Time to mine resource companies

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Time to mine resource companies

In the last six years, Korea’s self-sufficiency in oil and natural gas has improved substantially thanks to its concerted efforts to tap natural resources abroad. Still, the nation’s competitiveness in securing oil, copper, iron ore and other vital commodities remains comparatively low, due to its passive risk-taking as well as a lack of know-how and experience in resource exploration and development.

Korea urgently needs to cultivate resource companies that can spearhead acquisitions and exploration. Such global firms would be tasked with securing resources in the global market in which a small fraternity of majors dominate, including Anglo-American giants such ExxonMobil and BP; cash-rich state enterprises from emerging economies like China National Petroleum Corporation and Gazprom; and Japanese general trading companies, which have abundant experience and global networks and are the main players.

The local economy needs new growth engines. Its core industries such as IT and shipbuilding have matured and are especially susceptible to global economic swings. But the nation’s industries are also positioned to achieve synergy in their competitive plant engineering technologies and infrastructure construction to extract natural resources.

Natural resource projects have advantages such as longer life cycles and potential for massive long-term profit. But they carry huge risks during the exploration stage and diplomatic and security considerations. In order for a Korean-style resource major to be successful, it is necessary to apply the strategies of Japanese general trading companies or European later-comer majors, as these countries and Korea all lack resources but have strong competitiveness in manufacturing. Japanese general trading companies are leveraging their know-how accumulated through years of trade and brokerage, and companies in resource-poor European countries are resorting to strategies combining the advantages of privatization and vertical integration with state-level diplomatic support.

In Korea’s case, active government support is imperative to ameliorate the business risks and local concerns attached to overseas projects. It is especially important to incorporate the capabilities of both private and public companies to form specialized companies with a vertically integrated structure that includes everything from resource development to processing and sales. The structure would help ensure stable profits and lower risks as prices on commodity markets and economic conditions fluctuate.

Considering its global manufacturing capabilities and government policy and diplomatic support, Korea will need to take action on three levels. First, it needs to incorporate exploration and extraction capabilities of state and private companies to reduce costs and improve performance. It is also crucial to secure bases in regions where Korea has friendly relations such as Southeast Asia and Central Asia. In this phase, functions that serve the public interest, such as social support and environmental protection, should be strengthened to solidify the reciprocity of social and environmental responsibilities.

Second, improvement is needed in soft-power capabilities with a specific focus on cultivation of professional experts and enhancement of technological power. There are more than 10,000 specialists working in the exploration and development units of global majors, but Korea has fewer than 500 resource experts statewide. It is therefore necessary to expand resource-specialized universities in areas such as petroleum and minerals, and establish a national resource center that aims at researching technologies and strategies related to resource exploration, extraction and processing.

Third, it is important to implement bold risk-taking strategies. The exploration success rate for a global player tends to range from 20 to 30 percent, but for Korea, it is only 10 to 15 percent. Hence, the government should provide risk mitigation measures for the active investment in resource development by private companies. The financing system currently in operation should be maintained to induce corporate participation. The system covers 85 percent of investment costs if a resource development project fails and collects a certain percentage of profits if the project succeeds.

by Park Hwan-il

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