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NEW CHALLENGES: MINING INDUSTRY MAY BE LEFT HOLDING THE BABY
by Emmanuil Lazarian
Thursday, July 18, 02:02
The foreign markets seem to be preparing some new surprises for our
economy after its relative post-crisis revival. The Central Bank is
reluctant to soften its fiscal policy for fear of inflation, while
the Government is bogged down in its paper reforms and is unable to
do anything practical to improve the economy.
Just as some five or ten years ago, today, our economy remains lowly
diversified and highly dependent on external factors, particularly,
private money transfers (of which 70% come from Russia) and the global
prices of gold, copper and some other metals (which have made up at
least 1/3 of our GDP in the past years). It was these two factors that
kept the rotten ship of our economy afloat before the crisis of 2008.
But being just a couple of two thin sails, they were unable to stand
the storms of the crisis, and were it not for the money borrowed from
Russia and some international donors, the ship would surely sink,
leaving us to face some unpredictable social aftermaths.
Now that the global economy is recovering, our economy seems to
be reviving, but it is still unable to overcome the turbulence of
declining business, growing unemployment, chronic social apathy and
continuing migration. As a result, our key donors, the IMF and the WB,
expect a low 4.2% economic growth for this year in contrast to the
official upward projections. For the next year they predict an even
lower 4% growth. Their key arguments are not so much our own risks
and bottlenecks as stagnating economy in Russia and slumping energy
and metal prices in China, India and some other Asian "monsters."
Unluckily for us the global prices of gold and metals - our key export
items - are quickly declining.
The point is that all developing markets - and Armenia can already
be reckoned as one - depend on external demand (be it demand for
raw materials or demand for industrial products). Low demand leads
to low growth. For example, in Turkey GDP growth dropped from 9.2%
in 2010 to 2.5% in 2012. In Russia it went down from 4.3% to 3.4%
in 2011-2012 and may reach 2.5% this year. But the biggest danger for
developing countries will be a decline in China. Already today that
country is recording a drop in foreign investments due to worsening
prospects of its economy. The same is happening in other developing
countries. In Armenia last year direct foreign investments slumped
by 40%. Partly that slump was due to the past elections but mostly
it comes from the current global trend.
All countries are trying to resist it by attracting foreign
investments, softening their fiscal policies, boosting their exports,
increasing their currency earnings and tax revenues, creating new
jobs. All this is crucial for macroeconomic and social stability.
Today, nobody can say how low the gold and metal prices may fall.
Their decline is making people panic. Lots of metal is piled up in
warehouses in the United States and Europe, with the offer gradually
exceeding the demand and the threat of overproduction looming large
in the near future. According to a top manager from the Chinese
mining industry, this year cathode copper consumption in China will
start to grow after three years of decline, but the demand for other
commercial metals will drop following industrial crisis in Europe,
the key sales market for China.
However, the gold market that has constantly been amazing the analysts
by its record highs is perhaps becoming the most unpredictable market.
Now that prices are dropping, gold workers realize the need for the
production cost decline. But it is impossible to achieve that without
extra investments. Large companies investing in technologies and having
some safety cushions can hang on without essential job cuts, while
"junior" companies may come across big problems, even suspension of
their activities. Investors keep an eye on the gold production cost,
because, as William Tankard, Research Director, Mining at Thomson
Reuters GFMS, has said, if the gold price is 1200 USD/ozt, nearly
half of the gold mining industry starts suffering losses. He does
not think most of the gold mining enterprises will suddenly announce
their closure. Tankard believes that the process will go on gradually.
