Sweden – an attractive mining country from a global perspective?
An international comparison
In June 2015, the government commissioned the Swedish Agency for Growth Policy Analysis (Growth Analysis) to investigate Sweden’s attractiveness as a mining country and assess the investment climate in Sweden for mining investments.
Three central issues are analysed in the report:
- How attractive is Sweden’s mining industry for investments in old and new deposits?
- How can Sweden’s attractiveness be improved?
- How does the level of the minerals fee affect Sweden’s attractiveness as a mining country?
The task was formulated so as to focus on the perspective of business economics and developments in Sweden have been compared with a number of our rival countries. The task has not included analysing whether measures to improve Sweden’s attractiveness are justifiable from a societal perspective.
The mining industry is the starting point of a Swedish value chain
Sweden’s mining cluster does not only consist of mining companies; it also includes industries that provide the mining industry with technology and companies that use the minerals produced by the mines. Several collaboration partnerships of this kind have been in place for more than 100 years and they include companies such as Atlas Copco, Sandvik and SSAB. In recent years, IT companies such as Ericsson and Telia have also become part of the mining cluster.
It has been estimated that in 2013, the mining cluster contributed almost SEK 44 billion to the Swedish GDP, the equivalent of 1.3 percent of the GDP. The contribution to the GDP was SEK 128 billion if indirect economic effects from the mining cluster were included.
Is Sweden an attractive mining country?
An international comparison shows that Sweden is one of the most attractive mining countries in the world. Sweden has good physical potential. The costs of infrastructure, labour and energy are comparable to other rival countries. Sweden has an institutional framework that is stable and relatively well designed even though there is room for improvement. The long-standing collaboration that has existed among different lines of business in Sweden’s mining cluster is a contributing factor for Sweden’s attractiveness as a mining country.
How could Sweden’s attractiveness be improved?
A distinguishing feature of Sweden’s mining industry is that about 75 percent of exploration is done by the two large mining companies LKAB and Boliden. This can be compared with other rival countries where about half of all exploration is done by companies that have no revenue from an existing mine and which are relatively small compared with these two Swedish companies.
One reason why some rival countries attract new companies is because they have specific policy instruments that remove some of the risk incurred because exploration is expensive and frequently does not result in an operating mine. Often, a company carries out many exploration projects before it finds a deposit that is worthwhile extracting.
Canada has tax credits for exploration companies that do not own an active mine, where losses or investment costs can be deducted so as to reduce or eliminate tax debts. In Australia, new exploration companies can transfer costs, in the form of a tax credit, to their Australian shareholders who can deduct the cost from other incomes.
Lessons learned from Canada shows that new knowledge and innovations are created and disseminated when new companies are established in conjunction with exploration. However, new companies that choose to follow up exploration by starting to extract minerals are often more sensitive to low raw materials prices than large, established mining companies are. This in turn means there is a greater risk of bankruptcy and thereby increased costs for society, not least for after-treatment.
It is unlikely that Sweden will attract the largest global mining companies. These companies are often specialised in large-scale operations and the deposits in Sweden are too small.
Nevertheless, the government could take on an active role when it comes to generating interest in mining for rare earth metals. These metals are needed for the conversion of the energy system and in modern communication technology. They have been identified by the EU Commission as being essential for the development of new, innovative products. Moreover, the EU’s supply of rare earth metals is vulnerable. The Swedish government could play a more active role when it comes to identifying possibilities and obstacles associated with creating a rare earth metals cluster in Sweden which is similar to the iron ore cluster. The government could participate in the development of such a cluster by stimulating collaboration between the academic community, trade and industry and public authorities. Collaboration of that kind will be needed to develop a rare earth metals industry in Sweden.
How can Sweden’s attractiveness be improved?
Several of our rival countries have an effective tax rate, meaning in this context the total amount of tax paid by mining companies, of 35-50 percent while Sweden has 25 %. The relatively low effective tax rate in Sweden, along with criticism from local residents and conflicting interests and rivalry as regards land use by, for instance, the reindeer-herding industry and tourism, has led to discussion whether the minerals fee should be increased.
