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                                    Editor's Note

    'rhe- documents contained in this volume are in all cases reproductions of the origi-
    nals -- as delivered in Caracas, the summer of 1974; made available in New York
    City by the U. N. ; or gathered in various places by the reporters and editors of
    Ocean Science News.

    No attempt has been made to edit the documents, merely to shorten them where the
    repetition is obvious.

                                   TABLE OF CONTENTS

                                                                               page

    I. General Introduction to the Law of the Sea Conference in Caracas in 1974   3

    HI. Economic Implications of Seabed Mining
         A. Note by the Chairman of the First Committee in Caracas               1
         B. Report of the Secretary-General on the Economic Implications
            of Seabed Mineral Development in the International Area             34
         C. Reports on Particular Metals Submitted by the U. N. Conference
            on Trade & Development (UNCTAD)                                    124
                1. The Effects of Production of Manganese from-the Seabed,
                   with Particular Reference to Effects on Developing Country
                  -Producers of Manganese Ore                                  131
                2. An Econometric Model of the Manganese Ore Industry           155
                3. The Effects of Possible Exploitation of the Seabed on the
                   Earnings of Developing Countries from Copper Exports         174
                4. The Impact of Cobalt Production from the Seabed              186

    HIl. The Work of the First Committee in Caracas
         A. Summaries of individual delegates' statements                      226
         B. First Committee Accomplishments
                1. Report on Informal Meetings                                  249
                2. Draft Articles Considered (1-21)                             255
                3. Text Prepared by the Group of 77                             275
                4. Working Document Prepared by the EEC Countries               279
                5. Japanese Working Paper                                       285
                6. Statement of Activities of the First Committee               292
                7. Concluding Statement on the First Committee's Work           297
                8. Full text of remarks by C. W. Pinto (Sri Lanka)              300
                9.    i t                 D. G. Crosby (Canada)                 313
               10.    i t                 Shinichi Sugihara (Japan)             319
               11.    it                  the Delegation of the
                   German Democratic Republic                                   327
               12. Full text of remarks by Elisabeth Mann Borgese               336

    IV. The U. S. Position
         A. Address by John R. Stevenson Before the First Committee            342
         B. Statement by Leigh S. Ratiner to the First Committee               349
         C. U. S. Working Paper on the Economic Effects of
            Deep Seabed Exploitation                                           353
         D. U. S. Draft Appendix to the Law of the Sea Treaty Concerning
             Mineral Resource Development in the Intl. Seabed Area              365
         E. Statement by John R. Stevenson to the Senate Foreign Relations
             Committee (5Sep74) Upon His Return from Caracas                    373

                          UNITED  NATIONS
                                  Press Section
                           Office of Public Information
                              United Nations, N.Y.
             (FOR USE OF INFORMAT.ON Mr,"     NOT AN OFFICIALI RECORD)

    Background Release                                         P-ess Release SEA/18
                                                          28 May 1974

                   THIRD UNITED NATIONS COMPERENCE ON LAW OF SEA
                       TO MEET AT  CARACAS   .). JUE-29 AUGUST

          Goal is toA'o t Compr ehensive Convention and Set UP  chinery
                      To Reguate International Sea-Bed Area

         Nearly 150 nations have been invited to gather in June at Caracas in an
    effort to write a new set of binding international ru.es governing human
    activities in the two thirds of the eaw:.Ai- area covered by oceans.

         The Third United Nations Conference on the Law of the Sea, meeting in the
    Venezuelan capital for 10 weeks from 20 June to 29 August, has been convened
    by the United Nations General Assembly "to adopt a convention dealing with all
    matters relating to the law of the sea".

         As part of this task, the Conference will seek to create a body of rules
    and an international machinery governing the area'and resources 'of the vast
    reaches of ocean bottom that lie beyond the jurisdiction of any State. The
    aim will be to write laws acceptable to all nations for the once impenetrable
    ocean depths that have been called the last frontier of man on earth -- a vast
    storehouse of minerals and energy that humanity is quickly learning how to
    exploit.

         The subjects for the Conference were set out by the General Assembly
    in 1970, in resolution 2750 C (XXV). They are,in the words of the resolution:

         -- The establishment of an equitable international regime -- including
    an international machinery -- for the area and the resources of the sea-bed and
    the ocean floor, and the subsoil thereof, beyond the limits of national
    jurisdiction;

         -- A precise definition of the area;

         -- A broad range of related issues including those concerning:

                -- The regimes of the high seas, the continental shelf, the
                  territorial sea (including the question of its breadth and the
                  question of international straits) and contiguous zone;

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              --  Fishing and conservation of the living iesources of the high
                  seas (including the question of the preferential rights of
                  coastal States);

              --  The preservation of the marine environment (including the
                  prevention of pollution);

              --  Scientific research.

         In deciding last November that the mandate of the Conference should be to
    adopt a convention dealing 'wi th all. matters relating to the law of the sea,
    the Assembly asked the Conference to bear in mind tthat the problems of ocean
    space are closely interrelated and need to be considered as a whole".

         Five years of preparatory work have gone into this.Conference, beginning
    with studies on an international regime for the.sea-bed and later expanding into
    all of the other highly complex and interrelated aspects of sea law.  Hundreds
    of draft treaty articles, submitted by dozens of States, have been sifted'by a
    preparatory body set up by the General Assembly.in 1968.-- the Committee on the
    Peaceful Uses of the Sea-Bed and the Ocean Floor beyond the Limits of National
    Jurisdiction,

         One of the main documents before the Conference will be the six-volume,
    1,060-page report of the Sea-Bed. Committee on its 13 weeks of meetings at New
    York and Geneva last year.  The report sets out the Comititteets attempts to
    consolidate these proposals into draft articles -- mostly in several alternative
    versions for each article -- on which the Conference can base its work'.  '

         The Conference held an organizational session at United Nations Headquarters
    from 3 to 15 December, at which it elected its officers, decided on its
    committee structure and began discussing its draft rules of procedure.  H. Shirley
    Amerasinghe (Sri Lanka), who was Chairman of the Sea-Bed Committee from 1969
    until it was dissolved last December, was unanimously elected President of the
    Conference.

        .Most of the substantive work of the Conference is to be carried on in three
    main committees of the entire membership. According to present plans which
    await formal approval by the Conference, Committee I will deal with the
    international regime and machinery for the sea-bed, Committee IIwith other
    aspects of the law of the sea, and Committee III with preservation of the marine
    environment and scientific research.

         (The officers of the Conference and its ''committees are listed at the end
    of this release.)

         Foreseeing that still more work might be needed after the Caracas session,
    the Assembly decided last November, "if necessary, to convene not later than
    1975 any subsequent session or sessions as may be decided upon by the Conference
    and approved by the General Assembly" /Lresolution 3067 (XXKV111/. The
    Government of Vienna, as noted in the Assembly resolution, has offered Vienna
    as the site for the Conference in 1975.

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                                                           Press Release SEA/18
                                                           28 May 1974

        Earlier Conferences on Sea Law

         The first United Nations Conference on the law of the Sea met at Geneva
    in 1958, with 86 States participating, and produced fenc international
    conventions. They cover the territorial sea and contiguous zone, the high
    seas, fishing and conservation of the living resources of the high seas, and
    the continental shelf.  There is also an Optional Protocol of Signature
    concerning the Compulsory Settlement of Disputes.

         The Convention on the Territorial Sea and Contiguous Zonc provides that
    the sovereignty of a State extends over its territorial sea, It includes
    rules for determining the baseline from which the territorial sea is measured,
    but does not specify the width of this zone. It also deals with the
    jurisdiction of the coastal State over the zone contiguous to the territorial
    sea,  (46 States are parties; in force since 1964,)

         The Convention on the High Seas provides for freedom of the high seas and
    deals with specific problems, including the nationality of ships, piracy,
    pollution and submarine cables. (54 parties; in force since 1962.)

         The Convention on Fishing and Conservation of the Living ResouCes of
    the High Seas contains a general obligation to adopt conservation measures
    when necessary, supplemented by other specific obligations.  (35 parties;
    in force since 1966.)

         The Convention on the Continental Shelf gives coastal States exclusive
    rights to exploitation of the mineral and other non-living resources of the
    continental shelf, but specifies that those rights shall not affect the high
    seas lying above the shelf. (53 parties; in force since 1964.)

         The Optional Protocol of Signature concernin_ the Compulsory Settlement
    2of Disute provides for resort to arbitration, conciliation or the
    International Court of Justice to settle disputes over the interpretation of
    any of the Conventions on the Law of the Sea. (34 parties; in force since 1962. )

         A second Conference was called by the General Assembly in Geneva in 1960
    to seek to resolve disagreements over the breadth of the territorial sea and
    fishery limits. However, the 82 States represented were unable to adopt any
    substantive proposal on these matters.

         Sea-Bed Committees Established

         !t [was not until 1967 that legal questions involving the sea were again
    the subject of an Assembly resolution. At that time the Assembly created the
    first Committee on the sea-bed, a 35-member ad hoc body which was replaced the
    following year by the Committee that later became the preparatory body for the
    Law of the Sea Conference. Originally consisting of 42 members, the second
    Committee was twice enlarged until it became a 91-member body in 1971.

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         One of the initial tasks of the Committee when it was set up under Assembly
    resolution 2467 A (XXIII) of 1968 was to elaborate legal principles and norms
    for international co-operation in the exploration and use of the sea-bed and
    ocean floor.  The Committee devoted most of its first two years to this effort,
    leading up to the adoption by the Assembly in 1970 of the Declaration of.
    Principles Governing the Sea-Bed iad the Ocean Floor, and the Subsoil Therpof,
    beyond tht Iimits of National'Jurisdiction (resolution 2749 (XXV]))

         The Declaration, the first internationally agreed set of principles covering
    this vast arba of ocean, space, begins with the principle that the international
    area of the sea-bed and its resour'ces "are the common heriLtage4of mankind!' and
    shall not be subject to appropriation by any means by States or persons".:
    (For further details of the Declaration, see the section on the sea-bed below.)

         The Committee's discussions on the Declaration of Principles brought out
    clearly that the issues of the law of the sea are closely intertwined -- that
    it is impossible to consider one part of ocean space without reference to the
    other-parts.  Accordingly, at the same time thit it adopted the Declaration the
    Assembly decided that it would convene the Third United Nations Conference on
    the law of the Sea.

         Beginning in i97l1, therefore, the Committee's work was broadened to cover
    all aspects of the law of the sea, focusing on preparations for the Conference.
    It conducted much of its work in three sub-committees of the whole, with the
    following mandates:

         Sub-Committee I -- to prepare draft treaty articles embodying the
    international regime, including an international machinery, for the area and
    resources of the sea-bed beyond the limits of national jurisdiction.

         Sub -Cmmittee II -- to prepare a comprehensive list of subjects and issues
    relating to the law of the sea and to prepare draft treaty artieles thereon.

         Sub-Committee III -- to deal with the preservation of the marine environ-
    ment (including the prevention of pollution) and scientific research, and to
    prepare draft treaty articles thereon.

         (This sub-committee structure provided the model followed by the Conference
    in dividing its work among three main committees.)

         The pattern of work followed by each sub-committee. was roughly the same:
    a general debate on the main issues, followed by the creation of working groups
    which attempted to prepare draft treaty articles on the basis of proposals and
    working papers submitted by.delegatigns.  Politicians, lawyers, economists,
    technicians and scientists held no fewer than 469 formal meetings and countless
    informal ones between 1970 and :1973, including lOf) meetings of thae (rommi.tt.e,
    204 meetings of the sub-.ommittees and 161 meetings of working groups4

                                       (mcre)

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                                                           Press Release SEA/18
                                                           28 May 1974

         List of Subjects and Issues

         Before the treaty drafting work could begin in earnest, however, the
    Committee had first to agree on a list of subjects and issues relating to
    the law of the sea -- a kind of skeleton on which to hang the flesh cf treaty
    articles. This assignment, given to the Committee by the Assembly in 1970,
    took two years to accomplish -- another reflection of the complexity and
    interrelatedness of the issues involved. The result was a list of 25 main
    headings and a number of subheadings, drafted by Sub-Committee II and approved
    by the Committee in 1972 (document A/8721, pages 5-8). The Assembly decided
    last ypar that this list should be taken into account by the Conference when
    it goes about its task of adopting a convention.

         The 25 main-headings follow, with an indication of the issues which the
    Committee singled out under each one:

         1. International regime for the sea-bed and the ocean floor beyond
    national jurisdiction:  Six issues are listed under-tis heading:  nature and
    characteristics; structure, functions and powers of the international machinery;
    economic implications; equitable sharing of benefits bearing in mind the
    special interests and needs of the developing countries, whether coastal or
    land-locked; definition and limits of the area; and its use exclusively for
    peaceful purposes.

         .2. Territorial sea: The list identifies four main aspects for study
    in regard to this area (the zone which is closest to the coast and subject
    to the coastal State's sovereignty): nature and characteristics, including the
    question of the unity or plurality of regimes in the territorial sea;
    historic waters (those traditionally belonging to a particular State); limits;
     innocent passage in the territorial sea; and freedom of navigation and over-
     flight resulting from the question of plurality of regimes in the territorial
     sea,

          The issue of limits is further subdivided into two parts: first,
    question of the delimitation of the territorial sea and the various aspects
     involved; and second, breadth of the territorial sea, whether global or
    regional criteria should be used, and the different issues raised by open
     seas and oceans, semi-enclosed seas and enclosed seas.

          3.  Contiguous zone:  This was defined in the 1958 Convention on the
     Territorial Sea and the Contiguous Zone as an area beyond the territorial sea
     but no more than 12 miles from the coast. The list of subjects and issues
     gives three subheadings: nature and characteristics; limits; and rights of
     coastal States with regard to national security, customs and fiscal control.

          4. Straits used for international navigation: To be dealt with under
     this heading are innocent passage as well as other related matters including
     the question of the right of transit.

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                                                           Press Release SEA/18
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         5.  Continental shelf:  The 1958 Convention on the Continental Shelf says
    this term is used as referring "(a) to the sea-bed and subsoil of the submarine
    areas adjacent to the coast but outside the area of the territorial sea, to a
    depth of 200 metres or, beyond that limit, to where the depth of the superJacent
    waters admits of the exploration of the natural resources of the said areas:
    (b) to the sea-bed and ,subsoil of similar submarine areas adjacent to the coasts
    of islands".

         The fist of subjects and issues cites five aspects of this topic:  nature
    and scope of the sovereign rights of coastal States over the continental shelf,
    and duties of States; applicable criteria for the outer limit of the continental
    shelf; question of the delimitation between States and various aspects involved;
    natural resources of the continental shelf; and scientific research.

         6. Exclusive economic zone beyond the territorial sea:  This concept, also
    referred to as "patrimonial sea" by many Latin American States, is not mentioned
    in the 1958 law of the Sea Conventions. Nine aspects are cited in the list of
    subjects and issues: nattfre and characteristics, including rights and jurisdictior
    of coastal States in relation to resources, pollution control and scientific
    research in the zone, as well as duties of States; resburces of the zone; freedom
    of navigation and overflight; regional arrangements; applicable criteria for
    limits; fisheries; sea-bed within national jurisdiction; prevention and control
    of pollution and other hazards to the marine environment, including rights and
    responsibilities of coastal States; and scientific research.

         The fisheries aspect is further broken down into exclusive fishery zone,
    preferential rights of coastal States, management and conservation, protection
    of coastal States' fisheries in enclosed and semi-enclosed seas, and regime of
    islands under foreign domination and control in relation to zones of exclusive
    fishing jurisdiction. The subtopic of the sea-bed within national Jurisdiction
    is also subdivided -- into nature and characteristics, delineation between
    adjacent and opposite States, sovereign rights over natural resources, and
    applicable criteria for limits.

         7. Coastal State..preferential rights or other non-exclusive jurisdiction
    over resources beyond the territorial sea: Seven aspects of this topic are
    recognized in the list of subjects and issues: nature, scope and characteristics;
    sea-bed resources; fisheries; prevention and control of pollution and other
    hazards to the marine environment; international co-operation in the study and
    rational exploitation of marine resources; settlement of disputes; and other
    rights and obligations.

         8.  High seas:  The broad area of the sea beyond national Jurisdiction is
    to be looked at from six aspects, according to the list of subjects and issues:
    nature and characteristics; rights and duties of States; question of the freedom
    of the high seas and their regulation; management and.conservation-of living
    resources; slavery, piracy and drugs; and hot pursuit.

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    A~ ~9.  Iand-locked countries:  The l.i.st singles out four aspects of this topic:
       general principles of the :.aw of the sea con erni.ng the land-locked countries,
       rights and interests of land-locked countries, paroicular interests and needs of
       developing land-locked countries in the international rcg-me for the sea-bed,
       and rights and interests of land-locked countries in regard to living resources of
       the sea.

            Rights and interests of land-locked countries include free access to and from
       the sea through freedom of transit as well as means and facilities for transport
       and communications; equality of treatment in the ports of transit States; free
       access to the international sea-bed area beyond national jurisdiction; and
       participation in the international regime, including the machinery and the
       equitable sharing in the benefits of the area.

           10. Rights and interests of shelf-locked States arnd States with narrow
       shelves or short coastlines:  Shelf-locked States are those whose continental
       shelves do not open out onto the high seas; example pare.countries bordering
       certain large seas such as the Mediterranean and Caribbean. These and other
       categories of "disadvantaged" States dealt with, under this topic would have their
       rights and interests examined from four aspects, according to the list of subjects
       and issues: international regime, fisheries, special interests and needs of
       developing shelf-locked States and States with narrow shelves or shor6 coastlines,
       and free access to and from the high seas.

           11. Rights and interests of States with broad shelves.

           12. Preservation of the marine environment: Five subheadings are given:
       sources of pollution and other hazards.and measures to combat them, measures to
       preserve the ecological balance of the marine environment, responsibility and
       liability for damage to the marine environment, rights and duties of coastal
       States, and international co-operation.

           13. Scientific research: Nature, characteristics and objectives -of
       scientific research of the oceans is the first of three subheadings. The others
       are access to scientific information and international co-operation.

           14. Development and Transfer of technology: The subject matter, as set out in
       the list of subjects and issues, concerns the development of technological
       capabilities of developing countries through sharing of knowledge and technology
       between developed and developing countries, training of personnel from developing
       countries and transfer of technology to developing countries.

           15. Regional arrangements.

           16. Archi.030

           17. Enclosed and semi-enclosed seas.

           18. Artificial islands and installations.

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        19.- Regime of islands:  This covers islands under colonial dependence or
    foreign dcmination or control as well ts other related matters.

        20. Resoibilit  and liability for damage rsult._rom the use of the
    marine environment.

        21.  Settlement of disputes.

        22.  Peaceful uses of the ocean space; zones of peace and secuibi,

        23.  Archaeoic  and historical treasures on the sea-bed and ocean floor
    beyond the limits of national jurisdiction.

        24. Transmission from the high seas.

        25. Enhancing the universal participation of States in multilateral
    conventions relating- to the law of the sea.

         Sea-Bed Regime and Machinery

         The foundation for the Sea-Bed Committee's work in seeking agreement on a
    body of rules' and an organization for the international sea-bed area was the
    General Assembly's 1970 Declaration of Principles. In condensed form, these
    are as follows:

              1.  The area and its resources "are the common heritage of mankind".

              2.  "The area shall not be subject to appropriation by any means by
         States or persons, natural or Juridical, and no State shall claim or'
         exercise sovereignty or sovereign rights over any part thereof.'

              3. No State or person shall claim, exercise or acquire rights with
         respect to the area o6  its resources incompatible with the international
        -regime to be established and the principles of this Declaration.

              4, All exploration and exploitation activities shall be governed by
         the international regime.                                - ... .

              5.  "The area shall be open to use exclusively for peaceful purposes
         by all States, whether coastal or land-locked, without discrimination, in
         accordance with the international regime to be established."

              6,  "States shall act in the area in accordance with the applicable
         principles and rules of international law ... and the interests of maintaining
         international peace and security and promoting international co-operation
         and mutual understanding."

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                                                     28 Mray 1974

         7. Exploration and exploitation "shall be carried out for the benefit
    of mankind as a whole, irrespective of the geographical location of States.,
    whether land-locked or coastal, and taking into particular consideration
    the interests and needs of the developing countries".