What will stop the fall in the yellow metal prices? Shortly after
Bernanke announced the closing up of the "quantitative easing"
measures, traders and analysts started showing more interest in other
market segments they had paid no attention to for many years before,
because the investments flowed to the gold market. Denis Alexandrov,
CEO at Auriant Mining (Russia), says in an interview with Prime
(Russia) that in 2003 the gold price was 300-350 USD/oz, and the
cost was 150 USD/oz. He says that now gold costs 1400 USD/oz, and
the production cost is over 600 USD. He thinks it is a temporary
situation when the gold price is dropping and the cost of production
is even growing. The most important thing is to overcome this period,
because sooner or later either the price will go up or the production
cost will go down. He believes that industry cannot live in price
scissors and he hopes that there will be no such a situation. Anyway,
one should be ready for it, he says. Some analysts forecast the gold
prices to drop to 800 USD/oz.
Thus, the problem of survival of even such a strong sector of Armenian
economy as the mining sector is becoming especially relevant. However,
it may also face the risk of being sacrificed to maintain the targeted
macroeconomic indices. For instance, lapidary production was once
declared a priority; however, in the mid 2000s the priority of this
sphere was forgotten and sacrificed for macroeconomic stability and
floating exchange rate. The enterprises that had received serious
foreign investments to be upgraded eventually found themselves
under double pressing - currency and tax pressing. As a result,
most of them closed down and now the country lacks such a field,
and thousands of specialists have left the country. Tax lawsuits have
lasted for many years. Shoghakn Plant, the lapidary flagship, found
itself in a similar situation. It has become an Armenian tradition
to bite the hand that feeds you. It cannot be ruled out that this
is a well-considered foreign policy, a policy of the forces that
consider any economic strengthening of a country to be a headache
tantamount to death. This policy is often self-confidently supported
by the so-called specialist-officials, whose key advantage is to be
capable of "jawboning" any housewife from the TV screen.
Despite the ecological costs, the mining sector of Armenia is
undoubtedly an economic advantage of our country and has an essential
multiplier social effect. Today the role of the state is to maintain
and protect it against the strong external negative factors and
to prevent recurrence of the sad fate of the lapidary sector for
instantaneous benefits, no matter state or private. The unfavorable
climate cycle may be rather long. It may last for several years,
mayn't it?
http://www.arminfo.am/index.cfm?objectid=8DC873E0-EF2C-11E2-A5CA0EB7C0D21663&view=displaypageArticleWithCommen t
by Emmanuil Lazarian
Thursday, July 18, 02:02
The foreign markets seem to be preparing some new surprises for our
economy after its relative post-crisis revival. The Central Bank is
reluctant to soften its fiscal policy for fear of inflation, while
the Government is bogged down in its paper reforms and is unable to
do anything practical to improve the economy.
Just as some five or ten years ago, today, our economy remains lowly
diversified and highly dependent on external factors, particularly,
private money transfers (of which 70% come from Russia) and the global
prices of gold, copper and some other metals (which have made up at
least 1/3 of our GDP in the past years). It was these two factors that
kept the rotten ship of our economy afloat before the crisis of 2008.
But being just a couple of two thin sails, they were unable to stand
the storms of the crisis, and were it not for the money borrowed from
Russia and some international donors, the ship would surely sink,
leaving us to face some unpredictable social aftermaths.
Now that the global economy is recovering, our economy seems to
be reviving, but it is still unable to overcome the turbulence of
declining business, growing unemployment, chronic social apathy and
continuing migration. As a result, our key donors, the IMF and the WB,
expect a low 4.2% economic growth for this year in contrast to the
official upward projections. For the next year they predict an even
lower 4% growth. Their key arguments are not so much our own risks
and bottlenecks as stagnating economy in Russia and slumping energy
and metal prices in China, India and some other Asian "monsters."
Unluckily for us the global prices of gold and metals - our key export
items - are quickly declining.
The point is that all developing markets - and Armenia can already
be reckoned as one - depend on external demand (be it demand for
raw materials or demand for industrial products). Low demand leads
to low growth. For example, in Turkey GDP growth dropped from 9.2%
in 2010 to 2.5% in 2012. In Russia it went down from 4.3% to 3.4%
in 2011-2012 and may reach 2.5% this year. But the biggest danger for
developing countries will be a decline in China. Already today that
country is recording a drop in foreign investments due to worsening
prospects of its economy. The same is happening in other developing
countries. In Armenia last year direct foreign investments slumped
by 40%. Partly that slump was due to the past elections but mostly
it comes from the current global trend.
