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8. Mine rents and mineral prices

As formulated during the early 1970s, the Third World's claim for the recovery of rent for the mines (or oil fields) was linked to the states' claim for control over natural resources. In fact, historically, the question of the nationalization of mining (or oil) fields had been raised, on both ideological and practical grounds before the possibility of fixing the price of raw materials on the international market arose. It was with the Arab-Israeli war of October 1973 and the oil price imposed by OPEC that the idea emerged of a possible durable increase in the price of raw materials emerged. The Third World countries had never before considered the possibility of fixing, let alone increasing, the international market price of the primary products they exported. In addition, nationalization and taxation seemed the only ways to increase the state's revenue.

The idea of a revaluation of mineral resources assumes that the relatively low price level incorporates an implicit rent for the consuming countries as they pay much less than they should, on the basis of a normal price. When this price level is increased such implicit rent disappears and an explicit rent accrues to the producing countries. This rent must be distinguished from the differential rents related to differences in quality, in proximity or in access between different fields and expressed by the price system. The internationalization of the market for the main minerals during the last three decades has resulted in only one price on that market for each given mineral, and this price is necessarily based on the highest production costs, so that those producers who incur lower costs, benefit from additional incomes which correspond to the differential rents.

World trade in iron ore, copper and bauxite represents a very high proportion of the world demand; the standardization of the minerals according to the requirements of technology and transport reinforces the trend towards a unique market for each product. Differential rents are important for copper and bauxite, the production costs being much lower in the Third World than in Europe and North America; and for iron ore, which has a much higher metal content in Brazil and Australia. Additionally, transport costs, included in the import prices, influence export prices. The import prices for a given product in a given market must, indeed, be identical, whatever the product's origin. therefore the export price of minerals from distant locations must be lower than those from closer ones. These differential rents are generated through the free play of the price mechanism and do not depend upon enterprises' or governments' intervention on the market.

It may be useful here to recall some elements of economic theory to define the nature of this implicit rent that the Third World producing countries want to recover. Rent, like wage and profit, is a category of income distribution in capitalist society. The wage is paid to the workers and the profit is the income of the entrepreneurs, but the rent is paid to individuals or governments who are not involved in production but are owners of the land or the subsoil. The rent has no productive counterpart and is founded on property rights that limit the access of capital to the land or to the mineral deposits. It is a kind of tax paid by the capitalist to the owner of the land or the field he is exploiting. The concept of rent could be extended to any income derived from a property right, such as dividends or interest, and this would correspond to the usual sense of the word 'rentier'. Also, the notions of 'technological rents' or 'monopoly rents' are frequently used to characterize the incomes transferred within the industry through the price system, such as the temporary extra-profits of the innovating enterprises or the extra-profits that accrue to firms holding monopolistic positions. Classical economic theory, however, analysed only ground rent, and in a more restricted sense. Classical ground rent is founded on the heterogeneity of cultivated lands which are owned by individuals other than the capitalists, that is, the landlords; this ground rent is generated by the price mechanism. The increase of the wheat price, due to the growing demand for food, allows the cultivation of less fertile land with higher production costs and creates the (differential) rent for the more fertile land. Yet the oil rent emerged only with the deliberate fixing of a higher price by OPEC and not following the spontaneous evolution of the price level. In other words, the oil rent resulted from a voluntary restriction of supply rather than from a natural increase of demand.

Likewise, the increase in the prices of mineral resources can only be the outcome of the exporting countries' collective decision on the international market. Some neo-liberal theoreticians propose to analyse the oil rent as a classical differential rent, based on the increasing costs of oil production. They see OPEC as a disruptive element in the free play of the market, but they forget that for decades the big oil enterprises held a monopoly over oil extraction, transport, refining and marketing.

Some Marxist economists analyse oil rent in terms of differences between the oil price and the production costs of its substitutes, such as shale oil, synthetic gas or liquefied coal. They explain that, before OPEC's intervention, the oil price was based on the average social labour, that is, lower than the maximum social labour, corresponding to the production cost of the most expensive substitute. But this is an a posterior) rationalization of the oil price rise rather than an analysis of the oil rent. It is true that the gap between the price of a given mineral and the production costs of its substitutes determines, at a given time, the maximum margin for the price increase. But the mere existence of such a gap cannot by itself induce an increase in the mineral's price. Moreover, the nature of the substitutes and their production costs are not static, since they depend on technology, and the technical changes in the mineral industry are much more important than what Ricardo thought about agriculture in his time. Lastly, these technical changes are, in turn, induced by the increase of the mineral's price, as we can see with the development of alternative energy sources following the oil price rise.