         8. "The-~area shall be reserved exclusively for peaceful purposes"
    and agreements shall be concluded as soon as possible to constitute a step
    towards the exclusion of the area from the arms race.

         9e On the basis of these principles, an international regime for
    the area and its resources, including international machinery to give effect
    to its provisions, shall be established by "an international treaty of a
    universal character, generally agreed upon". "The regime shall, inter alia,
    provide for the orderly and safe development and rational m~anagement of
    the area and its resources and for expanding opportunities in the use
    thereof, and ensure the equitable sharing by States in the benefits derived
    therefrom, taking into particular consideration the interests and needs
    of the developing countries,, whether land-locked or coastal."

        10. States shall promote international co-operation in scientific
    research exclusively for peaceful purposes.

        11. States shall co-operate in the adoption and implementation of
    international rules., standards and procedures for the prevention of
    pollution and other hazards to the marine environment as well as for the
    protection and conservation of natural resources and the prevention of
    damage to flora and fauna.

        12. States shall pay due regard to the rights and legitimate interests
    of coastal and other States affected by their activities in the area.
    Coastal States shall be consulted with a view to avoiding infringement
    of their rights and interests.

        13. Nothing in the Declaration shall affect the legal status of the
    waters or air space above the international sea-bed'area, or the rights
    of coastal States to prevent, mitigate or eliminate grave and imminent
    danger to their coastline or related interests from pollution or other
    hazardous occurrences, subject to the international regime to be established.

        14. Every State and international organization is responsible for
    ensuring that activities in the area by those under its jurisdiction or
    acting on its behalf shall conform to the international regime. "Damage
    caused by such activities shall entail liability."

        15. The parties to any dispute relating to activities in the area and
    its resources shall resolve such dispute by the measures for peaceful
    settlement mentioned in Article 35 of the United Nations Charter and such
    procedures for settling disputes as may be agreed on in the international
    regime.

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        Drafting work for treaty articles on an- international regime and machinery
    for the sea-bed began in a working group of Sub-Committee I in 1972o Starting
    frem an informal working paper intended to reflect areas of agreement and
    disagreement, the drafting process was carried out in two stages a- a first
    reading designed to ensure that the opinions of members were fully and accurately
    reflected in the paper, and a second reading in which members sought to narrow
    the areas of disagreement as far as possible and to merge alternative texts
    where there was no fundamental difference of approach.

        As regards the international regime, the Working Group carried out a first
    reading of texts relating to the limits of the sea-bed area, and completed a
    second reading of texts concerning the following 20 subjects: the common
    heritage of mankind; activities regarding exploration and exploitation; non-
    appropriation or claim or exercise of sovereignty or sovereign rights, or of
    rights incompatible with the treaty rights, and the non-recognition of any such
    claims or exercise of rights; use of the area by all States Without discrimination;
    general conduct in the area;and in relation to the area; benefit of mankind as a
    whole; preservation of the area exclusively for peaceful purposes; who may
    exploit the area; general norms regarding exploitation; scientific research;
    transfer of technology; protection of the marine environment  protection of
    human life; due regard to the rights of coastal States; legal status of waters
    superjacent to the area;accommodation of activities in the marine environment
    and in the area; responsibility to ensure observance of the international regime
    and liability for damages; access to and from the area; archaeological and
    historical objects; and settlement of disputes.

         With regard to international machinery,, the Working Group completed its
    second reading of texts concerning the following subjects: the Assembly and its
    powers and functions; the Council and its powers and functions; the system of
    settlement of disputes (including the Tribunal); and an operating agency or
    bodies, variously called the Enterprise, operations commission, permanent board,
    management and development commission, international sea-bed operations
    organization, exploration and production agency, and exploitation commission.

         A first reading was completed of texts relating to the following aspects
    of the machinery: establishment of the machinery; nature of the sea-bed
    authority; status of the authority; operation of vessels and emplacement of
     installations by the authority; installations and other facilities for the
     exploration of the area and the exploitation of its resources; privileges and
     immunities; relationships with other organizations; fundamental principles of
     the functioning of the authority; purposes of the authority; powers and functions
     of the authority; principal organs of the authority; the secretariat; various
     proposed bodies, including a rules and recommended practices commission, planning/
     price stabilization commission, scientific and technological commission, legal
     commission, international sea-bed boundary review commission, and inspection
     and conservation commission; and miscellaneous provisions.

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          The texts produced by the Working Group of Sub-Committee I, "illustrating
    areas of agreement and disagreement", occupy 127 pages of the Committee's final
    report (document A/9021, volume 11, pages 39-165). In most cases, two or more
     alternative texts are given for each draft article.

         In addition to these subjects, delegations in the Working Group suggested
    a number of other matters which might need to be dealt with, including general
    rules and regulations regarding exploration of the area and exploitation of its
    resources, integrity of investments, regional arrangements, the participation
    of disadvantaged countries, a statute for the Tribunal, criteria for the sharing
    of benefits, the parties to the treaty, and transitional provisions. Not all
    delegations accepted this list in its entirety.

         The Secretary-General will submit to the Conference a study on the economic
    implications of sea-bed mining. This will be a follow-up to earlier papers
    presented to the Sea-Bed Committee in response to Assembly resolution 2750 A
    (XXV) of 1970.

         The first of these papers, issued in .1971, noted that technological develop-
    ments would eventually make deep-sea petroleum and manganese nodule exploitation
    not only technically possible but also commercially feasible. It predicted that
    petroleum markets were unlikely to be affected significantly by such developments,
    because of the higher costs of deep-water production and the abundance of on-
    shore and shallow-water petroleum. However, it held that future exploitation of
    manganese nodules lying on the ocean bottom might become an important source of
    the' world's nickel requirements and might eventually become a major source of
    cobalt supply.as well, in addition to supplying a minor proportion of copper needs.

         General Aspects of Sea Law

         Sub-Committee II, which drew up the list of issues and topics in 1972,
    began work on draft articles in March 1973, when its Working Group started
    meeting. After a preliminary discussion on how to go about the drafting, the
    Group decided that the subjects and issues assigned to it would not be examined
    one by one or in groups, but should be regarded as forming part of one whole.

         A comparative table was drawn up for the Group in July, setting out all
    70 texts submitted by delegations, arranged according to the headings and
    subheadings in the list of subjects and issues (document A/9021, Vol. V). For
    some of these subjects consolidated texts were prepared, making possible a more
    direct comparison of the various proposals provision by provision (document
    A/9021, Vol. VI).

         Using these two compilations as a tool, the Working Group decided to present
    variant (alternative) texts which might, where appropriate, form the basis of
    draft articles. Delegations presented many variants during the Group's last
    few meetings in August, and informal consultations made it possible to effect
    some reduction in the number of variants (document A/9021, Vol. IV)o However,
    it was recognized in the Working Group that the presentation or non-presentation
    of variants by delegations did not commit them to a particular position or
    signify support for one or the other variants presented, inasmuch as Governments'
    official proposals were lodged individually with Sub-Committee II.
                                        (more)       fNfl1

                                                           Press Release SEA/18
                                                           28 may 1974

         The 161 pages of variants deal with such subjects and issues as the nature
    and characteristics of the territorial sea, the delimitation of the territorial
    sea, the breadth of the territorial sea, innocent passage, straits, archipelagos,
    the exclusive economic zone, the continental shelf, preferential rights and
    duties of coastal States, rights and interests of land-locked and geographically
    disadvantaged countries, regional arrangements, and certain aspects of fishing
    on the high seas.

         Marine Environment, Science and Technology

         The main subjects examined by Sub-Committee III were preservation of the
    marine environment, scientific research, and the development and transfer of
    technology.

         The group known as Working Group 2 began its drafting on the marine
    environment in March 1973. Basing itself on proposals submitted to the Sub-
    Committee by delegations, the Working Group discussed the following subjects:
    general obligation to preserve and protect the marine environment; general
    obligation of States to adopt measures to prevent pollution of the marine
    environment, irrespective of the source of pollution; obligation of States to
    prevent damage from marine pollution; particular obligation of States to adopt
    specific measures in connexion with certain sources of marine pollution, and
    the relation between such measures and generally accepted international standards;
    global and regional co-operation; technical assistance; monitoring; standards;
    and enforcement.

         Informal consultations were then held under the Working Group's auspices,
    between sponsors of the various proposals and other delegations. They were able
    to produce a number of texts -- usually in alternative versions -- for draft
    articles on many of these subjects, but the Working Group as a whole did not have
    time to examine those texts, which are reproduced in the Committee's 1973 report
    (document A/9021, Vol. I, pages 86-89 and 91-105).

         Working Group 3 of Sub-Committee III began discussing the various proposals
    on scientific research in April 1973. Its discussions covered the definition
    and objectives of marine scientific research, the conduct and promotion of marine
    scientific research, and the prerequisites for the conduct of such research.
    Informal consultations produced several alternative versions of texts for draft
    articles on this subject (document A/9021, Vol. I, pages 103-105), but the
    Working Group as a whole did not have time to examine them.

         As to development and transfer of technology, Sub-Committee III completed
    a general debate on this topic but its Working Group 3 did not have time to begin
    work on draft articles.

         Conference Procedure

         The second session of the Conference is to be opened by its President at
    3 p.m. Thursday, 20 June, at Parque Central, a new complex of commercial and
    residential buildings near the centre of Caracas. Following a minute of silence
    for prayer or meditation, the Conference will hear an address by the President
    of Venezuela, Carlos Andres Perez.

                                       '             00014

                                                          Press Release SEA/18
                                                          28 May 1974

        The next order of business will be adoption of the rules of procedure.
    This was to have taken place during the organizational session held in New York
    last December, but disagreements persisted over the question of how decisions
    are to be taken by the Conference, including rules for voting.

         The question of decision-making at the Conference had been discusseE by
    the General Assembly, which approved last November the following "gentlemen's
    agreement" reached between delegations:

              "Recognizing that the Conference at its inaugural session will adopt
         its procedures, including its rules regarding methods of voting, and
         bearing in mind that the problems of ocean space are closely interrelated
         and need to be considered as a whole and the desirability of adopting a
         Convention on the Law of the Sea which will secure the widest possible
         acceptance,

              "The General Assembly expresses the view that the Conference should
         make every effort to reach agreement on substantive matters by way of
         consensus; that there should be no voting on such matters until all
         efforts at consensus have been exhausted; and further expresses the view
         that the Conference at its inaugural session will consider devising
         appropriate means to that end."

         When it proved impossible to reach agreement on this issue in December,
    the Conference agreed to a proposal by its President that he hold informal
    consultations on the matter in New York- from 25 February to 1 March 1974.  It
    further agreed that the decision in regard to the rules should be taken by the
    Conference in Caracas not later than 27 June, if necessary by voting. The
    understanding agreed to by the Conference was that the rules would be adopted
    by a simple majority unless the Conference decided that this constituted an
    important question requiring a two-thirds majority.

         Informal consultations were held as scheduled from 25 February to I March,
    and it was agreed at that time that the contacts would resume in New York from
    12 to 14 June.

         Draft riles of procedure were drawn up last November by the Secretariat
     !document A/CONF.62/2 and Add.l-3), "designed to facilitate as far as possible
    the search for the broadest possible agreement on any matter of substance,
    before a formal vote is taken by a committee or by the Conference". To this
    end, what has been described in the debate as a "cooling-off period" is provided
    for in the draft rules, under the requirement that, if there is any objection
    to taking a vote, a main committee would secure the permission of the Conference
    before voting. Both in the Conference and in any committee the presiding officer
    would have authority to defer taking a vote for a given period.

          The draft rules follow the rules of the General Assembly in requiring a
     simple majority vote for the adoption of proposals in committee and a two-thirds
     Majority in plenary. Abstaining or absent delegations would not be counted in
     deter~inin~g ~he+.nr a majority exists.

                                        (more)          00015

                                        - 1                 Press Release SFA/18
                                                            28 May 19714

         'Severil amendments to this procdc.ure have been proposed. .'Two of them
    would require larger majorities for suostantive decisions:  a.two-thirds
    'c-'ority of States participating ir' the Conference and ioct Just of those voting
    "'>s" or "no" (United States), and a nine-tenths majority of those present and
    voting (Soviet Union).  Other proposed amendments would change the "cooling-off"
    procedure in a variety of ways,

         on other matters, the draft rules provide' for a 48-member General Committee
    to assist the President in the conduct of .the business of the Conference, ensure
    the co-ordination of its work, and maoe r,'Cemendations to further the progress
    of the Conference.  Its members are the:PTe'sident, Vice-Presidents and
    Rapporteur-General of the Conference and the officers of the three main committees;
    the Chairman of the Drafting Committee, may participate in the General Committee
    without the right to vote.

         There is also a 23-member Drafting Comnmittee and a nine-member Credentials
    Committee                                                   .

         Conference Participants

         The General Assembly has invited to the Conference the 135 Membe-'s of the
    United Nations and the other States (now numbering 13) which are members of one
    or more specialized agencies. It also invited the Republic of Guinea-Bissau
    (which has since become a member of a'specialized agency -- the Food and
    Agriculture Organization) and the Democrati6 Republic of Viet-Nam.  The latter
    declined the invitation last November, however, bdtljse thq Provisional
    Government of the Republic of South Viet-Nami had nqt been invited (document A/9350).

         In addition to these 149 States, tie Assembly' requested the Secretary-
    reneral to invite the United Nations Cot1icil for Namibia, the specialized agencies
    of the United Nations, and the International Atomic Energy Agency. Other
    intergovernmental bodies and interested'-nohl-governmental organizations having
    consultative status with 'the Economic and Social Council ar' also to be invited to
    attend.

         The draft rules of procedure provide that observers for"! intergovernmental
    organizations may participate without vote in the Conferenceanq .its main,
    committees and subsidiary organs, on the invitation of the presiding officer
    and on questions within the scope of their activities.  They may also have, .
    written statements distributed to delegations.  International non-governmental
    organizations would have the right, under the draft rules, to designate observers
    who could attend public meetings; of the Conference and its aain committees, make
    oral statements on the presiding officer's invitation and subject to the approval
    of the body concerned, and have written statements distributed,

                                        (more)

                                                        00016

                                                           Press Release SEA/18
                                                           28 MNay 1974

         Officers of Conference

         The officers of the Conference, elected at the organizational session in
    December, are as follows:

    President:  H. Shirley Amerasinghe* (Sri Ianka)

    Vice-Presidents (31):  Algeria, Belgium, Bolivia, Chile, China, Dominican Perublic,
                           Egypt, France, Iceland, Indonesia, Iran, Iraq, Kuwait,
                           Iiberia, Madagascar, Nepal, Nigeria, Norway, Pakistan,
                           Peru, Poland, Singapore, Trinidad and Tobago, Tunisia,
                           Uganda, USSR, United Kingdom, United States, Yugoslavia,
                           Zaire and Zambia.

    Rapporteur-General:    Kenneth Rattray (Jamaica)

    Committee I (international sea-bed regime and machinery):
                  Chairman: Paul Bamela Engo (United Republic of Cameroon)
                  Vice-Chairmen: Brazil, German Democratic Republic and Japan
                 Rapporteur:  H. Charles Mott (Australia)

    Committee  II  (general aspects of law of the sea):
                  Chairman: Andres Aguilar (Venezuela)
                  Vice-Chairmen: Czechoslovakia, Kenya and Turkey
                  Rapporteur: Satya N. Nandan (Fiji)

    Committee III (marine environment, research and technology transfer)
                  Chairman:  Alexander Yankov (Bulgaria)
                  Vice-Chairmen:  Colombia, Cyprus and Federal Republic of Germany
                  Rapporteur: Abdel M.A. Hassan (Sudan)

    Drafting Committee (23 members):
                  Chairman:  J.A. Beesley (Canada)
                  Other members:  Afghanistan, Argentina, Bangladesh, Ecuador,
                                  El Salvador, Ghana, India, Italy, Lesotho, Malaysia,
                                  Mauritania, Mauritius, Mexico, Netherlands,
                                  Philippines, Romania, Sierra Leone, Spain, Syria,
                                  USSR, United Republic of Tanzania and United States.
    Credentials Committee (9 members):
                  Chairman (elected by the Committee): Heinrich Gleissner (Austria)
                  tembers: Austria, Chad, China, Costa Rica, Hungary, Ireland,
                             Ivory Coast, Japan and Uruguay.

          Constantin A. Stavropoulos has been appointed by Secretary-CGeneral Kurt
     Waldheim as his Special Representative to the Conference (biographical note in
     Press Release BI1/1102 of 24 May). The Executive Secretary of the Confernr.(ce is
     David L.D. Hall.                    * *** *

     *  Formbiographical note see Press Release BIO/1074-SEA/4 of 3 December 1973.
                                                       na n nf

             UNITED NATIONStr
                                                                      Distr.
                                                                      LIMITED

                                                                   *  A/CONF.62/C.l/L.2
                          g   ~~~~~~~THIRD CONFERENCE                      0 26 July 1974
            ON THE LAW OF THE SEA                                       2 u.
                                                                      ORIGINAL: ENGLISH

    FIRST COMMITTEE

                                    Note by the Chairman

         In order to assist the Committee in the consideration of the questions relating
    to economic implications of sea-bed mining, the Chairman of the First Committee has
    prepared the following note containing the major summaries and conclusions of the
    pertinent.documents presented to the Conference.

                                      1. Basic documents

         - Economic Implications of Sea-Bed Mineral Development in the International Area:
           Report of the Secretary-General (A/CONF.62/25)

         - Statement made by G. Do Aisenis on behalf of the Secretary-General of UNCTAD
           (A/CONF.62/32)

         - The effects of possible exploitation of the sea-bed on the earnings of
           developing countries from copper exports: Report of the UNCTAD secretariat
           (TD/B/484)

         - The effects of production of manganese from the sea-bed, with particular
           reference to effects on developing countries producers of manganese ore
           (TD/B/483)

          - Exploitation of the mineral resources of the sea-bed beyond national
           jurisdiction: case study of cobalt (TD/B/449/Add.i)

         - Exploitation of the mineral resources of the sea-bed beyond national
           Jurisdiction:  issues of international commodity policy.  Note by the UNCTAD
           secretariat (TD/B/449)

         - Mineral production from the area of the  sea-bed-btl3nd national Jurisdicton:
           issues of international commodity polic~yD7113/Supp.4).

    C-0671
                                                             00018

                       II. Summary tnd conzlusions of' tl- Rebort of the
                            Secretary-General (A/CONF.62/25)

    I.   This summary provides a brief review of the conitents of the report.  In view of
    the complexity of the subject, however, it necessarily omits much of the analyses and
    accordingly should not in any sense be taken as a substitute for the text of Ithe report
    itself.

    2.   Manganese nodules are the most likely deep-sea minerals to be exploited in the
    foreseeable future. Nodules are composed of fine-grained oxide material and are
    distributed widely over the floor of the world ocean. They vary widely in their
    composition, as well as in their physical and chemical properties. There is now
    considerabie commercial interest in exploiting them for their component metals, chiefly
    nickel, copper, cobalt and manganese.

    3.   Only about 3 per cent of the sea floor has been extensively surveyed.  However,
    intensive exploration in recent years has revealed enough about the extent and location
    of deposits to permit commercial exploitation of nodules. Potential commercial deposits
    exist in the Pacific and Indian Oceans, while none have yet been located in the
    Atlantic Ocean.

    4.   Various commercial groups have completed the exploration or prospecting phase and
    are now evaluating potential mine sites. Site evaluation focuses on estimating the
    average concentrations of the constituent metals in nodules and on the nodule density
    per unit area of the mine site. These are the key parameters which, with bottom
    topography, affect the potential profitability of a mine site. There is great interest
    in the central Pacific region, which contains extensive concentrations of higher value
    nodules. Within this region, some evidence suggests that nodules with the highest
    potential value are concentrated in an east-west belt between 6%N and 20�N latitude
    and extending between 110 W and 180�W longitude.