All countries are trying to resist it by attracting foreign
investments, softening their fiscal policies, boosting their exports,
increasing their currency earnings and tax revenues, creating new
jobs. All this is crucial for macroeconomic and social stability.
Today, nobody can say how low the gold and metal prices may fall.
Their decline is making people panic. Lots of metal is piled up in
warehouses in the United States and Europe, with the offer gradually
exceeding the demand and the threat of overproduction looming large
in the near future. According to a top manager from the Chinese
mining industry, this year cathode copper consumption in China will
start to grow after three years of decline, but the demand for other
commercial metals will drop following industrial crisis in Europe,
the key sales market for China.
However, the gold market that has constantly been amazing the analysts
by its record highs is perhaps becoming the most unpredictable market.
Now that prices are dropping, gold workers realize the need for the
production cost decline. But it is impossible to achieve that without
extra investments. Large companies investing in technologies and having
some safety cushions can hang on without essential job cuts, while
"junior" companies may come across big problems, even suspension of
their activities. Investors keep an eye on the gold production cost,
because, as William Tankard, Research Director, Mining at Thomson
Reuters GFMS, has said, if the gold price is 1200 USD/ozt, nearly
half of the gold mining industry starts suffering losses. He does
not think most of the gold mining enterprises will suddenly announce
their closure. Tankard believes that the process will go on gradually.
What will stop the fall in the yellow metal prices? Shortly after
Bernanke announced the closing up of the "quantitative easing"
measures, traders and analysts started showing more interest in other
market segments they had paid no attention to for many years before,
because the investments flowed to the gold market. Denis Alexandrov,
CEO at Auriant Mining (Russia), says in an interview with Prime
(Russia) that in 2003 the gold price was 300-350 USD/oz, and the
cost was 150 USD/oz. He says that now gold costs 1400 USD/oz, and
the production cost is over 600 USD. He thinks it is a temporary
situation when the gold price is dropping and the cost of production
is even growing. The most important thing is to overcome this period,
because sooner or later either the price will go up or the production
cost will go down. He believes that industry cannot live in price
scissors and he hopes that there will be no such a situation. Anyway,
one should be ready for it, he says. Some analysts forecast the gold
prices to drop to 800 USD/oz.
Thus, the problem of survival of even such a strong sector of Armenian
economy as the mining sector is becoming especially relevant. However,
it may also face the risk of being sacrificed to maintain the targeted
macroeconomic indices. For instance, lapidary production was once
declared a priority; however, in the mid 2000s the priority of this
sphere was forgotten and sacrificed for macroeconomic stability and
floating exchange rate. The enterprises that had received serious
foreign investments to be upgraded eventually found themselves
under double pressing - currency and tax pressing. As a result,
most of them closed down and now the country lacks such a field,
and thousands of specialists have left the country. Tax lawsuits have
lasted for many years. Shoghakn Plant, the lapidary flagship, found
itself in a similar situation. It has become an Armenian tradition
to bite the hand that feeds you. It cannot be ruled out that this
is a well-considered foreign policy, a policy of the forces that
consider any economic strengthening of a country to be a headache
tantamount to death. This policy is often self-confidently supported
by the so-called specialist-officials, whose key advantage is to be
capable of "jawboning" any housewife from the TV screen.
Despite the ecological costs, the mining sector of Armenia is
undoubtedly an economic advantage of our country and has an essential
multiplier social effect. Today the role of the state is to maintain
and protect it against the strong external negative factors and
to prevent recurrence of the sad fate of the lapidary sector for
instantaneous benefits, no matter state or private. The unfavorable
climate cycle may be rather long. It may last for several years,
mayn't it?
http://www.arminfo.am/index.cfm?objectid=8DC873E0-EF2C-11E2-A5CA0EB7C0D21663&view=displaypageArticleWithCommen t