However, the effective tax rate for Swedish mining companies says nothing about the consequences of raising, for example, the minerals fee in Sweden. Swedish mines that extract iron, especially underground mines, have relatively high costs compared with mines in other countries. This means that iron mining in Sweden is sensitive to increased costs when the prices of raw materials goes down on the global market. Growth Analysis’ calculations show that if the minerals fee were to be increased, there is a risk that would impede new investments in iron mining. It should also be considered that the revenue gained by increasing the minerals fee would not generate much income to the state. The calculations done for a model mine in Sweden indicate that an increase of the minerals fee from 0.02 percent to 5 percent would give SEK 177 million to the state.
In contrast to iron ore, other minerals and metals are not mined in underground mines which means the costs involved are lower. The mining of these minerals is not as expensive which implies that these companies would be able to cope with increased costs. The same situation applies in other international mining regions. Some of these regions have chosen to differentiate the minerals fee so as to take the company’s ability to pay into account.
One alternative to raising the mineral fee is to impose a tax on high profits that arise in situations when mineral prices are high. Australia has had a system for taxing high profits but it was abandoned since it did not provide the state with the large amounts that had been predicted. Moreover, the system was expensive from an administrative point of view, just like other systems where the framework of rules is controlled by profit assessment.
One way of handling conflicting land-use interests which increases uncertainty for investors is to introduce a “shared value process”, which means collaboration between the government, other related industries, the local community and the mining company. The purpose of this process is to reduce conflict through collaboration and the creation of added value for all interested parties involved in or affected by the mining project. There are several mining regions that have made more progress on this front than Sweden has. In Canada and Finland, this approach has also led to branch organisations taking the initiative to set up their own guidelines.
Certain mining regions have drawn up a strategy which embraces more than just the Swedish part of the value chain. The lesson learned in these countries is that this approach has brought about measures that have contributed to the overall aim.
Innovations will be needed in order to make it possible to produce minerals with only very small greenhouse gas emissions. This development will require the creation of niche markets for these minerals. A prerequisite for this is that there is a reliable labelling system for the environmental impact of minerals.
Recommendations and conclusions
Assuming that Sweden wants to make its mining industry more attractive, Growth Analysis suggests the following measures be considered:
- Conduct an investigation to analyse and design a policy instrument that will reduce financial risks for exploration companies that have no income from mining operations.
- Strive to bring about international labelling of minerals that will facilitate the creation of niche markets through, for example, government procurement requirements or the environmental profiling of customers, and investigate how the government can stimulate developments of this kind.
- Broaden the mineral strategy so it embraces more actors from the mining cluster, thereby creating a more holistic approach.
- Provision of skills - 43 percent of all the work force in the mining industry will have retired by 2025. Measures are needed to encourage young people to choose specialised study programmes that will prepare them for either the mining industry or other parts of the mining cluster.
- Invest in more research and development as regards exploration. Exploration is a basic prerequisite for Sweden’s future mining industry and because of that, it is important to develop technology, for instance, for deep exploration.
- Mining cluster for rare earth metals - an analysis should be done to investigate the obstacles and possibilities linked to developing a rare earth metals cluster in Sweden. The analysis must also identify what measures the government can take to promote such a development.
With regard to increasing the minerals fee in Sweden, this could have negative consequences for iron mining since it could lead to the mines not being profitable. It seems that for copper, there is a margin which could cope with an increase of the minerals fee. However, the income from such an increase must be balanced against the cost of increased administration and complexity. The situation with regard to other minerals must be analysed further before a possible increase of the minerals fee is introduced. However, it should be noted that only raising the minerals fee for certain minerals will mean the principle of tax neutrality will be abandoned.
Instead of increasing the minerals fee, the government can initiate collaboration between local communities and mining companies so as to generate mutual added value. Another alternative is that clearer rules are established concerning the social responsibility of mining companies, with an increased possibility of imposing special conditions in conjunction with mining. However, this must be thoroughly investigated.
The introduction of a tax on extraordinary profits generated by price increases on the raw materials market has proven to be very expensive and has not resulted in much income. Such a policy instrument should therefore be analysed carefully before possibly being introduced.