    5.  The physical problem of recovering the nodules from the sea floor is proving to be
    a difficult one. As surficial deposits, nodules will be dredged and either pumped or
    hoisted from the sea floor. At the surface facility the nodules will then be loaded
    into barges or ore carriers for transportation to a processing plant. Under hydraulic
    lifting systems the nodules must be concentrated within a relatively small area so that
    the suction system can operate efficiently; this gathering process seems to be one of
    the most serious stumbling blocks in test operations.

    6.   Several national Governments have been and are involved in nodule mining through
    various forms of direct and indirect subsidization of mining activities. They have
    funded research on exploration, offered tax relief and the use of government facilities
    for research on processing, and in some cases Governments are contemplating direct
    participation in mining ventures.

    7.   By most estimates, it appears that nodule mining will prove to be a commercially
    profitable operation. Although the physical, technical and logistic problems are
    formidable, the existing technological capability can allow the industry to work. The
    question of the probable impact of sea-bed mining on world markets centres on the
    degree of competitiveness between marine and land-based sources of metal supply. To be

                                                         00019                      I...

     rigorous, a study of this question would require a comparison of the relative supply
     costs of these two sources. This is not practicable for the following reasons:
     (v.) most information on estimated costs of individual firms or consortia is still
     proprietary and closely guarded; (b) as the industry matures costs will drop from
     initial levels due to a "learning-by-doing" effect. Also, technical progress in
     engineering, materials, and design will serve to further reduce costs over time- (c) the
     range of costs among land-based producers is extremely wide, making it difficult to find
     a uniform supply price for land-based producers as a whole; (d) the profitability of
    nodule mining, the volume of production, and the impact on prices will be affected by
    the nature and extent of any regulation of the industry by the Sea-Bed Authority.

    8.   Therefore, in order to approximate the likely impact  of nodule mining, certain
    assumptions must be made to facilitate the analysis. In this report, the assumptions
    made are based on the latest information available, on the discernible trends, and on
    the known plans of sea-bed miners.

    9.   Given the state of preparedness of the industry, commercial metal production from
    nodules could commence toward the end of the decade, though nodule mining might start
    as early as 1976. The decision to go ahead and begin production will depend on whether:
    (a) the firms feel that their mining and metallurgical processing technology is
    economically viable; (b) that they are on safe legal grounds with security of investment
    and assurance of exclusive access to their chosen mine sites; and (c) that they have
    adequate financing for their ventures. Once the go-ahead decision is made, it is
    assumed that commercial operations can commence within three to five years.

    10. Perhaps the most critical assumptions deal with the expected rate of development of
    the nodule industry, the average grade of nodules processed, the constituent metals to
    be recovered and the metallurgical yields. Metal production from nodules will be
    affected by the pattern in which new operations enter the field each year and by
    increases in capacity of existing operations. Economies of scale will dictate the size
    of individual operations; the likely sizes being of 1 and 3 million ton capacities.
    Six groups are expected to be in operation by 1985, the total volume of dry nodules
    being processed in that year amounting to 15 million tons.

    11. According to most experts, nickel will be the mainstay of the nodule industry.
    Copper, cobalt and nickel will be produced jointly, with manganese and several trade
    metals probably being produced as by-products from the tailings. As a guideline for
    their own planning, nodule miners look for a combined nickel and copper content equal to
    3 -:r cent of tha d,-,-ight  ~nodva.  Other metals will be recovered if the
    additional costs of processing are covered by the additional revenues from these metals,
    which in turn depends on their prices. Thus, there can be no uniform, industry-wide
    assumptions about production of other metals. For example, industry plans vary widely
    with respect to manganese production, not only regarding its volume but also its form,
    i.e. ore, ferromanganese or manganese metal.

    12.  For nickel, a minimum 6 per cent per annum longT-tcrm growth rate is assumed.  In
    1972, the share of developing countries in world production of nickel was only 13 per cent,
    althcuqh this share is expanding rapidly. Production-frcm nodules might amount to
    lb per cent of the total world demand in 1985. This volume of production would depress
    prices somewhat, but the impact would be lessened by the good growth prospects for

                                                                                     0.002
                                                          00020

    nickel, and by the fact that developing producers account for a small share of the
    total market.  Nickel production from nodules might cause some high cost laterite
    projects under consideration to be abandoned, but it should not have a serious effect
    on land-based production as a whole.

    13. The w6rld market for copper is huge compared to that for nickel, being about 14
    times the size of the nickel market in 1972. Copper prices rose dramatically from
    1970-1974, reaching a record level of $US 1.10/lb. in early 1974. Of the metals
    contained in nodules, copper production is the least concentrated among producers. It
    is expected that the demand for copper will show an annual percentage growth rate of
    4-5 per cent to the end of the century. Production from nodules might supply about
    1.3 per cent of world consumption in 1985 and would  displace only 5.5 per cent of the net
    import requirements of developed countries by that time. Copper production from
    nodules is expected to have a minimum impact on a relatively large, growing and
    somewhat diffuse market.

    14. Manganese might be recovered from nodules in two forms, either as pure metal or
    as ore-equivalent. More than 90 per cent of the manganese produced is used in the form
    of ferromanganese in the manufacture of steel; thus the rate of growth in its
    consumption will tend to parallel that of steel production. On the other hand, the
    market for manganese metal is relatively small. Metal production from one operation of
    i million tons/year in 1985 mijht 9-zrtm2t to twice the volume of projected demand.
    Therefore, manganese metal supply from nodules woud depress prices. Depending on the
    form and volume of manganese recovery from nodules, the export earnings of developing
    country producers might drop significantly. However, with just one exception,
    developing countries are not dependent-upon manganese exports to a great degree.

    15.  Cobalt is a relatively expensive metul with a small market, and its value in
    world commodity trade is rather smal3.  By 1985, production from nodules could account
    for about half the volume of world output while effecting a drop in price to about
    two thirds of current levels.

    16.  The long-term prospects of the nodule industry are tied closely to nickel and
    copper. In the long-term, if capacity expansion in sea-bed mining was sufficiently
    large to depress the price of nickel to approximately the price of copper, this would
    open up some important substitution possibilities of nickel for copper. In this case,
    the prospects for the industry might warrant a large second-round expansion. This
    scenario is somewhat speculative, and possible only in the absence of any form of
    regulation.

    17. Although everyone agrees that nodule resources should be developed in a rational
    manner, opinions differ on what specific objectives come under this very general goal.
    In the Sea-Bed Committee, several policy objectives were proposed and discussed, in
    particular: to encourage nodule development so as to enlarge the world resource base,
    to minimize the impact of nodule exploitation on developing countries exporters of
    minerals, to ensure the participation of developing countries in sea-bed mining
    activities, to promote the conservation of nodule resources and to preserve the marine
    environment.

                                                      00021

    18. Some of these objectives and the conflicts between them indicate the need for a
    trade-off between  f:'icincy  and equity, which is one of the fundamental issues under
    any form of economic organization. Some would argue that the nodule industry should be
    free to operate v  '   restraint, since under conditions of competition and free
    entry, the nodule resources would then be developed at minimum cost. Others contend
    that unrestricted nodule exploitation would benefit primarily those countries developing
    the necessary technology which are also the largest consumers of minerals; thus many
    developing countries mineral exporters might be harmed by nodule exploitation.

    19. TwO different approaches are examined in the report for balancing the objectives
    of efficiency and equity: the compensatory approach, whereby the nodule industry
    would be allowed to -nerate with little or no explicit regulation, but some forms of
    compensation would b-? - aid to developing countries if they experienced a loss in export
    revenues; and the preventive approach, which would involve some form of direct regulation
    of the nodule industry by an International Authority. The second approach only is
    discussed in detail in the report.

    20.  Under a general preventive approach, many specific regulatory formulae would be
    possible, depending on what the Authority chooses as the basis of regulation. The
    report considers the effects of choosing nickel as the basis for regulation. In this
    case, the Authority would allow new ventures to come on board and production from
    nodules to proceed so as to supply part or all of the increase in demand for nickel in
    each year. This type of scheme would recognize the complementarity between land and
    marine sources, since production from both sources would be growing. It would also
    recognize the need of the industry to remain viable, and since nickel would be one of
    the main generators of industry revenue, this would be assured.

    21. Metal production frcm nodules could, for example, be geared to supplying between
    50 and 100 per cent of the increase in demand for nickel, with possible additional
    restrictions on recovery of other component metals, such as manganese. Assuming that
    the demand for all these metals would be growing at their long-term rates by 1985, and
    the maximum production is authorized, sea-bed mining could make considerable inroads
    into the cobalt market, accounting for 66 per cent of world demand.  The share of world
    demand for nickel supplied by nodules could be 28.6 per cent by 1985, under these
    assumptions.

    22. Even taking into account a share of revenues for the International Authority, it
    appears that nodule mining woiuld still show a financial return commensurate with that
    of other investments. On the basis of a wide range of analytical assumptions, some
    estimates are contained in the report.  If, for example, the Authority were to take a
    50 per cent share of net revenues, the medium estimate of the take from a single mining
    operation of 3 Pillion tons/year would be $96 million. This would still allow the
    miners a 36 per cent return on total investment after payment of the Authority's share.
    This is more than commensurate with the average return on investment in mining in the
    United States which was 13.4 per cent in 1972.

    23. Whatever specific form regulation by the sea-bed Authority might take, the r6gime
    must have sufficient flexibility to adapt its mode of operation to the changing
    conditions of world markets and of the industry itself. Without this flexibility, the
    Authority would be severely hampered, and it would be extremely difficult to ensure that

                                                               001~ ~~~~~I.

    the oe1.entives discussed under the goal of rational development would be achieved. A
    more pIactical problem will be to determine on which stage of production the take of
    the Authority would be based. If the value of nodules on board ship were to be used
    as the base, then the liorn'5 sha'e of the benefits from the common heritage o:f mankind
    would accrue to the producing countries.  Nodules on board ship would represent only 6
    to 10 per cent of the value of nodules after the processing stage. The Authority must
    be able to capture some of the value added by processing, since the significant
    spinoffs from establishing the processing plants rill again go to the producing countries.

    24. One possible way to tackle the objective of conservation of nodule resources would
    be to employ a grid system for demarcating the area of potential mining operations.
    Within the grid system, only selected blocks might be auctioned by the Authority to
    potential producers in any one year.  The take of the Autholity might, for example,
    consist of two parts:  the proceeds fromi the auction plu3 a levy onr net or gross
    revenues. The highest bidder would acquire control over the mine site for a fixed
    period which wnoud be long enough to allow him to recoup his investment, after which
    the site would be returned, in a snecified condition, to the Authority. Certain blocks
    would no. be auctioned off immediately; but reserved for futulre use.

    25.  The range of possible policy alternatives open to t-he International Authority is
    quite wide.  The regulatory options discussed in the report are by no means the only
    feasible alternatives. For example, it is not necessary that the Authority license
    commercial exploitation of nodules by private companies.  Alternatively, the Authority
    might enter into joint ventures, or it might choose to undertake the entire operation
    of sea-bed mining by itself.

    26. In any case, it appears that even after paying the levies of an International
    Authority, sea-bed mining will be a commercially profitable operation. There are
    concrete policy options which can balance the interests of the mineral producing and
    consuming nations, and some o- these possible options are discussed at length in the
    report. It should be emphasized that the pace of change in world economic affairs -.
    especially in regard to exchange rates, eommercial. policies and inflation - can
    significantly alter the economic picture within a few years. Any form of international
    regulation of sea-bed mining must be sufficiently flexible to adapt itself, its
    methods and objectives to the changing economic order.

                                                          00023

                       III. Summary and conclusions of UNCTAD's reports

             A. Summary of the statement made by Mvr. G. D. Arsenis on behalf of the
                Secretary-General of the United Nations Conference on Trade and
                Development (A/CONF. 62/32)

    1.   It is now generally agreed that greater availabilities and presumed lower costs
    associated with the production of minerals frcm the sea-bed would bring benefits to the
    world as a whole. How could these benefits be distributed among Member States? This is
    the central question.

    2.   The Conference would wish to take account of the following principles in answering
    this question:

         (a) the sea-bed resources are the 'common heritage of mankind"r;

         (b) their exploitation should be "?for the benefit of mankind as a whole, taking
    into account the special interests and needs of developing countries";

         (c) the need for concerted international action to underpin the development of
    developing countries and to reduce the economic gap between developed and developing
    countries;

         (d) the convergence of interests of producing and consuming countries, and
    consequently, of the need for a new strategy that would meet the legitimate needs of
    consuming countries for assured supplies and of producers for strengthened earnings and
    assured markets: both producers and consumers have an interest in an orderly price
    situation and in the rational exploitation of non-renewab2.e resources.

    3.   One important result of sea-bed mineral exploitation would be that it would bring
    direct benefits to consumers of the minerals concerned which are, by and large, mineral
    using industries in developed countries.

    4i. The chief consequence of sea-bed production for land-based producers of the minerals
    concerned would be that their total earnings from the minerals would grow less rapidly
    than they would have done otherwise, and in some instances, they might even decline from
    previously realized levels. In 1980, on the level sea-bed production might reach in that
    year, export earnings of developing countries in that year would be about $360 million
    lower than in the absence of sea-bed mining.

    5.   Income likely to accrue to the proposed international sea-bed authority would fall
    short of the potential export earnings foregone by established developing countries. The
    likely revenue of the authority would be insufficient to compensate those countries,
    nor would funds be available for the benefit of other developing countries.

    6.   It would appear that in the absence of special arrangements to protect the interests
    of developing countries, mineral production from the sea-bed while contributing to
    world development, may also result in a widening of the income gap between developed
    and developing countries.

                                                                0 0 0 2 4i ~  ~       I..

    7.  There is, therefore, an imperative need for the international community to make firm
    arrangements to ensure that such activity would not adversely affect the interests of
    developing exporting countries.

    8.   A-compensatory approach is conceivable, but would require additional funds to meet
    the shortfall of the revenues of the authority in relation to the loss in export
    earnings of developing countries.

    9. An alternative approach would consist of arrangements to ensure that output from the
    sea-bed will not result in prices which are not equitable and remunerative to the
    ieasonably efficient countries which are established producers of the minerals concerned.
    For this purpose, strict control over production or selling prices should be exercised
    by the proposed international authority.

    10. The establishment of a properly constituted international authority either able to
    undertake sea-bed mining itself or alternatively equipped with the full regulatory and
    taxing powers, appears to be a prerequisite to the equitable utilization of these
    resources.

                  B. Case study of copper (TD/B/484): Summary and conclusions

    1.   The consumption of'copper has increased in the last two decades at an average annual
    rate of 5 per cent, and in the non-socialist world reached an annual average of 8 million
    metric tons in the period 1969-1971.

    2.  Mine production over that period totalled about 5 million tons of copper content,
    corresponding to a value of $6,000 million, the difference, between mine production and
    consumption being accounted for largely by the use of secondary copper. The share of the
    developing countries in that output was about 40 per cent.

    3.   The characteristics of the copper market, and in particular the existence of two
    relatively independent sub-markets, were taken into account in an econometric model which
    was used to simulate the behaviour of the market in the event of exploitation of the
    sea-bed. As in the UNCTAD secretariat's previous reports, four assumptions were made
    concerning the intensity of exploitation of the sea-bed. On the low assumption 14,100
    tons of copper would be extracted from the sea-bed in 1980, on the medium-low assumption
    42,300 tons, on the medium-high assumption 982800 tons, and on the high assumption
    141,000 tons.

    4.   On the assumption that in 1980, 141,000 tons of refined copper will reach world
    markets, the volume of copper extracted from the sea-bed would not account for more than
    2 per cent of mine production, or for more than 1 per cent of consumption in the
    non-socialist-world. According to the results of the quantitative analysis, the effect
    of this production might be summarized as follows, by comparison with the case of no
    exploitation df the sea-bed: contraction of mine production on land by 0.7 per cent,
    expansion of total mine production (on land and on the sea-bed) by 1.2 per cent, and
    expansion of consumption by 0.4 per cent in the non-socialist world. London Metal Exchange
    prices would drop by 2.2 per cent and United States producer prices by 1 per cent. The
    export earnings of the developing countries would shrink by about $200 million, or about
    3 per cent of the total.

                                                        00025

    5.   This figure may be compared with the value of the copper that would be extracted
    from thesea-bed on the same assumption - about $300 million.  Assuming that the profits
    of firms engaging in that activity is not li.kely to exceed half their gross receipts, it
    will be seen that a transfer of all or part of those profits to the developing countries
    would not offset the shrinkage of their potential export earnings.

                C. Case study of manganese (TD/B/483): Summary and conclusions

    1.   This paper presents the results of an analysis of the effects of the mining of
    manganese nodules from the ocean floor on the land-based manganese ore industry and, in
    particular, on the developing country producers of such ore. These results are based
    on an econometric model of the manganese ore industry - summarized on page 15 - and fully
    described in TD/B/483/Add.l.

    2.   The analysis is related to a base case set of premises, whl !h can be summarized
    as follows:

         (a)  The range of sea-bed production levels which can realistically be anticipated
    over the projection period (1974-80), is taken to run from a low of about 442,000 metric
    tons of manganese ore in 1980 to a high of about 4,420,000 metric tons of ore in the
    same year.

         (b)  Production of manganese ore from the sea-bed is assumed to be planned, broadly,
    on principles similar to those relating to land-based production. This will lead to a
    partial, though not pound-for-pound, displacement of land-source supplies by ocean-source
    supplies.

         (c) The share of the developing countries in aggregate land-based production will
    remain approximately constant at its current level over the period.

         ('d) Real gross national product in the industrialized countries which are the
    principal consumers of manganese ore is assumed to groy.r during the projection period at
    recently observed rates.  Further details of these 'assumptions and information about other
    assumptions made are provided in chapter II. The base case premises Just summarized
    should be regarded as merely a reasonable reference case for study.  Alternatives to
    certain key assumptions and the effects of these alternatives on tihe analytical results
    are considered in chapter V.

    3.   The principal results which flow from the base case premises and which pertain to the
    manganese ore industry as a whole are as follows (see chapter III for details).

    4.   Aggregate consumption of manganese ore in the developed market economies and in the
    developing countries is expected to increase at an average annual rate of about

                                                       00026

     �per cent between  .74 an l         i/  m~_is is 9 somewhat hi~-hcr r:.te of increase than the
    average over, say, the last two decades. It reflects the anticipated relatively high
    rate of growth of steel production in the developing countries and an increase in the
    share of production by such countries in the total. Sea-bed output of manganese ore will
    affect the price of such ore. However, since consumption of manganese ore is very
    price-inelastic, consumption is unlikely to vary with sea-bed production.

    5.   Production of manganese ore from land sources will, of course, be affected by ocean
    mining operations. In the absence of sea-bed production, land-based output is
    anticipated to grow at an annual average rate of 4.2 per cent. Given a moderate level of
    sea-bed production, 2/ this rate will probably drop to about 1.5 per cent per year.  In
    the last year of the forecast period (1980), the reduction in land volume will be from
    12.6 million metric tons to 10.4 million metric tons, a reduction of about 18 per cent. 3/

    6.   The price of manganese ore is expected to be fairly insensitive to the level of
    sea-bed production. Without production from the ocean floor, price is expected to decline
    by about 1.1 per cent per year under the influence of continuing high production capacity,
    United States Government stockpile deliveries, and imports from the socialist countries.
    This rate of decline will accelerate to only about 1.6 per cent per annum under the
    assumption of a medium level of sea-bed output. The difference in prices between the two
    situations in 1980 is the difference between $17.3 per metric ton and $16.8 per metric
    ton. 4/  The effect of ocean mining development on the price of manganese ore is
    moderated by the fact that sea-bed production will to some extent supplant land-based
    production. Hence the effect of the former on total supplies will be mitigated.

         1-/ All physical quantities and values are aggregates of the developed market
    economies and developing countries. Published data on the manganese economies of the
    socialist countries were insufficient to permit representation of these countries in the
    econometric model on which the analysis is based. All quantities and values refer to
    manganese ore of metallurgical grade. Data limitations prevented inclusion of chemical-
    grade, battery-grade, or ferruginous manganese ore within the model. Consumption of
    metallurgical-grade ore, however, represents about 90 per cent of total consumption of
    all types of manganese ore.

         2/   This is the :medium 2" sea-bed production case shown in table 1 below.

