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Management Report

Management reports, briefs and video-clips issued by Samsung Economic Research Institute

Resource-Rich Countries Emerge as Big Powers

Resource-Rich Countries Emerge as Big Powers

KIM Deuk-Kab

Apr. 16, 2008

Transcript

Welcome to our Video Program. I’m Deuk-Kab Kim from the Global Studies Department.

Economists often speak of the “resource curse.” This refers to countries rich in natural resources who nevertheless still suffer poor economic growth rate and earnings. These days, however, the “resource curse” has become something of an obsolete notion, as resource-rich countries are now becoming increasingly wealthy.

Resource-rich countries generally satisfy the following three conditions. Their exports of natural resources exceed $100 billion per year, resource exports take up more than 10% of their GDP, and their per-capita income exceeds $5,000.

Countries that meet these conditions include Saudi Arabia, the United Arab Emirates, Kuwait, Qatar, Russia, Kazakstan, and Norway, who all maintain large reserves of oil and natural gas. Chile and South Africa are mineral-rich countries, while Argentina is a grain-rich country. Australia, Canada, and Brazil are rich in multiple resources.

Today, we’ll take a closer look at the current situation in resource-rich countries and how to benefit from their increased presence on the global economic scene.

Key factors that are contributing to the strengthened position of resource-rich countries on the global market include impressive economic growth in emerging markets like China and India, which have increasing demand for raw materials. Indeed, China’s growth has been so impressive it is often referred to as a “resource black hole.” Despite rapid growth in demand worldwide, only a small number of countries are blessed with such abundant natural resources.

The top four countries have a combined market share of 65% in iron ore, 62% in wheat, 57% in copper, and 41% in crude oil. Under these circumstances, it is inevitable that these countries will wield ever-rising clout in the global marketplace. Backed by strong exports of natural resources, resource-rich countries accumulated $3.4 trillion in 2003 to 2007, with the level of their national incomes growing at a rapid pace. With about $2 trillion in national sovereign wealth funds, resource-rich countries are emerging as powerful players in the global financial market.

How should Korean businesses respond to the increased economic presence of natural resource-rich countries?

First, they need to grab new opportunities from natural resource-rich countries. Korean firms can benefit in many ways by becoming more actively involved in the development of natural resources, including through industrial diversification and the establishment of social infrastructure.

Strategic decisions on development, of course, play a large role in the development of natural resources. The development and exploration of oil fields is no longer a simple task, due in large part to intentional policies on the part of resource-rich countries to limit supplies and manage their resource wealth as a kind of strategic and diplomatic resource. The development of natural gas fields, however, still provides ample opportunities for participation from foreign companies. Since gas development requires massive upfront capital for gas storage and transportation facilities, resource-rich countries remain reluctant to execute projects alone.

Industrial diversification, pursued widely by oil-rich countries in the Middle East, Russia, and other Central Asian countries, is aimed at cultivating resource-related industries, resulting in rapid growth in demand for plants like petrochemical factories, power generation facilities and pipelines.

The demand for construction and engineering is growing at a torrid pace in resource- rich countries as these countries aggressively pursue the establishment of new towns and social infrastructure. More than 2,000 construction projects are slated for the Middle East from 2007 to 2012, at a cost of more than $1.3 trillion. Resource-rich countries are also expanding investment in IT infrastructure to diversify into information services.

Second, domestic businesses need to adopt a prudent stance between competition and alliances with major resource companies.

These companies earn their profits through grain and natural resources like oil, gas, and minerals. Among the front-runners are three major oil players . Exxon Mobil, Royal Dutch Shell and BP, the three major mineral companies . BHP Billiton, Rio Tinto, and Vale, and the three major grain giants . Cargill, ADM and Bunge.

Resource companies are expanding their business to encompass the entire value chain. In crude oil, for example, resource companies are expanding their business from simple exploitation and drilling into transportation, refining, and sales. Instead of relying simply on capital, they are placing greater emphasis on technological superiority through R&D. They are beefing up R&D investment in state-of-the-art drilling and oil field extraction technologies, information analysis and production management. They are also aggressively pursuing M&As. In the category of minerals, Brazil’s Vale acquired Canada’s Inco, while BHP Billiton attempted to acquire Rio Tinto.

In the global resource market which is now dominated by a handful of major players, Korean companies need to consider participation in resource projects and alliances to secure stable supplies and remain ahead of the global competition to secure resources.

A new age is dawning when the threat of withholding natural resources is increasingly used as a strategic weapon for resource rich countries. Strategies for how and where to secure resources are now emerging as one of the determining factors for business survival. Competition to secure natural resources among individual businesses is now becoming something akin to the past wars between countries over access to resources.

For shrewd businesses, however, this resource war, need not be a crisis, and indeed can offer a wide range of business opportunities. The time has come for domestic businesses to formulate new plans to procure resources over the long-term by entering overseas development projects and carefully monitoring the latest trends in resource-rich countries.

Thank you for watching. I’m Deuk-Kab Kim.

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