In fact, the theory of the 'absolute rent' in agriculture developed by Marx seems more relevant for an analysis of the mines' rent. The absolute rent is founded on the private property of the soil, which limits the access of capital to land and restricts the circulation of capital between industry and agriculture. It is not, therefore, dependent upon the differences in fertility or in production between the cultivated lands. Marx thought that the 'organic composition of capital', that is, the ratio of means of production to labour, expressed in labour value, was lower in agriculture compared to industry, and he explained the formation of the absolute rent by the absence of free circulation of capital between the two sectors. In Marx's analysis, if capital had free access to the land, that is, if the land was not privately owned, the equalization of the profit rates would entail a value transfer from agriculture to industry. According to Marxist theory, indeed, in a competitive capitalist economy, the equalization of the profit rates implies a value transfer from industries with a low organic composition of capital to those with a higher one. Therefore, the absence of such equalization between industry and agriculture allows the latter sector to sell its products at their labour value and to retain that portion of its surplus value it would have otherwise lost to the benefit of industry. It is this part of the surplus value retained in agriculture that Marx defines as an absolute rent. This analysis implies that the absolute ground rent derives from the value created by the workers in agriculture and that it is not, therefore, an income transferred from industry. In other words, unlike the differential rent, the absolute rent would not oppose the landowners to all capitalists but only to those of the agricultural sector. Such an analysis implies also that the level of the absolute rent is objectively determined for a given technology, since the rent is equal to the difference between the individual labour value of agricultural commodities and their theoretical production price. Lastly, the absolute rent is supposed to be generated by the market mechanism.

Is it possible to analyse the mines' rent in these terms? We know, first, that the mining industry is highly capital intensive, usually much more so than most other industrial activities. And if we admit that the 'organic composition of capital' is higher in mining than in the manufacturing industry, Marx's analysis no longer holds for the mines' rent. A limited access of capital to the mineral fields would, in this case, imply that minerals are sold at an individual labour value which is less than their theoretical production price. The manufacturing industry would thus benefit from an absolute rent, which is quite absurd if this is the outcome of Third World states' limitation of Western capital's free access to their mineral resources. The Marxian assumption of a lower organic composition of capital in agriculture as the technical basis of the absolute rent, is clearly unacceptable for mining, and the opposite assumption makes the absolute (mines') rent disappear completely. But in Marx's analysis, the hypothesis about the lower organic composition of capital is actually combined with the monopolistic property of the land, without which the absolute ground rent could not exist. The absolute rent should, therefore, be based only on private or state monopoly over the land or the subsoil. The landowners (in agriculture) and the government (for mineral resources) can, on the basis of this monopoly, impose a higher price for the products of the soil or the subsoil, either by fixing a rental or by directly influencing the selling price.

The absolute rent, like the differential, is an income transferred from industry to agriculture or to the mining sector. The mines' rent, however, presents some peculiarities in comparison with the ground rent. State monopoly of the subsoil must, indeed, be effective, which means that it cannot be reduced to a formal property right, and its effectiveness must be on an international scale. The concession system, which was so advantageous to foreign capital's mining activity in the Third World, was based on the formal property of the local state, and we have seen that, in most cases, this is still the situation in African mining countries. Only the effective nationalization of foreign mining assets and the development of mining activity under state control can erect barriers to prevent the entry of foreign capital in the Third World and enable the local government to impose a higher rental for the exploitation of its natural resources or a higher price for its product on the international market. Moreover, the internationalization of mineral production and consumption implies that the exporting countries must establish a collective monopoly of the subsoil in order to be able to determine the international price level of their resource and/or a high rental for their fields. The landowners need not form a coalition or become farmers to impose the ground rent on the capitalists of other sectors. But the mining state of the Third World must be involved, at least partially, in mining activity and in an international cartel in order to benefit from the absolute mines' rent. If, however, the state is at the same time the owner of the fields and the producer of the minerals, it becomes very difficult to distinguish between rents and profits in its income. But if we admit the existence of a trend towards the equalization of profit rates on a world scale within the mineral industries, the mines' rent could be defined as the mining state's income surplus over the world average profit realized in its mining activity.

The finite character of mineral deposits has led to the definition of a 'scarcity rent', which corresponds to the depletion cost of the deposit, just as the amortization allowance corresponds to the depreciation of fixed capital. But since prospecting does not always lead to the discovery of new deposits this cost could also be defined as the cost clearly incurred by a country because of the reduction of its mineral reserves. Such a scarcity rent would be then a component of the price of the mineral, and it would be fixed by the state according to a given social rate of discount. The legitimacy of this rent was recognized, however, only after the political decision of OPEC to increase the oil price.