         3_/ All quantities are gross weight of ore. An analysis in terms of weight of
    metal content would also have been of interest but was precluded by data limitations.

         4/   This is a world average f.o.b. price per ton of metallurgical-grade ore,
    gross weight.

                                                      00027

    7.   The base set of assumptions also has implications for the export earnings of
    developing country producers of manganese ore. 5/ In the absence of an ocean mining
    development, the export earnings of the developing countries from the sale of manganese
    ore are expected to rise at an annual rate of about 3.1 per cent over the forecast
    period. This gain reflects the conflicting effects of an anticipated slight decline in
    price, offset by a moderate rise in export voluxie. With a medium level of sea-bed
    production of manganese ore, export earnings would probably decline by about 2.0 per cent
    per year between 1974 and 1980. These differential rates of change imply a very
    substantial difference in export earnings in 1980 as between the no sea-bed production
    case and the medium sea-bed production case, the difference between $93.7 million in the
    first case and 5165.6 million in the second, a reduction of approximately 30 per cent
    (see chapter IV for further details).

    8.   As noted, the results given above rest upon a particular set of assumptions, the
    base set. It is of interest to determine how the figures of developing country export
    earnings might change in response to plausible variations in certain key assumptions.
    (See chapter V).

    9.   It could, for example, be assumed that the developing countries' share of aggregate
    land-based production would decline because they would feel the full effect of the
    displacement of land supplies of manganese ore by sea-bed production. This would be the
    probable result, for example, if sea-bed production were to be utilized mainly in the
    United States which is a distinct possibility, at least over the first few years of the
    forecast period. Under these circumstances, and with a medium level of sea-bed output,
    the export revenues of developing countries from the sale of manganese ore would decline
    at an annual average rate of 6.3 per cent falling to $48.5 million by 1980.  In that year,
    such earnings would be about 21 per cent lower than if the impact of sea-bed production
    had been shared equally with the developed market economies and 48 per cent lower than if
    there were no ocean mining.

    10. Similarly, it might be assumed that the average growth rate of the industrial
     countries, which are at present the principal consumers of manganese ore, would be less
    than historically experienced. Under the influence of a temporary (two-year) reduction
     of growth in these countries, and given a medium level of sea-bed production, export
     earnings of developing countries from the sale of manganese ore would be relatively
     lightly affected. Under a sustained reduction of growth (one-half the recent historical
     rate) - once again with a medium sea-bed outputI- such earnings would suffer quite
     drastically, however, falling to $54.2 million in 1980, a decline of 4.5 per cent per
     year between 1974 and 1280. In the latter year, earnings would be approximately
    17 ner cent less than if 'rowth had been sustained at its historical rate.  Such earn-ni':'s
    would be 42 -er cent less than if growth had been sustained and the sea,-bed development
    had not occurred.

          5_ Figures on another indicator of the impact on developing country producers,
     namely value of annual production, are given in table 7 below.

    11. All the above results obtain under an assumption of a fairly moderate scale of
    ocean mining operations. Under an assumption of a high - but not impossibly high -
    scale of operations, the effects would be even more severe.

    12. The table below draws together tne main analytical results relating to the effects
    of sea-bed production on export earnings of developing country producers of manganese ore,

                         Export earnings of developing countries from
                                      manganese ore in 1980

                                          Under alternative assumptions regarding:
           Under the base
         set of assumptions             Developing countries           Reduced growth in
                                           share of land              the industrialized
                                             production                  countries a/

           No         Moderate          Developed    Developing      Temporary       Sustained
         sea-bed       sea-bed          countries'   countries'      reduction       reduction
        production    production        production   production
                                       displaced    displaced

                                            ($US million)

          93.7          65.6              86.5         143.5           62.8            54.2

           atTaken here as the 11 major consumers of manganese ore.

    13. The figures presented in the table above suggest that some sort of sea-bed regulatory
    regime will probably be required ioretoptctthe export earnings of developing
    country producers of manganese ore. Regulations could pertain to offering -prices,
    production, or offers to sell the output from mining operations, or some combination of
    these. On the other hand, a compensatory approach to protecting the export earnings of
    developing countries would probably not be successful. Under any sea-bed case considered,
    losses in export earnings of the developing countries amount to about 50 per cent of the
    value of sea-bed production. Since the latter represents gross revenues, without
    deduction for operating costs, depreciation and amortization, and return on capital, the
    prospects for compensating the developing countries for loss of export earnings solely
    from the sale of sea-bed production of manganese ore do not appear bright. Thus, a
    system of regulation in which losses are prevented, rather than compensated after the
    fact, would seem to be indicated. Definitive statements on these matters, however,
    must await a joint analysis of all four principal sea-bed metals, an analysis in which
    interactions among the various metals and between land and ocean operations can be
    systematically exiamined.

                                                           00029

                            D. Case study of cobalt (TD,/�/449/Add.l):
                                Summary. and conclusions

    1.   Relative to other non-ferrous metal markets, the market for cobalt may be
    considerably more affected by the exploitation of mineral deposits on the ocean floor.
    For those sea-bed operations presently envisaged, although larger quantities of both
    manganese and nickel would be extracted, the amount of by-product cobalt recovered
    would represent a far greater pTroportion of cur2ent land-based production than would
    be the case for any other metal. It is estimated, for example, that one commercial,
    deep-sea mining operation could add each year aiound 30 per cent to current land-based
    cobalt production levels, while comparable proportions for manganese or nickel would be
    less than 5 per cent.

    2.   Cobalt is at present a relatively scarce, expensive metal which is nevertheless
    used in a wide variety of industrial products, both metallic and non-metallic. Its
    special properties make it particularly suited to a number of rapidly expanding,
    advanced-technology industries, and in these uses there are few other metals which
    could be substituted for it. At considerably lower prices, cobalt itself could
    probably be substituted for various other non-ferrous metals. In these circumstances
    the addition to the cobalt market of large quantities of sea-bed supplies could alter
    and enlarge the structure of cobalt consumption.

    3.   The available data relating to cobalt production, especially to production costs
    and pricing strategies, are insufficient to allow a quantitative assessment of
    production frontiers at price levels outside the range observed in the recent past.
    This is especially pertinent with respect to sea--bed operations and the indirect
    effect of lower cobalt prices on the economics of exploitation. The Justification
    for sea-bed production depends on the recovery of other metals in addition to cobalt,
    particularly manganese and nickel, and the interaction effect on the various markets
    of sea-bed supplies of these metals has not yet been analysed. This may be
    particularly important in the case of the nickel-cobalt markets.  Within a limited
    range around the current cobalt price ]�er, ho:-r'er, it has been possible to
    undertake an econometric analysis of' the cobt'Lt market and to draw some bypothetical
    conclusions regarding the impact of sea-bed production.

     4.  According to this aralysis, the impact of sea-bed production woulabe most
     evident in the drastic redistribution of production and production revenues which
     would result if compared with current pattI:rns of production and trade.  Gross
     revenues presently accrvinz to ,lveloping countries from cobalt production amount to
     approximately $95 million annually  i terms ol 1970 prices.  By 1980, if there were
     no production from the sca-bed, this latte. nmount is projected to increase to
    "240 million  again          " '    inir  I  t'. .  .  1; of :e. bed production, however,
     developing countries' revenues would be less, between $120-$220 million for 1980,
     depending on the level of sea-bed production assumed.

     5.   The national revenue loss to developing countries in the event of sea-bed
     production is thus projected - for 1980 - to be in the region of $19 to $120 million
     at 1970 prices, depending on the assumptions made. Under these same assumptions, the
     revenue accruing to sea-bed production in 1980 would be $16 to $100 million, at 1970
     prices, while developed countries' revenues would remain substantially unchanged in
     the region of $10 million.                            00030

              E. Exploitation of' the mineral resources of' the sea-bed beyond
                  national jurisdiction: issues _of international commodity
                  policy (TD/B/449): Summary

    1.   In the formulation of appropriate commodity policies in relation to the
    exploitation of the mineral resources of the sea-bed, the international community
    should bear in mind the following major considerations:

         (a) The potential exploitation of the mineral resources of the area of the
    sea-bed beyond the limits of national jurisdiction has implications of' great importance
    for international trade and development in the minerals sector.

         (b) One important result of such exploitation would be that it would bring
    direct benefits to the consumers of the minerals concerned who are, by and large,
    the mineral-using industries in developed countries.

         (c) On the other hand'. the chief consequence of sea-bed production for land-based
    producers of the minerals concerned would be that their total export earnings from
    those minerals would grow less rapidly than they would have done otherwise, and might
    even decline from previously realized levels.

         (d) The impact of' sea-bed production would be likely to be particularly adverse
    for developing producing countries, because they typically depend more heavily on the
    minerals concerned for their export earnings and government revenues than do developed
    producing countries, and for other reasons.

         (e) The restrictive impact of mineral production from the sea-bed on the scope
    for the growith of the export er.nnsc- the developing Producin,- countries would be
    the more serious since the relatively rapid rate of growth in international trade in
    minerals and metals affords developing countries an opportunity of partially
    compensating for the stagnation of' their export trade in many agricultural commodities.
    Curtailment of this opportunity would impact the prospects for the developing. countries
    of achieving the-targets laid down in the International Development Strategy for the
    Second United Nations Development Strategy for the Second United Nations Development
    Decade for the ovcm'_- .1  Thci  :iir export e-,nin.ps.

         (f) A            -   ;poyh  uni.: -,7rhich the developing Producing countries
    affected by sea-bed production would receive compensation for the estimated adverse
    impact upon their export earnings, -would be unworkable on account of the insufficiency
    of funds on the part of the sea-bed authority if these were confined to the net
    revenues accruing from the exploitation of the sea-bed.

         (g) Therefore, firm preventive arrangements would be required in advance of the
    production of' minerals from the sea-bed in order to ensure that such activity would
    not adversely affect the interests of developing producing countries. In practice, this
    would imply the exercise of strict controls so that the market prices of the minerals
    concerned are not depressed below levels declared by the international community as
    remunerative and equitable.

                                                         00031

         (h) Finally, whatever organizational arrangements are made with regard to the
    utilization of the resources of the sea-bed - which are recognized as "the common
    heritage of mankind" I/ - the international community will presumably take care
    that they ere fully consistent with the established role of the United Nations in the
    formulation and implementation of appropriate international commodity policies as an
    integral component of an over-all strategy for development, particularly of the
    developing countries. 2/

              F. Mineral production from the area of the sea-bed beyond national
                 ,jurisdiction: issues of international commoditypolicy
                  (TD/ll3/Supp.4): Summary

    1.   The economic impact of competing production of minerals from the sea-bed, which
    might be expected to be adverse to varying extents for the export incomes of all
    established producers (in relation to the incomes which they would otherwise earn),
    might be particularly adverse for typical developing producing countries. This could
    be so for a variety of reasons:

         (a) Developing producing countries typically depend more heavily on the minerals
    concerned (such as copper and manganese ore) for their export incomes and government
    revenues than do developed producing countries.

         (b) The share of developing countries in world trade in certain minerals
    (notably manganese ore) has been declining owing to the more rapid progress made in
    the developed countries' production for export.

         (c) The developing countries are likely to participate directly to only a small
    degree in the production of minerals from the sea-bed, for, because of its technically
    sophisticated nature and its high capital requirements, this production will no doubt
    be undertaken principally by interests from the affluent and technologically advanced
    countries.

         (d) Developing countries, which are increasingly processing land minerals before
    export, would lose such potential export income to the extent that minerals produced
    from the sea-bed were processed on the mainland of the producing enterprise's "home
    country". Moreover, the stimulus which sea-bed production would undoubtedly impart to
    the existing technological trend towards the direct processing of mineral concentrates,
    and the avoidance of intermediate processes which are now partly carried out in
    developing producing countries, would aggravate the loss of potential export income
    on the part of developing countries.

         1/ General Assembly resolution 2750 A (XXV),
         2/ The International Development Strategy for the Second United Nations
    Development Decade makes no reference to the resources of the sea-bed presumably
    because, at the time it was drawn up, the potential utilization of those resources
    seemed remote.

                                                        00032

         (e) The need for large-scale capital investments for the exploration and mining
    o' se-i              r.�-4irct  n..ht ad~rcr-ei  rf'.tct th-~ flow of rrivatc iirvestment into similar
    activities in developing countries.

         (f) Because fewer alternative investment and employment opportunities exist in
    developing than in developed countries, particularly heavy economic and social costs
    will be incurred in any re-allocation of resources that may be necessitated by the
    competition from sea-bed production.

    Some implications for policy

    2.   The essential problem which would arise from the production of minerals from the
    sea-bed would thus be the adverse impact of such production - in the absence of special
    arrangements - on the economic well-being of the developing producing countries
    concerned, and the consequential difference between the social costs and benefits of
    sea-bed production and its costs and benefits judged simply in terms of normal
    commercial criteria. The implication of this conclusion for international policy is
    that firm arrangements would be required in advance of the production of minerals from
    the sea-bed in order to ensure that such activity would not adversely affect the
    interests of developing producing countries or, better, would bring them, and to other
    developing countries, positive benefits.

    3.   There would appear to be two possible approaches to the problem of protecting
    the trade interests of the developing countries which are established exporters of
    the minerals in question: (a) an approach designed to obviate or minimize any
    potential adverse effects, and (b) an approach under which the affected countries
    would receive compensation for the estimated adverse impact upon their export earnings.

                                                              00033

          UNITED NATIONS

          THIRD CONFERENCE                                                A/CONF.62/25
                                                        22 May 1974
          ON THE LAW OF THE SEA
                                                        ORIGINAL: ENGLISH

                   ~ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

            ECONOMIC IMPLICATIONS OF SEA-BED MINERAL DEVELOPMENT IN THE
               INTERNATIONAL AREA: REPORT OF THE SECRETARY-GENERAL

                                CONTENTS
                                                                Page

       Preface ........ ...................... 5

       Summary .............................. 7

    I. REVIEW OF SEA-BED MINING ACTIVITIES ................ 12

       1. The search for nodule deposits ................ 12
          (a) Procedures used ...................... 12
          (b) Recent activities .....................                                 14
       2. Nodule mining technology .................. 15
          (a) Nodule collection ..................... 15
          (b) Materials elevation .................. .17
           (c) Surface vessel ...................... 22
       3. Metallurgical processing .................... 22
       4. Government activities ..................... 23
       5. Proposals for government legislation .............. 25

    II. THE PROBABLE IMPACT OF NODULE MINING ................ 26

       1. Forecasting future production of metals from nodules:
          the problems involved ..................... 26
       2. The probable scenario for the next decade . . . ........ 26
           (a) The methodology used . . . ................ 26
               (i) Aetal production per ton of nodules ......... 27
              (ii) Size of operations. .............. . . 29
             (iii) Entry of new nodule operotions ............. 29
           (b) Forecasting probable metal rc-.overy from nodules by 1985.             30

    74-13396
                                           0003i

                            CONTENTS (continued)
                                                                  Page

        3. The likely impact of nodule mining ............... 33
            (a) Nickel ...........................                                      34
            (b) Copper .......................... 35
            (c) Manganese ......................... 37
            (d) Cobalt .......................... 39
            (e) Summary .......................... 41
        4. The long-term prospect of nodule mining ............ 43

    III.  PROMOTING THE RATIONAL DEVELOPMENT OF HODULE RESOURCES   .......                 145

        1. Identification of major policy objectives ........... 45
            (a)  Encouraging the development of nodule resources ...... 45
            (b) Minimizing the impact of nodule mining on mineral
                exports of developing countries .............. 45
            (c) Ensuring the participation of developing countries
                in the nodule industry .................. 46
            (d)  Maximizing revenues for the international authority   . ..   . 46
            (e) Preservation of the marine environment .......... 47
            (f) Conservation of nodule resources .............                          h47
        2. Harmonizing conflicts of interests ............... 47
        3.  Balancing nodule development against its impact on mineral
            exports of developing countries .... . .48
            (a) Basic approaches .....................48
            (b) Long-term planning: the preventive approach ....... 49
            (c) An alternative approach - indirect controls ........ 57
            (d) The compensatory approach .................                             58
            (e) Short-term price fluctuation ............... 59
        4. Participation of developing countries ............. 59
            (a)  Indirect methods:  transfer of knowledge of resources
                and techniques ...................... 59
            (b) Direct methods - joint ventures ... 60
        5. Revenue for the international machinery ............
            (a) Value of nodules versus value of processed
               minerals/metals ...................... 62

                                             00035

                                CONTENTS (continued)

              (b) The profit potential of the nodule industry-
                  preliminary estimates of revenues and costs .                      .          t
             (c) The share of revenues of the international authority...
                  (i) The basic component of the authority's share
                       of revenues . . . . . ,.................
                 (ii) Auction of mine sites................
         6. Preservation of the marine environment .............
         7. Conservation of nodule resources ................

                                    List of tables

    Table No.

      1.  Estimated metal production per million tons of high grade
          nodules (metric tons) .......................

      2. Probable metal production from nodules in 1985 (in metric tons)

       3. Estimated market share of nickel production from nodules
          by 1985 (thousand metric tons)..................

      4. Copper statistics:  mine production, refined consumption and
          net exports of developing and industrial countries, 1968-1972
          (thousands of metric tons)....................

      5. Cobalt:  world mine production (Co. content in metric tons) . ...

      6. Manganese, nickel., copper and cobalt:  probable production from
          nodules, estimated world demand and estimated net import
          requirement of industrial countries in 1985.                ...........

      7.  Summary presentation of possible scenarios of controlled
          nodule development........................

      8.  Hypothetical mineral -production from nodules based on full4
          utilization of the planning guidelines..............

      9. Estimated revenue of two possible sizes of nodule
          mining operations .........................

     10. Estimated operational results of two possible sizes of nodule
          mining units (millions of $US)..................

                                             00036

                                    CONTENTS (continued)
       Table No.

         11. Estimated operational results of two possible sizes
              of nodule mining operations after payment of two
              alternative shares of revenue to the Authority
              (in million $US).........................

         12. Estimated return on equity investment (50 per cent
              of total investment) of two possible sizes of nodule
             mining operations (assumed interest rate on
              borrowed funds = 10 per cent) . . . ................

         13. Area of one degree square blocks (in square kilometres)......

                                       List of figures
       Figure No.-

          1. Offshore exploration of nodules ..................

          2. Components of nodule mining systems ................

          3. Artist's conception of the likely operation of three
              systems proposed for mining nodules ................

          6. Forecast of entries into nodule mining:  1976-i985........

          7. Capital and operating costs vs production (costs based
              on full stream production at outset)...............

          8. Summary presentation of issues and alternatives relating
              to sea-bed resource conservation.................

    4     ~9. Two hypothetical cases of subdivision of the international
              area...............................

         10. Three possible approaches to the reservation of areas
              for future use..........................

                                                   00037

                                        PREFACE

         This report was prepared in response to General Assembly resolution
    2J50 A (XXV) of 17 December 1970 as a follow-up of two previous reports on the
    edonomic implications of sea-bed mining submitted to the Sea-Bed Committee in
    1971 1/ and 1972. 2/ It responds in particular to the operative paragraph of this
    resolution, which requested the Secretary-General to:

              "(a) Identify the problems arising from the production of
         certain minerals from the area beyond the limits of national
         jurisdiction and examine the impact they will have on the economic
         well-being of the developing countries, in particular on prices of
         mineral exports on the world market;

              "(b) Study these problems in the light of the scale of possible
         exploitation of the sea-bed, taking into account the world demand for
         raw materials and the evolution of costs and prices;

              "(c)  Propose effective solutions for dealing with these problems;'

         Following past practice, the Secretariat of UNCTAD made some comments and
    suggestions on an earlier draft of this report. Moreover, the findings 3/
    of UNCTAD's report on manganese ore (TD/B/483 of 23 April 1974) were also
    taken into account.

         The first section, "Review of sea-bed mining activities", up-dates a previous
    report 4/ presented in 1973. In the second section, an analysis is made of the
    probable impact of sea-bed mining on world metal markets and on developing
    country exporters of minerals, during the period 1976-1985. The final section
    deals with a number of policy questions, with special emphasis given to the
    objectives of minimizing the impact of nodule mining on mineral exports of
    developing countries and of maximizing revenues for the international authority.

