The Challenge of Adding Value in Tanzania’s Mining Sector

On 3 March the government of Tanzania announced an immediate ban on the export of concentrates and ores of all metallic minerals. The ban is intended to ensure that “value addition activities,” such as smelting and refining, are undertaken within Tanzania, with the stated objectives of increasing revenue generation, employment creation and technology transfer. By announcing such a policy, Tanzania joins several other resource-rich countries, including Indonesia and Mongolia, which are considering or implementing policies that encourage domestic mineral “beneficiation”– the processing of mined output into a product of higher value – as an alternative to heavy reliance on the export of unprocessed minerals.
 
The Tanzanian government can potentially achieve increased economic benefits through a beneficiation policy. Smelting and refining facilities would provide some employment opportunities, and there could be spillover benefits for related industries through knowledge and technological transfer. In-country processing could also generate additional government revenue in the long term via the sale of a higher-value product and lower transport costs. (Refined products weigh less and take up less space than raw commodities.) It could also lower the risk of tax avoidance. Unlike refined products, the mineral content of ores and concentrates can vary considerably, increasing the risk that companies might underreport the value of their exports. Recent government comments suggest suspected tax avoidance is one of the primary reasons for the ban—though the risk of misreporting is likely to be lower now that the Tanzania Minerals Audit Agency (TMAA) can effectively assay samples.
 
The most obvious impact of the ban to date is on copper concentrate, which London-listed Acacia Mining Plc recovers during the processing of gold at two of the country’s gold mines. The gold bars produced can still be exported given their refined form. However, with no in-country capacity for smelting and refining copper concentrate, the company has been required to suspend its export until further notice. Acacia, the country’s largest gold producer, has indicated that copper concentrate represented 30 percent of its revenues in 2016. Extractive Industries Transparency Initiative (EITI) data suggests that Acacia contributed 37 percent of Tanzania’s mineral revenues in 2013/14. Other projects would also be significantly affected going forwards, including three prospective large-scale nickel projects which are scheduled to commence operations in the next few years.

 
Critical factors for consideration
 
While there are potential benefits to increased value addition in Tanzania’s minerals sector, the current policy may or may not achieve the intended impact. There are a number of factors that government officials should consider as they plan implementation of this policy.
 
Immediate opportunity cost. The government will suffer an immediate fall in mineral revenues as a result of the export ban. Development of smelting and refining facilities will likely take at least three years, so revenues will be lower for some time, reducing the government’s ability to address the country’s urgent development needs . The opportunity cost will be even greater if the affected companies decide to halt exploration or move production operations completely.
 
Different costs and benefits across minerals. As discussed briefly below, the costs and benefits associated with smelting and refining copper concentrate are different from those for other minerals. Applying this policy to all metallic minerals rather than targeting those that are more likely to generate benefits is likely to reduce chances for success. 
 
The commercial viability of smelting and refining facilities. While economies of scale are less important for smelting and refining nickel, large-scale economies are required for copper plants to operate profitably. In a 2011 study of the viability of a copper smelter, TMAA suggested that the volumes currently being produced in Tanzania would not generate the necessary scale economies for a smelter to be profitable. Cost levels also depend on the quality of the feedstock. TMAA indicated that Acacia’s output tends to be blended with that of other producers before being smelted, given its lower quality. The discovery of further copper reserves and/or the import of copper concentrate from elsewhere in the region may therefore be necessary for smelting and refining facilities to operate profitably in Tanzania without government support.
 
Potential for additional revenues. Smelting and refining increases the export value of some metallic minerals by only a small margin. A 2013 Indonesia study by Nathan Associates indicated that refining can add significant value to nickel but generally adds little to the value of copper concentrate. The increase in the value of the gold and silver contained in concentrate is minimal, while the price differential between the concentrate and refined copper is only around 4 to 6 percent. Concurrently, the cost of constructing and operating smelting and financing facilities is significant, especially when scale economies are limited. Therefore any increase in export value may be negated by higher costs, resulting in lower, not higher, government revenues.
 
Impact on other sectors and diversification. Smelting and refining facilities require considerable financing. Government support may be necessary, such as through a public-private partnership. However, this could reduce the government’s capacity to provide similar support to other productive sectors. These facilities also require significant power, but a reliable power supply will likely mean diverting energy from elsewhere. In both cases, the government’s efforts to diversify Tanzania’s economy would be hampered while exposure to the inherent volatility of the minerals sector would increase.
 
Investment environment. While it seems the government and industry have been discussing this issue  for some time, the imposition of the ban with immediate effect—including on existing projects—is indicative of an increasingly unpredictable policy environment. The impact that this has on the decision-making of both current and potential foreign investors could be significant. This has specific implications for the success of this policy. Given the scale economies required to overcome prohibitively high smelting and refining costs, any reduction in investment in the upstream–either due to already-present mining companies slowing operations or would-be new investors shying away from Tanzania–will affect the viability of investing in the downstream. It also has implications for the wider economy at a time when investment in Tanzania’s large offshore gas deposits is still uncertain. Engagement with industry and the development of a consensus on this process is now all the more important to reduce uncertainty and ensure that Tanzania continues to attract investment.
 
While there are potential benefits to increased value addition in Tanzania’s minerals sector, there are also a number of potential costs. These costs and benefits will vary for different minerals. A comprehensive cost-benefit analysis, specific to each mineral and undertaken in consultation with industry, is therefore a crucial next step in the implementation of this policy.
 
Thomas Scurfield is an economic analyst with the Natural Resource Governance Institute (NRGI) in Tanzania.