overseas activities for acquiring resources will intensify and grow, and, despite the temporary slow-down, in the long-term there should be no major deviation from this course.

At the same time, efforts are being made to improve recycling technologies to recover precious and rare metals from discarded home appliances, electronics, mobile telephones and automobiles.

Businesses are already established to recover gold, silver and platinum-group metals, and Japan is investing in recycling projects in Southeast Asia, China and elsewhere. It is highly likely the number of metals targeted for recovery will increase as recovery technology advances.

By viewing metals contained in discarded products as reserves, these products are beginning to be treated as "urban mines".

These are important resources for Japan and other countries, which are dependent on foreign supplies. For Japan, as a technically advanced country, major topics for the future will be how to economically extract useable metals such as rare earths, tantalum, cobalt, tungsten and gallium from urban mines, and whether or not they can be supplied to processing industries as raw materials.

In addition, research is already underway to reduce the quantities of these metals used in manufactured products, underlying the importance of reducing metals consumption as an important element of metals-supply strategy.

FURTHER INITIATIVES

In addition to securing a range of supply routes for its raw material needs, Japan has advocated an "element strategy" under which there will be further research to identify hitherto unknown properties of all the elements and to use the properties of these elements to the fullest extent possible. This strategy is also linked to finding alternative minerals for a range of new and existing goods and processes.

Japan recognizes the potential that new applications for metals will be found from the increased numbers of projects extracting useable metals from urban mines and the knowledge gained from its element strategy.

Japan is replacing the simple and traditional "invest and buy" principle of past metals procurement with innovative and multiple initiatives for securing its industrial raw materials.

As competition for raw materials strengthens, its strategy is developing into a model that all resource-poor industrialized countries must consider adopting.


This interview is part of an ongoing series highlighting Asia-related business, trade and investment opportunities and issues.

KWR International, Inc. is a consulting firm specializing in the delivery of Asia-focused trade, business and investment development, research and public relations/public affairs services for corporate and government clients.

This includes an initiative supported by the Japan Oil, Gas and Metals National Corporation (JOGMEC) and Nippon Export and Investment Insurance (NEXI) to facilitate Japanese investment in the natural resource sector. For more information, please visit http://bit.ly/w0GkLH.


While the information and opinions contained within have been compiled from sources believed to be reliable, KWR does not represent that it is accurate or complete and it should be relied on as such. Accordingly, nothing in this article shall be construed as offering a guarantee of the accuracy or completeness of the information contained herein, or as an offer or solicitation with respect to the purchase or sale of any security. All opinions and estimates are subject to change without notice. KWR staff, consultants and contributors to the KWR International Advisor may at any time have a long or short position in any security or option mentioned.

KWR International Advisor

Editor: Dr. Scott B. MacDonald, Sr. Consultant

Deputy Editors: Dr. Jonathan Lemco, Director and Sr. Consultant and Robert Windorf, Senior Consultant

Publisher: Keith W. Rabin, President



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