         1/ United Nations, "Possible impact of sea-bed mineral production in the
    area beyond national jurisdiction on world markets, with special reference
    to the problems of developing countries: a preliminary approach" (A/AC.138/36),
    May 1971.
         2/ United Nations, "Additional notes on the possible economic implications
    of mineral production from the international sea-bed area" (A/AC.138/73),
    May 1972.
         3/ Although its projections were based on somewhat different assumptions,
    the conclusions reached in the UNCTAD report on the impact of nodule mining
    on manganese markets are essentially similar to those in this report.
         4/ United Nations, "Sea-bed mineral resources: recent developments"
    (A/AC.138/90), July 1973.

                                                   00038

         The only resource studied in this report is manganese nodules. Hydrocarbons
    were not considered because very little production is expected in the foreseeable
    future from the deep sea-bed, and in any case the possible impact of such
    production is likely to be minimal. Nor were other minerals such as pIiosphorliLes,
    metalliferrous muds and brines, and deposits in the bedrock taken into acco-unt
    in this study.

         It should be borne in mind that the materials and observations contained in
    this report are based on available information on future market conditilons and
    the technology being developed for nodule exploitation. Considering the nature
    of long-term market forecasts 5/ and the limited knowledge of nodule technology
    outside the few groups engaged in research and development work, the analyses
    and observations should be considered as tentative and as calling- for periodic
    review. It should be clearly understood that the ideas put forward are merely
    illustrations of the policy implications of some of the possible mechanisms which
    could be employed under the international regime.

         5/ For example, it is possible that the actions of organizations of mineral
    exporting countries might result in metal prices considerably different
    from those assumed in the report. Some of the recommendations of the Special
    General Assembly on Raw Materials could also change the existing perspective
    of future mineral markets.

                                                    00039

                  Suimmary of report on economic impact of sea-bed mining

             This sunmmary provides a brief review of the contents of the report.
         In view of the complexity of the subject, however, it necessarily omits
        much of the analyses and accordingly should not in any sense be taken
         as a substitute for the text of the report itself.

        Manganese nodules are the most likely deep-sea minerals to be exploited in
    the foreseeable future. Nodules are composed of fine-grained oxide material and
    are distributed widely over the floor of the world ocean. They vary widely in
    their composition, as well as in their physical and chemical properties. There is
    now considerable commercial interest in exploiting them for their component metals,
    chiefly nickel, copper, cobalt and manganese.

         Only about 3 per cent of the sea floor has been extensively surveyed.
    However, intensive exploration in recent years has revealed enough about the extent
    and location of deposits to permit commercial exploitation of nodules. Potential
    commercial deposits exist in the Pacific and Indian Oceans, while none have yet been
    located in the Atlantic Ocean,

         Various commercial groups have completed the exploration or prospecting phase
    and are now evaluating potential mine sites. Site evaluation focuses on estimating
    the average concentrations of the constituent metals in nodules and on the nodule
    density per unit area of the mine site. These are the key parameters which, with
    bottom topography, affect the potential profitability of a mine site. There is
    great interest in the central Pacific region, which contains extensive concentrations
    of higher value nodules. Within this region, some evidence suggests that nodules
    with the highest potential value are concentrated in an east-west belt between
    60N and 20ON latitude and extending between 1100W and 180OW longitude.

         The physical problem of recovering the nodules from the sea floor is proving
    to be a difficult one. As surficial deposits, nodules will be dredged and either
    pumped or hoisted from the sea floor. At the surface facility the nodules will then
    be loaded into barges or ore carriers for transportation to a processing plant.
    Under hydraulic lifting systems the nodules must be concentrated within a
    relatively small area so that the suction system can operate efficiently; this
    gathering process seems to be one of the most serious stumbling blocks in test
    operations.

         Several national governments have been and are involved in nodule mining
    through various forms of direct and indirect subsidization of mining activities.
    They have funded research on exploration, offered tax relief and the use of
    government facilities for research on processing, and in some cases governments
    are contemplating direct participation in mining ventures.

         By most estimates, it appears that nodule mining will prove tL-o be a commercially
    profitable operation. Although the physical, technical and logistic problems are
    formidable, the existing technological capability can allow the industry to work.
    The question of the probable impact of sea-bed mining~ on world markets centres on
    the degree of competitiveness between marine and land-based sources of metal supply.
    To be rigorous, a study of this question would require a comparison of the relative
    sup-Dlv costs of these two sources. This is not practicable for the following

                                                          00040

    reasons: (a) most information on estimated costs of individual firms or consortia
    is still proprietary and closely guarded;(b) as the industry matures costs will
    drop from initial levels due to a "learning-by-doing" effect.  Also, technical
    progress in engineering, materials, and design will serve to further reduce costs
    over timei(c) the range of costs among land-based producers is extremely wide,
    making it difficult to find a uniform supply price for land-based producers as a
    whole; (d) the profitability of nodule mining, the volume of production, and the
    imnact on prices will be affected by the nature and extent of any regulation of the
    industry by the Sea-Bed Authority.

         Therefore, in order to approximate the likely impact of nodule mining, certain
    assumptions must be made to facilitate the analysis. In this report, the assumptions
    made are based on the latest information available, on the discernible trends, and on
    the known plans of sea-bed miners.

         Given the state of preparedness of the industry, commercial metal production
    from nodules could commence toward the end of the decade, though nodule mining
    might start as early as 1976. 6/ The decision to go ahead and begin production will
    depend on whether: (a) the firms feel that their mining and metallurgical processing
    technology is econcmically viable; (b) that they are on safe legal grounds with
    security of investment and assurance of exclusive access to their chosen mine sites;
    and (c) that they have adequate financing for their ventures. Once the go-ahead
    decision is made, it is assumed that commercial operations can commence within
    three to five years.

         Perhaps the most critical assumptions deal with the expected rate of development
    of the nodule industry, the average grade of nodules processed, the constituent
    metals to be recovered and the metallurgical yields. Metal production from nodules
    will be affected by the pattern in which new operations enter the field each year
    and by increases in capacity of existing operations. Economies of scale will
    dictate the size of individual operations; the likely sizes being of one and three
    million ton capacities. Six groups are expected to be in operation by 1985, the
    total volume of dry nodules being processed in that year amounting to 15 million tons.

         According to mcst experts, nickel will be the mainstay of the nodule industry.
    Copper, cobalt and nickel will be produced jointly, with manganese and several
    trade metals probably being produced as by-products from the tailings. As a
    guideline for their own planning, nodule miners look for a combined nickel and
    copper content equal to three per cent of the dry weight of nodules. Other metals
    will be recovered if the additional costs of processing are covered by the
    additional revenues from these metals, which in turn depends on their prices. Thus,
    there can be no uniform, industry-Tride assumptions about production of other metals.
    For example, industry plans vary widely with respect to manganese production, not
    only regarding its volume but also its form, i.e. ore, ferromanganese or manganese
    metal.

         For nickel, a minimum six per c&mt per annum long-term growth rate is
    assumed. In 1972, the share of dev~,Ioping countries in world production of nickel
    was only 13 per cent, although this -Caere is expanding rapidly. Production from
    nodules might amount to 18 per cent of the total world demand in 1985. This

         6/ The rassumed timinv of entry (-.' nodule operations is shown in figure 5.

    volume of production would depress prices somewhat, but the impact would be lessened
    by the good growth prospects for nickel, and by the fact that developing producers
    account for a small share of the total market. Nickel production from nodules might
    cause some high cost laterite projects under consideration to be abandoned, but it
    should not have a serious effect on land-based production as a whole.

        The world market for copper is huge compared to that for nickel, being about
    14 times the size of the nickel market in 1972. Copper prices rose dramatically
    from 1970-1974, reaching a record level of $US 1.10/lb. in early 1974. Of the metals
    contained in nodules, copper production is the least concentrated among producers.
    It is expected that the demand for copper will show an annual percentage growth rate
    of 4-5% to the end of the century. Production from nodules might supply about 1.3%
    of world consumption in 1985 and would displace only 5.5% of the net import
    requirements of developed countries by that time. Copper production from nodules is
    expected to have a minimum impact on a relatively large, growing and somewhat diffuse
    market.

         Manganese might be recovered from nodules in two forms, either as pure metal or
    as ore-equivalent. More than 90% of the manganese produced is used in the form of
    ferromanganese in the manufacture of steel; thus the rate of growth in its
    consumption will tend to parallel that of steel production. On the other hand, the
    market for manganese metal is relatively small. Metal production from one operation
    of one million tons/year in 1985 might amount to twice the volume of projected
    demand. Therefore, manganese metal supply from nodules would depress prices.
    Denending on the form and volume of manganese recovery from nodules, the export
    earnings of developing country producers might drop significantly. However, with
    just one exception, developing countries are not dependent upon manganese exports to
    a great degree.

         Cobalt is a relatively expensive metal with a small market, and its value in
    world commodity trade is rather small. By 1985, production from nodules could
    account for about half the volume of world output while effecting a dror in price to
    about two-thirds of current levels.

         The long-term prospects of the nodule industry are tied closely to nickel and
    copper. In the long-term, if capacity expansion in sea-bed mining was sufficiently
    large to depress the price of nickel to approximately the price of copper, this
    would open up some important substitution possibilities of nickel for copper. In
    this case, the prospects for the industry might warrant a large second-round
    expansion. This scenario is somewhat speculative, and possible only in the absence
    of any form of regulation.

         Although everyone agrees that nodule resources should be developed in a rational
    manner, opinions differ on what specific objectives come under this very general
    goal. In the Sea-Bed Committee, several policy objectives were proposed and
    discussed, in particular: to encourage nodule development so as to enlarge the
    world resource base, to minimize the impact of nodule exploitation on developing
    countries exporters of minerals, to ensure the participation of developing countries
    in sea-bed mining activities, to promote the conservation of nodule resources and to
    preserve the marine environment.

            Some of' these objectives and the conflicts between them indicate the need for
       a trade-off between efficiency and equity, which is one of the fundamental issues
    *  under any form of economic organization.  Some would argue that the nodule industry
       should be free to operate without restraint, since under conditions of Coimnetition
       and free entry, the nodule resources would then be developed at Min~imum cost.
       Others contend that unrestricted nodule exploitation would benefit prirnari-ly those
       countries developing the necessary technology whiCh are also the largest censirne2 s
       of minerals; thus many developing countries mineral exporters rni~ht be h~irmed by
       nodule exploitation.

            Two different approaches are examined in the report for balancing the
    *  objectives of efficiency and equity:  the compensatory approach, whereby the nodule
       industry would be allowed to operate with little or no e~plicit regulation, but some
       form of compensation would be paid to developing countries if they experienced a
       loss in export revenues; and the preventive approach, which would involve some form
       of direct regulation of the nodule industry by an International Authority. The
       second approach only is discussed in detail in the report.

            Under a general preventive approach, many specific regulatory formulae would
       be possible, depending on what the Authority chooses as the basis of regulation.
       The report considers the effects of choosing nickel as the basis for regulation.
       In this case, the Authority would allow new ventures to come on board and production
       from nodules to proceed so as to supply part or all of the increase in demand for
       nickel in each year. This type of scheme would recognize the complementarity
       between land and marine sources, since production from both sources would be
       growing. It would also recognize the need of the industry to remain viable, and
        since nickel would be one of the main generators of industry revenue, this would be
       assured.

            Metal production from nodules could, for example, be geared to supplying
       between 50 and 100 per cent of the increase in demand for nickel, with possible
       additional restrictions on recovery of other component metals, such as manganese.
        Assuming that the demand for all these metals would be growing at their long-term
        rates by 1985, and the maximum production is authorized, sea-bed mining could make
        considerable inroads into the cobalt market, accounting for 66 per cent of world
        demand. the share of world demand for nickel supplied by nodules could be
        28.6 per cent by 1985, under these assumptions. 7/

             Even taking into account a share of revenues for the International Authority,
        it appears that nodule mining would still show a financial return commensurate with
        that of other investments. On the basis of a wide range of analytical assumptions,
        some estimates are contained in the report. If, for example, the Authority were to
        take a 50 per cent share of net revenues, the medium estimate of the take from a
        single mining operation of 3 million tons/year would be $96 million. This would
        still allow the miners a 36 per cent return on total investment after payment of the

             T/ Detailed presentation of hypothetical production from nodul es, following,
        these guidelines, is found in table 8

                                                         00043

    Authority's share.  This is more than commensurate with the average return on
    investment in mining in the United States which was 10.4 per cent in 1972. 8/

         Thatever specific form regulation by the sea-bed Authority might take, the
    re-ime must have sufficient flexibility to adapt its mode of operation to the
    cian7:ng conditions of world markets and of the industry itself.  Without this
    flexibility, the Authority would be severely hampered, and it would be extremely
    difficult to ensure that the objectives discussed under the goal of rational
    development would be achieved. A more practical problem will be to determine on
    which stage of production the take of the Authority would be based.  If the value
    of nodules on board ship were to be used as the base, then the lion's share of the
    benefits from the common heritage of mankind would accrue to the producing countries.
    Nodules on board ship would represent only 6 to 10 per cent of the value of nodules
    after the processing stage. The Authority must be able to capture some of the value
    added by processing, since the significant spinoffs from establishing the processing
    plaits rill again go to the producing countries.

         One possible way to tackle the objective of conservation of nodule resources
    would be to employ a grid system for demarcating the area of potential mining
    operations.  Within the grid system, only selected blocks might be auctioned by the
    Authority to potential producers in any one year. The take of the Authority might,
    for example, consist of two parts: the proceeds from the auction plus a levy on net
    or gross revenues. The highest bidder would acquire control over the mine site for
    a fixed period which would be long enough to allow him to recoup his investment,
    after which the site would be returned, in a specified condition, to the Authority.
    Certain blocks would not be auctioned off immediately, but reserved for future use.

         The range of possible policy alternatives open to the International Authority
    is quite wide. The regulatory options discussed in the report are by no means the
    only feasible alternatives. For example, it is not necessary that the Authority
    license commercial exploitation of nodules by private companies. Alternatively, the
    Authority might enter into Joint ventures, or it might choose to undertake the
    entire operation of sea-bed mining by itself.

         In any case, it appears that even after paying the levies of an International
    Authority, sea-bed mining will be a commercially profitable operation. There are
    concrete policy options which can balance the interests of the mineral producing
    and consuming nations, and some of these possible options are discussed at length in
    the report. It should be emphasized that the pace of change in world economic
    affairs - especially in regard to exchange rates, commercial policies and inflation -
    can significantly alter the economic picture within a few years. Any form of
    international regulation of sea-bed mining must be sufficiently flexible to adapt
    itself, its methods and objectives to the changing economic order.

          / The detailed estimates of revenues per miningf operation of the Authority are
    given in table 11.

                      I.  REVIEW OF SEA-BED MINING ACTIVITIES 9/

        Deep sea-bed mining is a complex, multifaceted undertaking. Exploitation of
    nodules may be classified into three broad stages, namely: (1) the search for
    nodule deposits, (2) mining, and (3) metallurgical processing. A summary of the
    most important steps involved in each stage along with the most recent activities
    of companies and other institutions involved in research and development is
    presented below.

    1.   The search for nodule deposits

         In the search for nodules, activities of a scientific character can generally
    be distiiguished from the stages of exploration and evaluation because of their
    different objectives. Together they form a continuum in the accumulation of
    knowledge about sea-bed resources needed prior to commencement of commercial mining
    operations, and it is difficult to define where the scientific inquiry ends and
    the:~$e.~ aSexploration begins and where this stage ends and evaluation starts.

         (a) Procedures used

         Exploration is the broadly based survey using all available methods: the
    search generally begins over a large area and progressively narrows down to sites
    with mining potential.lO/ In industry circles this stage is generally referred to
    as "prospecting". It requires mapping, sampling of surficial and sub-bottom
    materials and making geophysical and geochemical measurements, and is best
    approached as a phased programme of increasingly more detailed surveys. II/

         A large array of scientific instruments and devices are required to collect
    the necessary data (see figure 1). Exploration vessels must carry sophisticated
    positioning equipment (satellite, celestial) and computers to correlate all sample
    data and other observations with precise co-ordinates. Acoustic and magnetic
    systems are used to obtain geophysical information about the nature of the sea
    bottom, The actual search for nodule deposits is made through optical systems such
    as closed-circuit T.V. and still and movie cameras.

         9/ Since no official communication or information on recent sea-bed mining
    activities was available, this section was prepared on the basis of publications,
    such as journals, technical periodicals and company press releases. Accordingly,
    the Secretary-General cannot vouch for the accuracy of all the material covered
    in this report.
         10/ United Nations, Report of the Ad Hoc Committee to Study the Peaceful Uses
    of the Sea-Bed and the Ocean Floor Beyond the Limits of National Jurisdiction
     (A/7230) New York, 1968, p. 25.
         LI See J. E. Flipse, M. A. Dubs, and R. J. Greenwald, "Pre-Production
    Manganese Nodule Mining Activities and Requirements", Mineral Resources of the
    Den ~bqd, Hearings of the Subcommittee on Minerals, Materials and Fuels of
    POW~    t   ta&tes Senate on Senate Bill 1134, May-June 1973, pp. 607-614.

                                                                                 I..
                                                00045

                          Figure 1. Offshore exploration of nodules

        Ulshure Exploration of 'res

    Navigation                 Oceanographico              Survey of                       Localization
                         Survey                     Ore Deposits                    of launched
                         0.    ~f-    -.L      �h ~d                                 Survey Gauges                                                             0
                        �  brnoM b.V                         'Mn       $01        opww~

    Bafthyretry              @             .w               .A

    Reflection         -        "MY
    Seismic                    *~~00,,
       dw"

                  0t0, fly~~r~00Or0,                                                                                    /

                                     0001010,000,0 d~~~~~~~~nO

                                     ,.001r0000~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~
                                                                          ~~~~~~~~ /GO

                                                                                                /                          /)
                                                                                       I

                       Courtesy of A. M. R.    from         the    F.   R.  of German/

         The spacing at which samples are taken depends on results obtained, and
    generally range from 5 to 50 miles.  The devices most commonly used for collecting
    samples are the free-fall sampler also called "boomerang", gravity-corer,
    piston-corer and dredge.  The free-fall sampler is extensively used by
    institutions and industry groups such as Kennecott, Centre national .pour
    1Jexnloitation des oceans (CNEXO), Preussag and Global Marine.  These fre-a
    devices grab a small sample of nodules from an area of about I square fect,. L-/
    Corers are used to derive information on the sediments underlying the nerd cu
    deposit.  Dredge sampling is used to collect a large volume of nodules for
    metallurgical testing from areas known to contain attractive nodule& depost-,s

         A detailed appraisal follows the discovery and outlining of a potential Tiine
    site. The objective is to provide information upon which to base feasibility
    studies. 13/ Recoverable nodule grade and concentration estimates are the key
    parameters sought in evaluation surveys. The equipment required for evaluation
    is similar to that needed for the exploration stage.  However, greater attention
    must be given to the precise correlation of sample data and other observations
    with their geographic location.

         (b) Recent activities

         Given the difficulty of differentiating in practice between the activities
    of exploration and evaluation, they will be described jointly. Most of the major
    groups involved in manganese nodule mining investigations have completed the
    exploration stage and are aware of a number of potential manganese nodule mining
    sites. 14/ Some groups are believed to have virtually completed the evaluation
    stage.

         Deepsea Ventures has carried out 33 cruises in the Pacific with the R/V
    Prospector in three and a half years of work at sea. Kennecott Copper sponsored
    exploration cruises before initiating its own surveys in 1967. 15/ The company
    has dredged about 250 tons of nodules for processing research. Global Marine has
    been conducting nodule surveys on behalf of Summa Corporation. International
    Nickel has undertaken several cruises in recent years using chartered vessels.

        12/ The operation cycle of these devices is approximately three hours.  It is
    reported in French and German expeditions that up to 10 per cent of the devices
    may be lost during a cruise. W. Kollwentz, "Exploration Methods and Techniques -
    Experiences with R. V. Valdivia", in Meerestechnik, December 1973, p. 192.
        13/ United Nations, Mineral Resources Development with Particular Reference to
    the Developing Countries (E.70.II.B.3), New York, 1970, pp. 3-5.
        141/ A. J. Rothstein and R. Kaufman, "The Approaching Maturity of Deep Ocean
    Mining - The Pace Quickens", in Offshore Technology Conference Preprints 1973,
    vol. I, pp. 323-344.
        15/ Kennecott Management Communication, vol. 2, No. 10, November 1970, p. I.