In Marx's analysis, the maximum level of the absolute rent is limited by the labour value of agricultural commodities, and the general profit rate is undetermined because of the absence of profit rate equalization between industry and agriculture. If we abandon the assumption of a lower organic composition of capital in agriculture to make the absolute rent depend only on the private or state ownership of land and natural resources, its upper and lower limits, as fixed by Marx, which correspond respectively to the labour value and to the theoretical production price of the land's products, no longer exist. The level of the rent is then undetermined, since it depends now on the 'rapport des forces' between the landowners and the capitalists or, for the mines' rent, between the mining state on one side and foreign capital and importing countries on the other. There are, however, limits within which the level of the mines' rent must necessarily be determined. The lower limit is given by the 'normal world price' for the mineral, including a 'normal profit rate' in conditions of oligopoly, as we have seen how the mineral industries display an oligopolistic structure at the world level; the upper limit is given by the production cost of the mineral's closest substitute.

The increased level of the mines' rent by the increased price of the mineral induces new and profitable investments in the production of substitutes, and, depending on the income and price elasticities, it may even entail the reduction of demand for the mineral concerned. Such reactions could halt or even reverse the initial price increase. Moreover, in the long run, the upper limit fixed for the mines' rent is not given once and for all, as the cost of substitutes depends on the level of the world profit rate and the technology which determines the costs of labour and other inputs. This upper limit can, therefore, be lowered, following a change in the market structure or an improvement in the technology, especially as technical changes that reduce the production cost of substitutes are obviously stimulated by the price rise of a given mineral.

These theoretical considerations will have shown, at least, that the rent claim goes well beyond the classical demands of Third World countries in favour of a stabilization of raw material prices and the terms of trade. Even stabilized prices for the raw products exported by the Third World would, indeed, be too low if the production costs of substitutes, the finite character of mineral deposits and the possibilities of setting up collective monopolies at the international level are considered. The claim for mines' rent aims at upsetting, rather than stabilizing the relative price system between raw materials and industrial products on the world market.

Before we leave economic theory it may be necessary to recall that the question of the mines' rent must be clearly distinguished from that of the 'unequal exchange' between Third World and advanced economies. The different versions of the theory of unequal exchange emphasize the implicit transfer of value, incorporated in the world price system, from the Third World to the developed capitalist (and sometimes socialist) countries, either because of differences in labour productivity or wage rates or market structures. The mines' rent corresponds, by contrast, to a value transfer from developed to underdeveloped countries.

In fact, with the exception of oil, such a 'reverse transfer' remains a purely theoretical prospect for the minerals exported by Third World countries. And even for OPEC, the oil rent it succeeded in extracting during the mid-1970s has been progressively eroded.

Except for bauxite, the exporting countries have been unable to decisively influence the prices of minerals on the international market because they have never succeeded in acting collectively, as did the OPEC countries. Real prices for iron ore and copper have actually fallen during the last two decades. Since 1965, the constant dollar price of refined copper on the London Metal Exchange has fluctuated around a declining trend, but it decreased sharply after 1974, even on the New York market (see Table 8.1).

Table 8.1 Current and constant prices of copper ($US per tonne)

Source UNCTAD, Commodity Trade and Price Trends, 1986.

The London market represents only a marginal share of world copper trading and its prices are sensitive to very small changes in supply and demand, which thus determine wide fluctuations in world copper prices.

The fall in real prices has been as important for iron ore, as can be seen in Table 8.2.

The price fluctuations for iron ore are, however, less important, as transactions are mostly based on long term contracts. Prices are now determined in reference to the export prices of the Swedish and Brazilian ores rather than to the US domestic prices as was the case when the international iron ore market was controlled by US steel enterprises, thanks to their captive mines in South America and Liberia.

Table 8.2 Iron ore prices ($US per tonne)

Source: UNCTAD, Commodity Trade and Price Trends, 1986.

For copper, as for iron ore, the development of powerful state companies in the Third World, especially in South America, has led to acute competition on the international market, which, of course, aggravated the impact of the world crisis on mineral prices. Codelco of Chile, in particular, has increased its copper output considerably since the late 1970s. The production costs of Chilean copper are the lowest in the world and Codelco is now one of the very few mining enterprises still making profits. Significantly, the US group Kennecott, which was nationalized in the late 1960s, is at present negotiating its return, as a minor partner, with the Chilean government. The Chilean production costs are about 60 US cents per pound of copper, while during the 1980s the prices on the London Metal Exchange have oscillated between 62 and 70 cents. The Chilean government wants to double its copper output now more than one million tons - within ten years. Meanwhile, in North America, where production costs vary between 80 cents and one dollar per pound, producers are closing several mines, leaving about half of the mining capacity idle. Recently, eleven US producers urged the Reagan administration to impose quotas on copper imports. If Chile and Peru benefit from the present situation on the international copper market, however, things are quite different for the African producers, who have higher production costs. Thus in Zambia, the profits of the mining companies fell from 270 million kwachas in 1974 to 14 million in 1981 and one year later the mining sector recorded a loss of 174 million kwachas. Its contribution to the gross domestic product fell from one-third in 1974 to one-tenth in the 1980s and its contribution to the state budget also fell from 340 million kwachas to zero. The purchasing price index of Zambian copper on the international market has decreased over the past ten years, from 100 to 26, and the per capita income has fallen by one-third since 1974 to its 1965 level! External debt amounts to more than $4 billion (for a population of seven million) and debt servicing now absorbs all export revenue. Since the 1970s copper output has decreased markedly and, if copper still provides nine-tenths of export receipts - which makes some observers think that Zambian production is subsidized to earn foreign exchange - two-thirds of production costs (equipment, energy, transport, expatriates' salaries) are paid in hard currency.

