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Coal, cost and culture: Part 1

World Coal,

The outlook for Colombia’s beleaguered mining sector is relatively shaky. Gold mining projects face the most risk, but even Colombia’s large coal sector is vulnerable to labour strikes and demands from local communities for increased investment, as well as attacks from armed groups. Over the past two years, the mining sector has earned a largely negative reputation following safety accidents, environmental disasters and complaints from local communities, in addition to growing concern about armed groups’ exploitation of illegal mines.

Production capacity

The Colombian coal industry is well-established and makes a significant contribution to the country’s economy. Coal accounted for 25% of the country’s exports in 2011 and, although not a major producer in absolute terms, Colombia has risen to become the world’s fourth largest exporter of coal. This is attributable to relatively low levels of domestic consumption when compared with the US and China, which frees the majority of production for export. Traditionally North America and Europe were the main export markets; however, in recent years Colombia has sought to diversify its export markets to gain traction in Asia and Latin America. The country is home to the largest opencast coal mine in the world and the largest coal mine of any kind in Latin America. Proven Colombian reserves are measured at 502.9 million t.

Coal production reached 94.6 million short t in 2011, following consistent production increases since the turn of the century. Production doubled between 2000 and 2010, with the government aiming to repeat that success by doubling coal production by 2019. In the short term, the goal is to increase output by 115,000 tpa by 2014. However, coal production in H1 2013 fell by 13.4% due to severe disruption caused by industrial action. All major producers were affected, the largest being the Carbones del Cerrejón consortium, comprising Anglo American, BHP Billiton and Glencore Xstrata. The second largest producer, Drummond International (a joint venture between US-based Drummond Co. and the Japanese Itochu Corp.) was also affected. Together, these two companies contribute approximately 1.6% of Colombia’s GDP.

State involvement in the coal sector

Government participation in the coal market has been severely curtailed since the implementation of a new mining code in 2001. The legislation restricted the government’s role in the sector to that of a regulatory and administrative body, with the government having previously sold the stakes that state-owned Colombia Coal held in the Cerrejón Zona Norte (CNZ) project. The sector is now entirely controlled by domestic and foreign private companies.

It is unlikely that the current Colombian Government will push for outright resource nationalisation, due to the impressive returns that foreign investors have brought to the country. The government appears to be hesitant to make any controversial decision relating to the mining industry in the run up to next year’s presidential election. Evidence of these political considerations have been seen in other mining industries, particularly gold. However, increasingly damaging strikes and worker disruption could indicate the possibility of a change in policy after the election.

The government has been trying to promote mining sector reform more broadly, with the implementation of a new National Development Plan (NDP) in 2011 and the creation of a National Mining Agency (ANM) the following year. The NDP manages environmental concerns surrounding new mining developments, while the ANM is responsible for coordinating the sale of mining rights and realising the country’s potential income from the sector. By managing the mining sector more effectively, the government hopes to reverse the trend established under the previous administration of rapidly increasing the number of licenses granted without due regard and protection for environmentally important areas.

The expiration of the mining code in May looks unlikely to negatively affect the sector – and could even benefit mining companies by limiting legislators’ opportunities to demand higher taxes and royalties on mining production. The government included legislation in its NDP that will cover certain environmental policies related to the mining sector once the mining code expires. Officials from the ANM also expressed confidence that they can effectively regulate the sector via decree.

On a positive note, the administration is unlikely to submit mining code legislation to congress this year; legislators will be unable to pressure the government to raise royalty rates. Concerned with declines in the growth rates of investment and production, President Juan Manuel Santos and his administration will continue to reject efforts by some legislators to increase the government’s tax take for the sector.

Still, the problems surrounding mining code reform – which are caused by the government’s struggles to undertake required consultations with affected communities – reflect the difficulty of passing legislation that requires prior consultations with Afro-Colombian and indigenous communities. It is also indicative of how communities are able to effectively mobilise to delay legislation and projects that they oppose. While such consultations are not binding, it is clear that local communities are improving their ability to organise, mobilise and use Colombia’s court system to try to delay projects that could affect them.

Written by Dr Elizabeth Stephens, JLT Specialty Ltd.

Part 2 of this article is available here.

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