                                                     00047

         The West German Arbeitsgemeinschaft Meerestechnischgewinnbare Robstoffe (AMR)
    group has carried out a ,umber of cruises in the Pacific since 1971. This group
    chartered for two years Deepsea Venture's B/V Prospector and has been using since
    1972 the well-equipped R/V Valdivia (see figure 1). The AMR group plans five
    expeditions south-east of Hawaii in 1974. CNEXO of France, in association with
    Le Nickel, has undertaken surveys in the South Pacific since 1970.  CNEXO has
    established an oceanographic centre in Tahiti which supports its extensive nodule
    programme in the general vicinity of French Polynesia. 16/

         The Sumitomo - DOMA (Deep Ocean Minerals Association) group has carried out
    extensive nodule surveys in the Pacific and has dredged nodule tonnage for
    processing research. DOMA, which is made up of 27 leading Japanese companies,
    completed an advanced vessel specifically designed for sea-bed resource exploration.
    The Soviet Union has conducted several cruises using the R/V Vityaz and has
    reported a number of interesting nodule grades from the South Pacific. 17/

    2.   Nodule mining technology

         The mining systems under development comprise four major components: the
    mining/loading head; materials elevation/hoisting system; surface facility; and
    product transportation to shore plant. A schematic presentation of the major
    components of deep-ocean mining systems is given in figure 2.

         (a) Nodule collection

         Several forms of nodule gathering apparatus are under development. The
    dredge variety currently is thought to have the best potential for use in
    commercial production. Typically the dredge incorporates a sizing system to
    pick up nodules within a certain size range while excluding very large pieces as
    well as fine bottom silt. It is usually sufficient to drag the dredge head across
    the ocean floor to loosen the nodules from the substratum. The mining equipment
    must be kept as mechanically simple as possible to minimize maintenance. One
    problem encountered, however, is the construction and operation of the very wide
    dredge head needed to collect the desired volume of nodules per hour (200 to 400
    tons). The large dredge size is required because of the relatively low nodule
    concentration at the sea floor (1.5 to 5 lb/sq. ft.) and the maximum practical
    speed for operation of the system (1 to 3 knots).

         Three miner/loaders are shown in figure 3. The Deepsea Ventures and the
    AM. are both airlift systems with mining heads of the towed dredges type.  The
    bottom crawler has a tracked drum for nodule pick-up. 18/

        16/ CNEXO annual report, Paris, 1972.
        17/ N. S. Skornyakova and P. F. Andrushchenko, "Iron Manganese Nodules From
    the Central Part of the South Pacific", Oceanology, vol. 8, No. 5, 1968,
    pp. 692-701.
        18/ G. W. Sheary and J. E. Steele, "Mechanical Deep Sea Nodule Harvester",
    United States Patent 3,480,326, 25 November 1969.

                                    F.,ure 2. ComponentR of nodule mining system

     zIlE RS                              MAT E RIALS         LSt1lE                               PRODUCT
                                                                          SERVICE                  TRANISPORTATIONI
                                                                           FACILITY

                                         COrNT I 14UOUS

     DREDGE
                                                                                                           DRY BULK
     SELF-PROPELLEP                      HYDROLIFT                                                        CARRIER
     BUOY A 4t

     DRUIN                               AIRLIFT                                                          SLURRY
             DRUM >                                                       L AT F 0R M1
    TRACKEC ROLLER                       LIGHT-MEDIA
     BLADES AN1D RIDEIR                       LIFT                                                        BARGE
     ROTATING ARM

     TRUSS S\4EE?                    JCOnT IPUQUS LI-  E
     V-S .EEP                             BUCKET
     GATHERINC ARtM
                                            B AT CH

                               ______                       ->~lw  I ING SHIP

    ITOWED ORE-,ZEI                  -I'I OYAIlT HOPPERr

         (b) Materials elevation

         Another critical factor in nodule mining is the materials elevation/hoisting
    system. Continuous systems can be based on: air lift, hydrolift (hydraulic
    hoisting), light-media lift and mechanical lift such as the CLB system. Batch
    systems include wireline dredging which, although useful for collecting tonnage
    samples, is not regarded as an economic large-scale production system due to its
    high cost when used at great depths. A bouyant hopper (submersible hopper)
    system has been proposed. 19/20/ Whether this system is being developed for
    materials elevation is not known, although the concept is somewhat akin to the
    Summa Corporation barge. 21/

         An air-lift is technically a three phase flow - air, nodules, and water.
    Compressed air is injected into the main pipe at various water depths to sustain
    the lifting action. Deepsea Ventures successfully tested an airlift device in
    2,500 feet of water over the Blake Plateau in 1970. On 6 May 1974, Tenneco, Inc.
    announced the formation of a new consortium with three Japanese companies:
    Nichimen Co. Ltd., C. Itoh and Co. Ltd., and Kanematsu-Gosho Ltd. An additional
    European partner will be announced shortly. The five companies will have an
    equal equity participation in Deepsea Ventures.    They will invest about
    $US 20 million over the next three years to test mining and processing systems
    and to evaluate an ore body in the Pacific Ocean.

         A hydrolift is technically a two-phase flow - nodules and water. The pump
    can be located close to the bottom or at an intermediate depth 22/ (see figure 3)
    The Technology for hydraulic and hydrolift pumping is well-developed and is used,
    for instance, in the coal industry. But working at such depths and lifting such
    volumes as required in nodule mining represent giant steps beyond current
    capability. The hydrolift technique seems to be favoured by Kennecott, 23/ which
    has recently announced the formation of a multinational group including, in
    addition to Kennecott (50 per cent equity), Rio-Tinto Zinc (20 per cent) and Gold
    Fields (10 per cent) of the United Kingdom, Norande Mines (10 per cent) of Canada
    and Mitsubishi Corp. (10 per cent) of Japan. They announced plans for a large-
    scale mining test as part of a $US 50 million, five-year mining and processing
    development programme. 24__/

        19/ G. W. Lehmann, "Submersible Mining, Lifting, and Towing Barge", United
    States Patent No. 3,220,372, 30 November 1965.
        20/ J. C. Wenzel, "Systems - Development Planning", chapter in Ocean
    Engineering, Brahtz, J. F. (editor), J. Wiley, 1968, p. 110.
        21/ Business Week, 16 June 1973, pp. 47, 50.
        22/ J. L. Mero, "Dredge Underwater Pick-Up Head Assembly", United States
    Patent No. 3,226,854, 4 January 1966.
        23/ C. R. Tinsley, "In Search for Commercial Nodules, Odds Look Best in
    Miocene-Age Pacific Tertiary System", Engineering and Mining Journal, June 1973,
    pp. 114-116.
        24/ Metals Week, 4 February 1974, p. 6.

                                                    00050

               Figure 3. Artist's conception of the likely operation of three
                          systems proposed for mining nodules

       DEEPSEA VENTURES                                                             BOTTOM CRAWLER/
       OCEAN MINING SYSTEM                                                          SEMISUBMERSIBLE
                                                                            SURFACE FACILITY
                                                                                C ONCEPT

                       .nI~~~~~~~~~~~~~~~~~~~. ~~~~~~~~~P ivo ted
     O RE CARRIER~   itPOUSO  RG ~lOI   AS

                    PI PE

                                                                                  Pump ~Platform
                                           /                                     ~~~~~~~~~~~~~~~Capsule

      DUMP VALVE Bto

                                            Nodule Mining by Airlift System

                  DEEP OCEAN
        DREEHAD   MINING  SYSTEM           ___

    Courtesy of Deepsea Ventures

                                                       00051    Courtesy of A. M. R.             1.

         The Hughes system is thought to operate on the hydrolift principle. The
    major components of the system are the 36,000-ton Hughes Glomar Explorer and a
    sea floor mining vehicle which is connected to the ship by a string of 16-inch
    pipe and an umbilical cable that supplies electric power and control circuits.
    A large submersible barge plays a key role in the system. The mining vehicle
    is too large and heavy to be handled by the ship's gear in a conventional manner
    and must be installed from beneath the ship. The unit is loaded onto the
    submersible barge which meets the ship in calm waters of a specified depth. There,
    the barge submerges and the docking legs of the ship engage the mining vehicle
    which is then connected to pipestring lowered from the ship's rugged derrick. 25/
    The Hughes ship (figure 5) left the west coast of the United States in January 1974
    to join the barge for tests off Baja California. 26/ Actual mining on a pilot scale
    may begin in late 1974 or early 1975.

         The CLB system uses a continuous polypropelene braided rope with dredge
    buckets attached. At the top, the loop is wound through traction motors while
    the bottom part of the loop drags along the ocean bottom. The CLB system was
    tested off Tahiti in August 1970. 27/A later CLB test in August/September 1972
    recovered seven tons of nodules off Hawaii. 28/ Several participants of the CLB
    consortium under the leadership of CNEXO of France, are continuing work on a
    modification of the CLB, 29/ which would use two ships working in tandem (see
    figure 4); the main components of this modified system are expected to be ready for
    tests in 1974. 30/ Sumitomo is developing continuous ship handling equipment for
    the dredge baskets and is also doing additional research in the operation of the
    CLB system. The participants of the CLB consortium met in Houston, Texas, in
    early May 1974 to plan the financing and construction of the modified two ship
    system, which is expected to be ready for tests in late 1975. The system will be
    built in France by Ateliers et Chantiers de Bretagne. 31/

         The Sumitomo group, in co-operation with MITI is now proposing a large-scale
    manganese nodule venture with possible commercial operations by 1980. 32/
    Sumitomo would probably use the CLB mining technique.

        25/ "Hughes Glomar Explorer begins sea tests of mining systems", Ocean Industry,
    March 1974, pp. 32-34.
        26/ Ocean Science News, 11 January 1974, p. 1.
        27/ Y. Masuda, M. J. Cruickshank and J. L. Mero, "Continuous Bucket-Line
    Dredging at 12,000 Feet", Offshore Technology Conference, 1971, Paper No. 1410.
        28/ Mining Magazine, January 1973, P. 7.
        29/ CNEXO, Annual Report, 1972, Paris.
        30/ CNEXO, Bulletin d'Information, No. 61, January 1974, p. 5.
        31/ Ibid.
        32/ Metals Week, 11 June 1973, p. 2.

                                                      00052

         (c) Surface vessel

        The so-called first generation mining systems are likely to use the mining
    ship itself as the surface platform. Tug assistance may be used for directional
    movement in some systems. A pipe system for nodule lifting will require a
    derrick on board ship. Alternatives to a mine ship are a spar buoy or a
    semi-submersible platform. A spar buoy is a long cigar-shaped semi-submersible
    which when tilted on one end creates a small but highly stable working platform
    on its other end. 33/ Semi-submersible floating platforms are extensively used
    in the off-shore oil industry for work in deeper waters (figure 3). Both the
    spar buoy and the semi-submersibles, however, have a poor capability for lateral
    movement.

         The first generation of mining ships will do minimal processing at sea -
    perhaps crushing and/or drying the nodules - and the nodules will be transported
    in bulk by the mining ship itself (particularly a CLB mining ship 34_/) or
    transferred at sea to a dry or bulk carrier.

    3.   Metallurgical processing

         Nodules have a complex microscopic structure and are composed of fine-grained
    oxide material. 35/ They can vary widely in chemical and physical properties
    according to location, e.g. Blake Plateau nodules from the Atlantic are high in
    calcium, whereas those from the North Pacific are more siliceous. As a result,
    processing technology and costs for one type of nodule may not apply elsewhere.

         Kennecott, Deepsea Ventures and Inco are expected to have completed nodule
    processing research. 36/ Other groups - Summa Corp., AMR, DOMA - are fairly
    advanced in their process development programmes. Kennecott has operated a
    half-ton per day pilot plant for over a year. Inco has been carrying out
    laboratory tests at its Sudbury plant in Canada. Deepsea Ventures has completed
    a phase of its tests in a one-ton per day pilot plant and plans to build a
    larger pilot plant, possibly in 1974.

         The two basic approaches to nodule processing can be classified as
    pyrometallurgical and hydrcmetallurgical, the latter based on chloride, ammonia or
    sulfur oxide reaction. Some of these processes are considered technically possible,
    but not necessarily economically feasible. Heavy emphasis is being placed on the
    development of hydrometallurgical nodule processing systems.

         33/ D. M. Taylor, "New Concepts in Offshore Production", Ocean Industry,
    February 1969, pp. 66-70.
         34/ J. L. Mero, "Recent Concepts in Undersea Mining", American Mining Congress,
    1971 Mining Show, Las Vegas, Nevada, 4 August 1971.
         35/ P. H. Cardwell, "Extractive Metallurgy of Ocean Nodules", Mining Congress
    Journal, November 1973, pp. 38-43.
         36/ Metals Week, 21 January 1974, p. 10.

                                                 00053

    4.   Government activities

         Government activity can take several forms, such as in particular: (1) direct
    sponsorship or funding of research and development; (2) direct venture in mining
    or processing; and (3) indirect sponsorship through use of government facilities,
    taxation advantages, or university aid. A brief review of the activities reported
    in recent years is given below. 37/

         Australia's Bureau of Mineral Resources used the Navy vessel R/V Diamantina
    to dredge for nodules along a 200-mile stretch of the 39th parallel in June 1972.
    In New Zealand, the Department of Scientific and Industrial Research is giving
    increasing emphasis to studies on the distribution and chemical composition of
    manganese nodules and coatings.  38/

         In France, CNEXO has been conducting extensive exploration for nodules and
    is sponsoring engineering research  for a modification of the CLB mining system.  39/
    Research on nodule processing is being done by the French Atomic Energy Commission.

         The Japanese Government has been very active in the sponsorship of exploration
    programmes and development of mining and metallurgical processing. Its Science
    and Technology Agency subsidized Sumitomo Shoji and Sumitomo Shipbuilding and
    Machinery to conduct tests of a small-scale CLB system in 1968. 40/ MITI subsidized
    the Sumitomo group in 1970 to carry out research 41/and conduct a 1/10-scale CLB
    test off Tahiti. 42/ MITI again subsidized Sumitomo in 1971 to develop
    automatically detachable buckets for the CLB. 43/ In mid-1972, the Industrial
    Science and Technology Agency gave a subsidy to Sumitomo Metal Mining to assist
    the construction of a $106,000 test plant which would be partially used to
    conduct research and development on nodules processing. 44/

        37/ See also United Nations "Sea-bed mineral resources: recent developments",
    document A/AC.138/90, July 1973.
        38/ ECAFE, Report of the Committee for Co-ordination of Joint Prospecting for
    Mineral Resources in South Pacific Off-shore Areas (CCOP/SOPAC), first session,
    7-13 November 1972 (E/CN.ll/L.343), p. 34.
        39/ CNEXO annual report, Paris, 1972.
        40/ Sumitomo Shoji Kaisha, "Historical Review of Manganese Nodule Development
    by the Sumitomo Group", 25 September 1972.
        41/ J. E. Flipse, M. A. Dubs and R. J. Greenwald, op. cit., pp. 602-700.
        42/ Y. Masuda, "Development Work to Deep Sea Resources of Manganese Nodule
    Using Continuous Line Bucket System (CLB) by Japanese Group and its Future". 2nd
    International Ocean Development Conference Preprints, Tokyo, 5-7 October 1972.
        43/ Sumitomo Shoji Kaisha, op. cit.
        44/ Japan Metal Journal, 26 June 1972, p. 8.

                                                           ~00050~4~/..

                                                    0005 ,

         Governmental participation will increase with MITI's proposed creation of
    a large semi-public venture for nodule mining and processing called Deep Ocean
    Mining Association (DOMA). Funds would be allocated by industry and Government
    starting in 1976 or 1977. 45/ MITI has subsidized the construction of a
    sophisticated new vessel which should be ready to conduct manganese nodule
    surveys by mid-1974.

         In the United Kingdom, the Department of Trade and Industry has offered
    financial support of up to $US 1.8 million to Rio Tinto Zinc and Consolidated
    Gold Fields, which are two British members of the recently created - five company -
    Kennecott group. These funds would be repaid if the project proves commercial.
    These companies have, in turn, agreed that British firms would have first call on
    their 30 per cent share of the metals to be produced by the Kennecott group. �6/

         In the United States, government activity in nodule research has been carried
    out by the United States Bureau of Mines, the United States Geological Survey and
    by the National Oceanic and Atmospheric Agency (NOAA). However, the only federal
    research centre dealing solely with marine minerals was closed by NOAA in
    March 1973. The United States Geological Survey maintains an active nodule
    programme. The United States National Science Foundation is sponsoring a
    $500,000 a year interuniversity programme under the auspices of the International
    Decade of Ocean Exploration. The money is being spent primarily in studying
    the origins and chemistry of the nodules. The programme's financial commitment
    is due to be expanded to $1 million/annum in the second phase. The University
    of Hawaii will receive some United States government support for nodule
    exploration and environmental impact surveys in 1974.

         The Soviet Union has been actively engaged in nodule research and prospecting
    since the early 1950s.  Large numbers of photos and samples of nodules have
    been obtained. 47/ A Marine Geological Prospecting Board was formed in early 1971
    to promote better co-ordination of activities in marine minerals. A COMECON
    meeting in Riga discussed geological prospecting and greater use of ocean
    resources. 48/

         The Government of the Federal Republic of Germany granted support for a
    Preussag-Metallgesellschaft joint venture to study and explore for nodules in 1969.
    In 1970 and 1971 the Government provided funds to charter Deepsea Ventures'
    R/V Prospector for Pacific nodule exploration cruises. Private firms converted

        45/ Metals Week, 15 January 1973, p. 9.
        46/ Metals Week, 4 February 1974, p. 6.
        47/ N. S. Skornyakova and P. F. Andrushchenko, "Iron Manganese Nodules form
    the Central Part of the South Pacific", Oceanology, vol. 8, No. 5, 1968,
    pp. 692-701.
        48/ New York Times, 24 April 1971, "Soviet Bloc Plans Big Sea-Bed Study".

                                                                                I...

                                                     00055

    a stern trawler to the deep-ocean exploration vessel R/V Valdivia, which is now
    used for nodule surveys. The West German Federal Ministry for Education and-
    Science has chartered this ship for four years, thus providing substantial support
    for a comprehensive nodule survey programme. It is reported that a sister ship
    is being built with the help of a government subsidy. 49__

         The AMR group - Preussag, Metallgesellschaft, Salzgitter and Rheinbraun - has
    received a $US 3 million subsidy for a feasibility study on the mining of
    manganese nodules. 50/ The AMR group is spending about $3.1 million a year on
    nodule research and development with $700,000 annually coming from the Bonn
    Government. 51/

         Tonga, Western Samoa and Fiji have shown great interest in locating commercial
    grade nodule deposits close to their shores. The United Nations Economic Commission
    tor Asia and the Far East (ECAFE), through its Committee for Co-ordination of
    Joint Prospecting for Mineral Resources in South Pacific Offshore Areas, is
    sponsoring two nodule survey projects in this area. 52/

    5.   Proposals for government legislation

         A bill before the United States Congress, usually referred to as S.2801
    (now S.1134) has been the subject of hearings before the Subcommittee on Minerals,
    Materials and Fuels of the United States Senate Committee on Interior and Insular
    Affairs. The bill basically provides for the United States Secretary of the
    Interior to register deep-ocean mining leases of 40,000 sq.km on a first-in-time,
    first-in-right basis. The 15 year lease could be held for a total expenditure of
    $US 6.2 million. Three-quarters of the lease would be relinquished within 10 years
    of the issue date or at the start of commercial production. An escrow fund
    established from a portion of United States taxes would be distributed to certain
    "reciprocating" developing States designated by the President. The bill would also
    give protection, to licensed United States companies, against possible adverse
    effects on their financial position that might be brought about by regulations of
    an international regime. The United States Government would indemnify such losses
    to licensed operators under this "interim" legislation until the fortieth
    anniversary of the issuance of the licence. 53/

        49/ D. R. Horn, B. M. Horn and M. N. Delach, "Ocean Manganese Noduleg Metal
    Values and Mining Sites", Technical Report No. 4, International Decade of Ocean
    Exploration, N. S. F. Washington, D. C., 1973.
        50/ Metals Week, 18 December 1972, p. 3.
        51_/ Metals Week, 12 March 1973, p. 10.
        52/ Project (CCSP-1/TG.1) "Seabed investigations for manganese nodules on the
    deep submarine shelf on east side of Tonga platform"; and Project (CCSP-1/WS.2)
    "Seabed investigations for manganese nodules in oceanic areas surrounding
    Western Samoa"; see ECAFE (document E/CN.11/L.343) op. Cit., pp. 33-38.
        53/ Senate Hearings, op. cit.