The same situation prevails on the international market for iron ore, as Brazil is playing the same role as Chile's for copper, with the same consequences for the other producers, especially the African ones. The giant mine of Carajas is being developed while world demand is stagnating due to the steel crisis. At the same time, most of the iron mines, in developed as well as in Third World countries, are running deficits both because of the rising costs of mining production and because of the fall in world prices; the situation of the African exporting countries is catastrophic. In Liberia, the losses of the mining companies were already significant in the late 1970s, and NIOC could not even pay the wages of its workers. In Mauritania, SNIM is also incurring losses in spite of its recourse to foreign capital participation; and iron exports are no longer sufficient to cover the import needs of the mining sector.

The situation for bauxite prices was quite different, as shown in Table 8.3.

Table 8.3 Current and constant bauxite prices of Jamaican ore ($US per tonne)

Source: UNCTAD, Commodity Trade and Price Trends, 1986.

Prices rose very sharply after 1974, owing to the initiatives of the International Bauxite Association and especially of its Caribbean members. But, in the 1980s, prices have tended to decline, although the level of real prices remains substantially higher than in 1973. Also, nominal price fluctuations for bauxite are far less important than those for copper and iron ore. It is true, as we have seen, that the vertical integration of the aluminium companies has been reduced by nationalizations in the Caribbean countries, but the aluminium oligopoly still remains strong enough to be able to control the fixing of prices on the international market for bauxite. This also helps to explain why the world crisis did not hit the bauxite-aluminium industry as brutally as it did the copper or iron industries. By contrast, the weakening of the Western oligopolies in copper and iron ore production and the concomitant growth of Third World state companies, in the context of stagnating world demand, led to more acute price competition on the international market, which accentuated the fall in prices initiated by the crisis.

As for uranium, nominal prices increased markedly in the late 1970s and then tended to stabilize (see Table 8.4).

Table 8.4 Average nominal prices for uranium concentrates ($US per lb)

Source. Official government documents.

According to other data, the Nuexco (Nuclear Exchange Corporation) index, which is based on the marginal transactions, has evolved as is shown in Table 8.5.

Table 8.5 Average price based on marginal transactions ($US per lb)

Source: Nuclear Exchange Corporation.

The explanation for the strong price increase in the 1970s (Table 8.4) lies not only in the growth of demand following the policies of energy diversification, but also in the secret decisions of the undeclared cartel which was set up by the main producing firms. In the early 1980s the price movement was, however, reversed with the slackening of uranium demand and the increase in stocks within the consuming countries.

In all cases, the price of the ore represents only a small proportion of the price of the corresponding metal. Thus, the price of iron ore was equivalent to one-tenth of the price of steel in the EEC in the early 1970s and since then the proportion has even decreased. In Japan, which is by far the biggest importing country, the iron ore price index was 100 in 1969 and 189 in 1979, while that for steel went from 100 to 321 during the same period. The price of bauxite corresponded to 5% of the aluminium price in 1973 and 10% ten years later, although in relative terms its rise has been far from negligible. The same is true of uranium, which represents a very small fraction of the price of nuclear electricity, and the uranium cartel did multiply the price of ore concentrates by nine without reducing the profitability of investments in nuclear energy.

Only copper ore represents quite a high proportion - around two-thirds - of the price of such copper finished products as rods, sheets or tubes. This is due to the fact that in most cases, copper ore, which has a very low metal content, is processed before being exported, so that the copper sold on international markets is already a metal in its quasi-pure form.

This relative price system, which favoured the metal products, and the developed economies where they are mostly produced, was not upset during the 1970s even for minerals such as bauxite and uranium which have shown quite important price increases. The relative stability of such a price system means that the Third World mining countries have failed to impose any rent on the buyers of their mineral products. Their mining companies are no longer able to obtain the average world profit for their operations. In particular, the African bauxite and uranium producing countries are no less affected by the crisis than others; Guinea and Niger are running huge external deficits.

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