                           II. THE PROBABLE IMPACT OF NODULE MINING

       1. Forecasting future producticn of metals from nodules: the problems involved

    4       ~~The accuracy of a forecast is far less dependent on the complexity of the
       mathematical model used than on the quantification of the major parameters, and
       the assumptions regarding their behaviour. It is important, therefore, to stress
       the uncertainties involved in trying to forecast -the probable production of metals
       from nodules, which in itself is the first step in any attempt to assess the future
       impact of the nodule industry on world market in general and on the mineral
       exports of the developing countries in particular.

            At the risk of stating the obvious, it must be recalled that the "nodule
       industry" is not yet an ongoing reality. On the contrary, nodule mining
       technology and metallurgical processing are still in the developmental stage.
       Considerable uncertainties therefore becloud any estimates of performance by the
       future industry.

            It is natural that officials of firms developing nodule systems should be
       optimistic about the future. Indeed all available information tends to confirm
       the industry contention that nodule mining will be a very profitable
       proposition (see section ITII5.b, below). On the other hand, one should not
       minimize the potential hazards involved in the continuous operation of mine ships
       in the high seas -with sophisticated equipment for gathering and lifting nodules
       from about 5,000 metres water de-nth. The vagaries of the weather at the surface,
       resistance of materials subject to the high pressures and corrosion of the water
       column, topographic hazards at the sea-floor, the logistics of maintaining a large
       crew out at sea for an extended time, are some of the factors that will bear on
       the operational results of nodule mining once it starts on a commercial scale.
       It remains to be seen how attractive the economic returns of the industry will
       actually turn out to be.

       2. The probable scenario for the next decade

            Considering the problems involved in forecasting future production of metals
       from nodules, the projections presented in this section must be interpreted as
       orders of magnitude, based on the best information available. In order to
    *  facilitate the periodic revision of these projections, their underlying
       assumptions are explained below.

            (a) The methodology used

            Estimates of metal production from nodules are attempted for the arbitrarily
       selected decade 1976-1985. For the purpose of these projections, it is assumed
       that an internationally agreed r6gime would come provisionally into force by 1976,
       thus providing the legal framework enabling the interested companies and groups to
       go ahead with their nodule programmes. The projections are based on an evaluation
       of the probable time that it is likely to take for the various groups to conclude

                                                           0005?                    I...

    successfully all activities in their implementation programmes and start
    commercial production. Assumptions are made regarding metal production per ton
    of-dry nodules, size of projects and the schedule of start-up operations. 514/

         (i) Metal production per ton of nodules

         Metal output per ton of dry 55/ nodules is a function of nod-ale grade and of
    metallurgical recovery. The figures used are a combination of data: information
    made public by industry officials; published scientific data; and information
    provided directly by geologists and other officials associated with the industry.

         Some European and American geologists working for the nodule industry have
    suggested that their companies' targets to identify ore bodies containing over
    3 per cent combined nickel and copper have already been met. Metal recovery
    depends on the metallurgical process adopted, but it seems that the industry
    might obtain a 95 per cent yield on the recovered metals. 56/ The preliminary
    assumptions made on the grade of ore-bodies likely to be exploited by the first
    generation of nodule miners and metal production, including the recovery of
    several trace metals (molybdenum, vanadium, zinc, silver, etc. ), 57/ are summarized
    in table 1.

        54/ Implicit in all these assumptions is that costs of metals produced from
    nodules will be competitive with alternative land sources of these metals.
        55/ Since most metallurgical processes under consideration require the prior
    drying of nodules, plant capacity is generally referred to in terms of dry
    nodules. On the other hand, the capacity of mining systems is expressed in terms of
    wet nodules, since water accounts for about one third of the weight of 'Wet
    nodules.
         56/ "Studies to date indicate the practicality of process yields of
    98 per cent plus purity manganese, nickel, cobalt and metallic copper."
    'R. Kaufman and A. J. Rothstein, "Rlecent Developments in Deep Ocean Mining", in
    6th Annual Preprints of Marine Technology Society, 29 June-l July 1970,
    Washington, D.C. It is possible that some metallurgical processes will yield
    lower recovery rates than 95 per cent. These processes, requiring much lower total
    investments, are designed to optimize return on investment and not metal recovery.
        57/ Deepsea Ventures, Inc. "Pilot plant operation of a -process to produk-e
    metals from manganese nodules", mimeograph; and Undersea Technology, April 1973,
    pp. 26-27.

                  Table 1. Estimated metal production per million tons of
                            high gra(e nodules (metric tons)

                                                                      Approximate
                                                                  Metal production per
                                  Metal content per weight            million tons of
             Metal                      of dry nodules                 dry nodules* a/

          anganese (if recovered)           24%                        230,000 tons
         flickel                              1.6%                      15,000 tons
         Copper                               1.4%                      13,000 tons
         Cobalt                              0.21%                       2,000 tons

         Other metals                        0.3%                        2,500 tons

              * Assuming 95 ner cent metallurgical recovery except for trace metals
         where an 80 oer cent rate is assumed.

             a/ The estimated mntal production from nodules used in the recent UNCTAD
         report (TD/B/483) .r- different:  they were based on data from a previous
         United ICations publication (A/AC.138/36) of 1971.

         These estimated volumes of production are confirmed by separate company
    statements. The volume of nickel and copper coincide with the estimates of
    Kennecott Copper, Inc. 58/ The volumes of manganese, cobalt and trace metal
    recovery are the fi:ures indicated by Deepsea Ventures, 59/ which some experts
    thi.nk to be on the loiw side.

        58/ Marne Dubs, Director of the Ocean Resources Department of Kennecott stated
    that  One such /_odule7 plant of 3 million /ton7 size might produce on the order
    of 100 million pounds per year of nickel and 85 million pounds of copper along with
    other products mentioned"'. (This would amount to 15,150 tons of nickel and
    12,880 tons of copper for each 1 million tons of nodules.) Mineral Resources of
    the Deep Seabed, hearings before the Sub-committee on Minerals, Materials and
    Fuels on S.1134. 17 May 1973, p. 109.
        59/ Statement by Mr. N. W. Freeman, Chairman of the Boards of Tenneco, Inc. and
    Deepsea Ventures, Inc. before hearing on Senate Bill 2801, of the Sub-committee
    on Minerals, Materials and Fuels of the United States Senate, on 2 June 1972.
    Mr. Freeman indicated that the expected metal output from a production unit of
    1 million tons of dry nodules per year would be:
             Manganese        -    230,000 metric tons
             Nickel           -     11,400 metric tons
             Copper          -       9,100 metric tons
             Cobalt          -       2,000 metric tons
             Other metals    -       2,500 metric tons
        (including molybden',il, vanadium, zinc and silver)

                                                        0005 i9.

         (ii) Size of operations

         Like most mining and metallurgical operations, nodule systems are subject to
    considerable economies of scale. Decisions regarding the size of the total system
    are based on market considerations and the size relationship between the mining
    and processing stages.

         It is known, for instance, that economies of scale are much stronger at the
    stage of processing. As a result, unit costs are probably still decreasing for
    plant sizes of 3 to 4 million tons of dry nodules per year. On the other hand,
    it seems that mining rigs, of the hydraulic lift type, reach their optimum size
    at a capacity of between 5,000 to 10,000 tons of wet nodules per day, which is
    equivalent to 1-2 Mrillion tons of dry nodules per year. It may be expected,
    therefore, that most nodule systems will be designed to process 3 to 4 million tons
    of dry nodules per year with the use of 2 or 3 mining rigs. Deepsea Ventures is
    planning to recover manganese in metal form, the world market for which is rather
    small, and envisages a plant of 1 million tons of nodules per year.

         The projections of this report assume that nodule systems until 1985 will be
    of two sizes: 1 million tons/year and 3 million tons/year. 60/ This assumption is
    in fact an extension of the situation of American companies to companies and groups
    in other countries. 61/

        (iii) Entry of new nodule operations

         The timing question is likely to prove one of the most speculative in the
    projections equation. A multitude of factors can affect the entry of new nodule
    operations, more likely postponing the start of commercial production to a later
    date. Consequently, the timing schedule, compiled for the six companies (Figure 6)
    or groups known to be most advanced in developing nodule systems, could be taken
    as a rather optimistic assumption that no major problems would unduly delay the
    plans of the industry.

         The time-table was derived from an assessment of companies' stated plans and
    an evaluation of the most probable time for implementation of construction
    facilities for those companies or groups that have not publicized their

        60/ It must be understood that these figures are mere approximations in the
    absence of extensive tests of large-scale mining rigs.
        61/ "American mining companies at present are considering production rates
    of abo-ut 1 to 3 million tons of manganese nodules per year.", Leigh S. Ratiner,
    op. cit., p. 27.

                                                                                 I...
                                                     00060

               Figure 6. Forecast of entries into nodule mining: 1976-19851/
                              (in million metric tons of dry nodules)

      __ _*__ _  ___                                         1  8

    't.ryto.  76        77    78   79    80    81    82    83    84    85

               1~~~~~~~~~

             ,.~~~~~~. 3  4 I  1 12  14 1

        2/  In UCTAD reports TD/B/449.Add.1 and TD/B/483 different assumptions
    were used with alternate entry schedules, some starting as early as 1974.

                       *                                ~~~~00061
                                                    00061

    intentions. 621 Some projects are assumed to start operating at full capacity.
    This -would happen as a result of the implementation schedule of these projects,
    the decision to build the processing plant would have to await the successful
    testing of large-scale mining systems. Once the mining tests are concluded and
    the "go-ahead" is given for plant construction, some 2 to 3 years would elapse
    before metal production could start. In the meanwhile the original mine equipment
    would in all likelihood be used for mining nodules which would be stockpiled
    until processing could start.  If it is assumed that a second mine ship might be
    commissioned around the time the processing plant starts operation, the -
    3 million ton/year projects could commence production at full capacity. For the
    sake of simplicity it is assumed that output will be equal to a mining rig's total
    annual capacity, even in the first year of operation.

         The timing of entry might be affected by the degree of control over the pace
    of nodule mining that may be exercised by the international authority, in particular
    for the first few operations. The assumptions on timing of entry made in
    figure 6 are based on the absence of controls. If powers such as control over
    the pace of exploitation are exercised by the authority, a delay of perhaps one
    or two years might occur for the projects assumed to enter into operation up to
    1981, though the total tonnage of nodules that is likely to be mined by 1985 would
    probably be unaffected if the control scheme were established along the lines
    discussed in section 111.3 below. The global figure of 15 million tons of nodules
    likely to be mined by 1985 is therefore more meaningful than the precise timing
    of individual entries in the intervening period.

         Cb) Forecasting probable metal recovery from nodules by 1985

         Based on the assumptions developed in the previous section, a forecast of
    metal production from nodules in 1985 becomes a straightforward exercise. It
    would amount to a multiplication of the estimated metal recovery per ton of
    dry nodules by 15 million tons. Considering however, that only two companies or
    groups have indicated their intention to recover manganese from nodules, the
    calculation for this metal will instead be based on 14 million tons.

         It should be stressed that the estimates for production of manganese, as well
    as cobalt and other minor metals have a lower degree of confidence than the
    estimates for nickel and cop-per.

       62/ The implementation of a project requires the successful completion of work
    in a number of stages. Many activities can only start once some preceding
    activities are completed. From the time a decision is reached to go ahead with a
    nodule project, it would probably take some tChree years of accelerated construction
    work before commercial mining and processing could start. But the implementation
    stage presupposes the resolution of a number of questions, such as: (1) the
    general legal framework relating to commercial operations in the international
    area; (2) obtaining exclusive rights for exploitation of the desired mine site; and
    (3) approval of the financing scheme for the whole project. The resolution of the
    financial question in turn, would require considerable prior progress in nodule
    exploration and equipment development programmes.

                                                        00062                    I.

                 Table 2. Estimated metal production from nodules in 1-985 a/

                                                             Estimated production
             Metal                                                (in metric tons)

    Manganese                                                        920,000
    Nickel                                                           220,000
    Copper                                                           200,000
    Cobalt                                                            30,000
    Others                                                            38,000

         Source: Data from table 1 and figure 6 (except manganese, for which recovery
    is assumed from only 4 million tons of nodules).
        a/ See foot-note to table 1.

         The latter two metals will constitute the mainstay of the nodule industry;
    thus the effort ~to locate attractive mine sites is directed primarily at the
    nickel and copper content of the nodules. The content of manganese, cobalt and
    trace metals is probably of secondary importance except for nodules that contain
    heavy metals of the platinum group. 63/ Cobalt and the minor metals occur in
    varying quantities in nodules. It is known, for instance, that in some areas in
    the vicinity of French territories of the South Pacific extensive deposits are
    found with high cobalt content (above 1.5 per cent). Considering the low average
    cobalt content assumed for these projections (0.21 per cent), it is quite possible
    that the actual tonnage of cobalt output may be considerably greater than the
    30,000 tons projected for 1985. Similar considerations are applicableto other
    minor metals.

         A wide range of variance can also be expected in the total recovery of
    manganese from nodules. Only one firm in the United States has publicly affirmed
    its intention to produce manganese metal from 1 million tons of nodules. In
    Japan, research in nodule metallurgy is directed at finding an economic process
    to recover manganese. While it is possible that only the American firm will be
    producing manganese from nodules by 1985, it is also conceivable that advances
    in process research might make it possible for three or more ventures to recover
    manganese by that date. Hence, the uncertainty attached to the projected figure
    of 920,000 tons of manganese production by 1985.

        63/ The recently reported occurrence of heavy metals of the platinum group in
    some manganese nodules could be very significant since the value of the trade
    elements of the platinum group might substantially exceed the value of copper,
    nickel and cobalt contained in nodules, ECAFE/CCOP, op. cit.,
    (E/CN.11/L.343), p. 42.

                                                                                 0.0.
                                                       00063

    3, The likely im-pact of nodule mining

         An attempt to assess the likely impact of sea-bed mining, on world markets and
    on the exports of developing countries, requires in addition to the forecast of
    metal production from nodules, a forecast of metal production from traditional
    sources as well as a projection of demand for these metals. From the interaction
    of these variables it should be possible to assess the likely effect on prices of
    these metals. Demand and supply, however, are in turn dependent on prices. A
    rather complex econometric model would be required to indicate the likely impact
    of nodule mining on prices, and vice-versa, of prices on nodule mining and on
    traditional land-based mining.   Given the uncertainties involving the major
    variables projected over a 10-year span, a similar approach is used in this report.

         The degree of market penetration is used to provide a first approximation of
    the impact of nodule mining. The procedure involved is to estimate the share of
    the market for each metal which is likely to be supplied by the nodule industry.
    Based on the degree of market penetration it is possible to evaluate the probable
    influence on metal prices and to assess the implications for mineral exports
    of developing countries.

         This approach amounts to treating the supply of metals from nodules as an
    independent variable. Such a method is acceptable if it is assumed that nodule
    mining will remain profitable throughout the period, and if the joint product
    and by-product nature of the nodule industry 64�! is taken into account. Considering
    the drawbacks of alternative methods, the market penetration approach would seem
    to provide a useful first approximation to the magnitude of the problems
    involved. 65/

        64/1 The most fundamental fact about the economics of nodules is the
    joint-proluct and by.-product nature of the industry. Nodule processing will result
    in the simultaneous production of a number of minerals. Depending on the particular
    metallurgical process used, some minerals will constitute the primary output of
    the process (joint-products), while other minerals midy also be recovered if
    additional stages of processing are included in the plant design (by-products).
    The minor metals in nodules, such as molybdenum, vanadium, zinc, silver and others,
    could either be produced as joint-products or as by-products. In most processes
    under consideration manganese could be recovered as a by-product. This distinction
    is important in that by-product recovery must consider only the additional
    (marginal) cost involved in the subsequent processing of the tailings disregarding
    all other previous costs such as mining, transportation, and initial stages of
    processing. By-product recovery will only be undertaken if the additional revenue
    derived from the sale of these products is greater than the additional costs
    involved in the subsequent processing needed, after the major minerals are
    recovered.
        65,' Refinements to this approach might warrant additional studies.

                                                            00064~~~~~~1.

          (a) Nickel

         The most important uses of nickel are in the manufacture of stainless steel,
    alloys, and for electroplating.   Nickel imparts certain properties to alloys,
    such as increase in strength and resistance to corrosion, that cannot be
    economically obtained by other means. New steels and alloys are constantly being
    developed. Over 40 per cent of nickel consumption is in the manufacture of
    stainless steel, the market for which has very good prospects for future growth. 66/
    Nickel also has many other minor uses and its application is constantly increasing.
    World-wide consumption increased at the average rate of 6.5 per cent compounded
    annually from 1947 to 1970. A number of factors combined to make for a drop in
    demand in 1971, but the market has recovered since then and future prospects are
    for a minimum rate of 6 per cent long-term growth.

         Supply is highly concentrated in a few industrial countries. Canada's
    dominant position, however, has been declining from some 94 per cent of the
    total mined in market economy countries in 1950 to 73 per cent in 1960 and
    '.oproximately 58 per cent in 1970. Just three countries, Canada, France (New
    aledonia) and the Soviet Union, accounted for 74 per cent of world mine
    Production in 1972. Production of developing countries has been increasing but
    still accounted for less than 13 per cent of the world total by 1972.

         For the purpose of evaluating the probable impact of nodule mining, a number
    of assumptions were made: (1) demand will increase at a cumulative annual rate
    of 6 rer cent until 1985; (2) the share of developing countries in world mine
    production will increase to 20 per cent (13 per cent in 1972); 67_/ (3) metal
    production from nodules plus smelter production from land ores will equal total
    consumption; (4) smelter production will represent, as in 1972, 94 per cent of
    the tonnage of land ores.

         On the basis of these assumptions, it is estimated that production from
    nodules might account for about 18 per cent of total demand by 1985. This
    substantial market penetration may tend to depress nickel prices somewhat. Some
    high-cost laterite projects under consideration might be abandoned, but for the
    most part traditional producers are not likely to be seriously affected. In
    fact, production from land sources would need to increase by some 70 per cent
    from the level of 1972 mine production, in order to meet world demand. Most of
    this increase, however, would be required before 1980; from that time on almost
    all additional increases in demand would be satisfied by the nodule industry.
    In view of the mounting environmental difficulties with resulting rising costs
    in industrial countries and the various projects under consideration in
    developing countries, it is possible that the share of mine production from
    developing countries in 1985 will in fact be larger than 20 per cent.

         I/ Tn particular in the auto industry, pollution control equipment,
    desalination plants, chemical industry, petroleum refining, liquefied gas industry
    and several ocean-related industries.
        67/ A comprehensive survey of planned mine capacity is not available.
    Considering, however, the large projects under construction or in the planning stage
    in the Philippines, Indonesia, Guatemala, Dominican Republic, Colombia, Venezuela,
    Prazil, Botswana and Burundi, it is reasonable to expect that the share  of mine
    production from developing countries by 1985 is likely to account for at least
    20 per cent of the world total.                                                  I..

                                                      00065

         Table 3. Estimated market share of nickel production from nodules by 1985
                                  (thousand metric tons)

                                               1972 l/               1985 2/
                                                         Tonnage            Percentage

    World mine production:

         Developing countries                    79.5        210(c)                  (d)
         Industrial countries                   545.6        850(c)             (65) (d)
         Total                                  625.1      1,060(a)             (82) (d)

    Total smelter production (land ores)        587.5      1,000(a)(b)           82

    Production from nodules                       -          220(b)              18

    Total consumption*                          573.6(e)  1,220(e)              100

         Source: I/ World Metal Statistics, January 1974.
                  2/ Estimates.
                  * Excludes direct utilization of nickel in scrap form.
         Notes:  (a)  Average recovery efficiency of metal from ore same as in 1972
                      (94 per cent).
                 (b) Smelter production from land ores plus production from nodules
                      equal total consumption (long-run equilibrium of supply and
                      demand).
                 (C) Developing countries producing approximately 20 per cent of
                      world mine output.
                 (d) Reduced by 94 per cent.
                 (e) Excludes the substantial volume of direct use of nickel in scrap
                      form.

         (b) Copper

         Electrical conductivity and resistance to corrosion make copper invaluable in
    the manufacture of electrical equipment, cables and wires for communication and
    electricial transmission lines, electrical appliances, tubing and sheeting for
    the construction and chemical industries, alloys and in a number of other uses.
    Despite competition in certain areas from aluminium, plastics, glass and other
    materials, demand for copper has been growing by an average of 5 per cent per annum

                                                                                  I...

                                                       00066

    for the past two decades. Demand has been particularly strong since 1972 and as
    supply failed to keep up with the pace of demand, prices rose reaching in late
    1973 and early 1974 record levels of over $US 1.10 per pound. 68/

         Long-term market prospects are quite attractive. Demand is expected to grow
    between 4 and 5 per cent annually until the end of this century. In response to
    favourable demand conditions producers are expanding mine and smelter cape'ities.
    Mine capacity outside the centrally planned economies bloc is expected to
    increase by 45 per cent between 1972 and 1978. 69/

         Copper production is much less concentrated than is the case with the other
    three major metals to be recovered from nodules. Some 56 countries mine more than
    1,000 tons of copper (metal content) per year. The industrial countries are the
    largest producers and consumers, the United States, the Soviet Union and Canada
    alone accounting for some 3.3 million tons of copper mined in 1972 or 46 per cent
    of the world's total. The developing countries, accounting for 42 per cent of
    total mine production (1972), are by far the leading exporters. In 1971, the
    latest year for which comparable statistics are available, net exports from
    developing countries in all forms (ores, concentrates, blister and refined copper)
    amounted to almost 2 million tons or 73 per cent of the world's net copper
    exports. 70/

         Production from nodules is expected to have a very minor impact on copper
    markets by 1985. If demand for refined copper expands at an average rate of
    5 per cent per annum, by 1985 it would amount to about 14.9 million tons. By
    contrast, production from nodules is expected to reach some 200,000 tons or
    1.3 per cent of total consumption. Perhaps the most relevant yardstick for the
    probable impact of nodule exploitation on copper markets would be the production
    from nodules as a share of net imports of industrial countries. For example, in
    1971 net imports of 2.2 million tons represented approximately 33 per cent 71/
    of the total consumption of these countries. 72/ Assuming that net imports of

        68/Metals Week, 4 February 1974.
        69/ International Wrought Copper Council, Survey of Planned Increases in World
    Copper Mines, Smelter and RefineryCapacities, 1972-1978, London, 1973, pp. 6-7.

        70/Increased scrap recovery, releases from the United States Government
    stockpile and a faster expansion of mine production in industrial countries
    resulted in a decrease in the share of developing countries' net exports out of
    the world total refined consumption: from 31.2 per cent in 1968 to 27.4 per cent
    in 1971.
        71/ This share is likely to increase during the period under consideration.
    It is known, for instance, that of the increase in mine capacity planned for
    1972-1978, 52 per cent of the expansion was to take place in developing countries.
    International Wrought Copper Council, op. cit., pp. 6-7.
        72/ Copper trade statistics for the centrally planned economy block are not
    sufficiently complete for international comparison. From the figures available,
    nJet trade is small, amounting to around 20 to 50 thousand tons of imports or
    extorts, depending on the year.

                                                                                 1...

                                                    00067~

    advanced market economy countries would still amount to one third of their total
    copper consumption in 1985, production from nodules would amount to only
    5.5 per cent of the required net imports. In other words, production from nodules
    would be displacing about 200,000 tons of the approximate 3,630,000 tons of net
    imports that advanced market economy countries are likely to require by 1985. 73/

            Table 4. Copper statistics: mine production, refined consumption
                      and net exports of developing and industrial countries,
                      1968-1972 (thousands of metric tons)

                                    1968       1969        1970       1971        1972

    Mine production                 5 473.6    5 949.3    6 372.6    6 460.9    7 022.0
      Developing countries          2 399.1    2 534.2    2 582.3    2 652.4    2 939.4
      Industrial countries          3 074.5    3 415.1    3 790.3    3 808.5    4 082.6

    Refined consumption a/          6 500.2    7 143.2    7 248.5    7 302.7    7 886.1
      Developing countries            437.7       519.5       540.3      634.7       680.7
      Industrial countries          6 062.5    6 623.7    6 708.3    6 668.0    7 205.4

    Net exports  b/                 2 623.2    2 719.4    2 823.1    2 722.0         inc.
      Developing countries          2 027.3    2 199.1    2 175.0    1 999.3         inc.
      Industrial countries            595.9       520.3      648.1       722.7      inc.

         Source:  World Metal Statistics, August 1973 and January 1974.
                  Notes: a_/ Includes scrap and releases from United States government
                             stockpile.
                          b/ In all forms: ores, concentrates, blister and refined.

         (c) Manganese

         As stressed before, considerable uncertainties surround the estimates of
    manganese recovery from nodules. Any assessment of its possible impact on
    manganese markets must be viewed, therefore, as a precarious first approximation.

         About 95 per cent of the world production of manganese ore is used in the
    steel industry, mainly in the form of ferromanganese. Very large reserves of

         73/By way of comparison, in 1971 net imports reached 723,000 tons in Japan,
    472,000 tons in the Federal Republic of Germany, 371,000 tons in the United Kingdom,
    308,000 tons in France, 260,000 tons in Italy, 130,000 tons in Belgium and
    115,000 tons in the United States. By 1985 these volumes of net imports would
    probably double.

    manganese exist in many countries, both developing and industrial. The opening up
    of a number of large modern open pit mines and the utilization of economical bulk
    ore carriers contributed to a steady fall in prices for the past two decades
    (events over the past year, however, have led to a sharp increase in manganese
    [rices). Demand for manganese is quite inelastic and thus additional supplies
    tend to depress prices.

         The estimated manganese content in ores mined in 1971 reached 8.3 million tons,
    of which 46 per cent was produced in Aieveloping countries. 74/ Detailed trade
    statistics available for 1969 indicate that of 3.7 million tons of manganese-in-ore
    exported in that year, 56 per cent originated from developing countries. 75/
    Comparable worldwide statistics on consumption are non-existent, but given the
    nature of manganese markets, it would be safe to -isluze that total demand is
    eqvlivalent to world production. 76/ r-s;uming that manganese demand will keep
    �, =zndia, at an average annual rate oi 5 per cent, by 1985 world demand siiuld be
    �-'oI)roixilmately 16.4 million tons of manganese--in-ure.

         The tentative estimate of' manganese recovery  from noaules bty 1.985 of
    2,0 ,000 tons would amount to only 5.6 per cent of estimated wor:'L demar'nd for that
    year.  Considering, however, that the centrally planned countric: ,s a t1loc are
    net exporters of manganese, production from nodules would be directed at t. e   ods
    of advanced market economy countries.  Production from nodules might suprly al"rt
    i3 per cent of the import requiremens of these countries by 1985. if_/ Given the
    rather inelastic demand for manganese, 78/ and the ability of traditional suppliers
    to keep on expanding production for many years with only modest investments, the
    additional supply from the sea--bed will probably depress market prices. Moreover
    if manganese is recovered from 10 million tons of nodules 79/ instead of the
    4 million assumed here, production from nodules could account for about one third
    of the import needs of advanced market economy countries. In that case the market
    imbalance would be much greater and prices would fall considerably.

        74/ United Nations, Statistical Yearbook, 1973 (Preliminary).
        75/ UNCTAD, Problems of the World Market for Manganese Ore (document
    -D/B/C.1/105), July 1971.
        76/ In fact, production has been somewhat lower in the past few years due to
    substantial releases from the United States government stockpile.
        77/ If by that time the market share of advanced market economy countries
    remains the same as in 1969 (57 per cent), this group of countries would consume
    abuut 9.3 million tons of manganese. Furthermore, if it is assumed that, as in
    19C9, about 78 per cent of requirements by advanced market economy countries would
    be irpcrted, this would amount to some 7.3 million tons of manganese-in-ore.
        _/UNrCTAD, "Manganese Ore:  Brief review of main problems and possible forms
    cf action' (document TD/B/C.1/131/Add.4), p. 3, and UNCTAD, 'The effects of
    production of manganese from the sea-bed, with particular reference to effects on
    developing country producers of manganese ore" (TD/B/483), of 23 April 1974.
        7./One operation of 1 million tons/year and 3 operations of 3 million tons/
    year.

                                                      00069

         Developing countries exporting manganese will probably be significantly
    affected by nodule mining. The extent of this impact is difficult to assess, in
    view of the existing market structure. Most trade in market economy countries
    involves transactions from subsidiaries in producing countries to the parent
    companies - generally large steel producers - in industrial countries. This
    large "captive market" is not likely to be much affected in terms of volume,
    though the recorded value of transactions will probably decrease. Some older
    producers with higher costs due to lower ore grades, long distances from mine to
    port, and inadequate port facilities, will be the ones most affected.

         Three developing countries, Brazil, Gabon and India, each export about
    $US 30 million annually of manganese ore and ferromanganese. Zaire, Ghana and
    Morocco export less than $US 10 million each. A few other countries export less
    than $US 2 million each. Exports of manganese constitute an important foreign
    exchange earner only in the case of Gabon, where it accounts for some 20 per cent
    of the total value of exports. For the other major developing country producers,
    manganese exports represent 2 per cent or less of total exports.

         (d) Cobalt

         Cobalt is an expensive metal with a relatively small market. It is used in
    a variety of industrial products, both metallic and non-metallic. The principal
    characteristic of the metal is probably its resistance to high temperatures,
    but it also possesses important magnetic and chemical properties, which make it
    particularly suited to a number of rapidly expanding advanced-technology
    industries. 80/ At considerably lower prices, cobalt could be substituted for
    various other non-ferrous metals. Si/ One potential market of particular interest
    is in electroplating where cobalt was substituted for nickel during the 1969
    nickel strike.

         Cobalt is produced primarily as a by-product of cop-per and nickel mining.
    Zaire is by far the largest producer accounting for two thirds of total mine output.
    By selective mining of high cobalt content copper ores, Zaire has traditionally
    adjusted supply to demand conditions. By-product production from other countries
    has been increasing rapidly, and new mining projects in the Philippines, Australia,
    New Caledonia, Canada and Zambia are expected to increase supplies by mid-1970s.

        8Cy' The motor vehicle industry could become a major consumer of cobalt in
    heat-resisting alloys for the manufacture of gas turbines and as a catalyst in
    exhaust gases after-burners. J. D. Corrick, "Cobalt", in U.S. Bureau of Mines
    Minerals Yearbook, 1972 preprints.
        81/ In this report it was pointed out that the long-term elasticity could not
    be forecast without further investigation. UJICTAD, Exploitation of the mineral
    resources of the sea-bed beyond national juriud(iction: issues of international
    commodity policy. Case study of Cobalt (document TD/B/4419/Add.1), June 1973,
    pp. 2-5.

                                                       00070                       1.

         Statistics of cobalt production and consumption are generally incomplete and
    often conflicting. This is not surprising due to the by-product nature of cobalt
    production and its relatively small value in world commodity trade. Recorded
    mine production averaged 23,000 tons between 1970-1972 of which some 76 per cent
    was produced by developing countries (see table 5). Estimates of consumption must
    take into account the actual metal produced from ores, scrap use and releases from

                       Table 5. Cobalt: world mine production a/
                               (Co content in metric tons)

    Country                            1970                1971                  1972 b/

    Adv:nced countries                 5 350              5 130                 5 520

         Australia                      470                310                    740 c/

         Canada                       2 070              1 960                  1 880

         Finland                      1 270              1 270                  1 270

         USSR  c/                     1 540              1 590                  1 630

    Developing countries             18 500              16 600                17 740

         Cuba                         1 540              1 540                  1 540

         Morocco                        600                980                  1 150

         Zaire                       13 960             12 000                 13 000 c/

         Zambia                       2 400              2 080                  2 050

    Total                             23 850             21 730                23 260

         Source:  Jo D. Corrick, op. cit., p. 5.
          _/ In addition to the countries listed, Bulgaria, Cyprus, Democratic Republic
    of Germany, New Caledonia, Norway, Poland, United States, Spain and Sweden are
    known to produce ores (copper, nickel, and/or pyrite) that contain recoverable
    quantities of cobalt, but available information is inadequate to make reliable
    estimates of output levels. Other nations may also produce cobalt as a by-product
    component of ores and concentrates of other metals.
          t/ Preliminary.
          c/ Estimate0

                                                                                  0.07

                                                       00071

    the United States government stockpile. It is estimated 82/ that during 1969-1971
    consumption outside the centrally planned countries averaged 23,800 tons, having
    grown at an average annual rate of 6.2 per cent over the previous decade.

         For the purpose of this exercise, a 6 per cent annual rate is assumed for
    the period 1972-1980, increasing to 8 per cent during 1981-1985. 83/

         World demand by 1985 is projected as 60,000 tons against an estimated
    production from nodules of 30,000 tons. This would leave another 30,000 tons for
    traditional suppliers. It can be expected that cobalt prices will start falling
    when production from nodules reaches the market and by 1985 it is assumed that
    it should be about two thirds of present levels, or around $US 2.00/lb.

         If on the other hand demand fails to expand as fast as this report suggests,
    or if cobalt production from nodules turns out to be considerably larger than
    30,000 tons, the pressure on cobalt prices will be more serious. Prices might
    fall then to the level of nickel price since cobalt could then be used as a
    substitute for some uses of nickel. In fact, this situation is likely to develop
    in the second half of the 1980s.

         (e) Summary

         The nodule industry is expected to become an important source of minerals by
    1985 (see table 6). The impact of sea-bed production on world markets will vary
    considerably for the four major metals. By that time, nodules will be the most
    important source of cobalt, supplying at least half of the world market with
    prices dropping to about two-thirds of present levels. Many uncertainties surround
    the situation of manganese: recovery from nodules might account for 13 per cent
    of import requirements of advanced market economy countries, resulting in a drop
    of at least 50 per cent in the price of manganese metal, and some decline in
    prices of manganese ore and ferromanganese. Nickel markets will be affected by
    the output from nodules since it will probably account for over one quarter of the
    import requirement of industrial countries (table 6); considering the elastic
    nature of demand for nickel, only a gentle decline is expected in its price.
    The output of copper will only have a minor impact on copper markets; it might
    amount to 5.5 per cent of the net import requirements of the advanced market
    economies.

        82/ UNCTAD, Case study of cobalt, op. ci�., po 4.
        83/ For the period 1972-1980 this is a simple extrapolation of past trends
    based on a continuation of existing conditions (high prices, i.e., $US 3.10/lb.;
    relative scarcity; similar end uses). It is obvious, however, that when a
    substantial output from nodules reaches the market, lower prices will result.
    The nodule industry will certainly strive to expand the markets for cobalt by
    assuring continued supply at lower prices. Thus, an 8 per cent annual growth
    rate for cobalt demand is assumed for the period 1981-1985, which is the period
    when it is expected that subtantial supplies from nodules would be available.

                                                     00072

          Table 6. Manganese, nickel, copper and cobalt: probable production from nodules,
                    estimated world demand and estimated net imrort requirement of
                    industrial countries in 1985 (thousand metric tons)

                                                                                      Production from
                                                                                      nodules as a
                                                                   Estimated          percentage of
                                                  Production from  net import          net import
                  Probable        Estimated       nodules as a      requirement        requirement of
                  production      world           percentage of    of industrial        industrial
                   from nodules    demand          world demand      countries b/       countries

    Manganese         920           16 400                6            7 300                 13

    Nickel            220            1 220               18              770                 26

    Copper            200           14 900                1.3          3 600 a/ 5.5

    Cobalt             30               60 a/            50             n.a.                 n.a.

         Source:  World Metal Statistics, UN Statistical Yearbook (UNCTAD), Problems of the World
    Market for Manganese Ore.

         a/ Excluding the centrally planned economies.

        b/ Assuming that net import requirements would be proportionately the same as in 1972o

    4.   The long-term prospect of nodule mining

         Sustained long-run development of the nodule industry will depend on its
    relative competitive position, vis-~,-vis other sources of metal supply, namely
    land mining and recycling. The relative competitive position of these alternative
    sources of mineral supply will depend in turn on market conditions, technological
    developments and possible institutional constraints.

         The institutional framework for the exploitation of resources of the
    international area might include regulations for a rational long-term planning of
    nodule development. This question is examined in the following chapter. It is
    clear, however, that the controls or regulations which may be adopted, will be
    designed to orient nodule development along a course somewhat different from that
    which would emerge from the operation of unregulated market forces. What remains
    to be seen, however, is what would be the most likely scenario for the long-terrm
    development of nodule resources if it were governed exclusively by market forces.
    On the basis of available information, only some considerations of a general nature
    can be made about the long-term prospects of nodule mining.

         The implications of joint-products and by-products recovery from nodules
    become apparent when investment in new -projects is under consideration. In essence
    nodule projects would be undertaken, under free market conditions, 84/ as long as
    the prospective return on investment would be greater than the expected rate of
    return on alternative investments in traditional land mining. Available information
    seems to indicate that the first generation of nodule mining will be very profitable
    indeed (see section 111.5). Once the first few ventures become operational and
    Prove to be the financial success that is expected, investment interest will rise.
    But, as the first miners expand their operations and the second wave of investors
    make their splash, some market pressures will develop to change the profit
    picture of the industry.

         After the first decade of operation, further expansions of the industry are
    likely to cause average revenues to decline by more than the possible reductions
    in operational costs which will probably result from greater productivity and the
    development of more advanced systems. How soon and by how much the price of each
    mineral is likely to fall will depend on the relative volume of supply from
    nodules as compared with their world demand and the comparative cost of land based
    production. Normally, as a mineral produced from nodule becomes more abundant,
    its price would tend to fall to the level of its most important substitute.

         One of the first casualties is expected to be cobalt. BY 1985 approximately
    half of world demand would probably be supplied by nodule producers. As new
    nodule projects become operational, the price of cobalt would eventually fall to
    the level of nickel's.

        84/ it seems reasonable to expect that some of the major mineral importing
    countries might be willing to subsidize nodule miners, if necessary, to attain
    a minimum of self-sufficiency. In that case~ the nodule industry might expand
    beyond the levels that would be warranted by market considerations alone.

                                                              0 Ouln 7 4 ~ ~       1..

           Drastic changes can also be expected in the market for manganese metal.
      flanganese metal production from just one nodule operation of I million tons/year
      may be almost twice as large as the projected world market in 1980 for manganese
      in metal form. As a result the price of this metal will fall sharply and
      eventually it should stabilize at about the present price of ferromanganese, which
      it would probably replace in the steel industry. This would, of course, mean a
      fundamental change in the manganese industry, with serious implications for
      traditional producers of ore and ferromanganese.

           The eventual replacement of ferromanganese by manganese metpl in the steel
      industry will be simply a question of competitive cost. The by-product nature of
      manganese recovery from most systems offers an added incentive for sea-bed miners
      to develop new metallurgical processes that would reduce the alleged high-cost
      manganese separation stage. The magnitude of the incentive would be very high
      indeed; for example, even at $US 200/ton 85/(instead of the present $US 730/ton
      for manganese metal) the recovery of manganese metal would increase the gross
      revenues of nodule ventures by some 50 per cent. It can be expected, therefore,
      that before the end of the 1980s, the techno-economic problems will probably be
      overcome and nodules will become the major source of manganese for the world
      steel industry.

           The sharp decline in prices expected for cobalt and manganese, and possibly
      molybdenum among the trace metals, is not expected to alter substantially the
      total profitability of the nodule industry. Nickel will remain the most important
      source of revenue, accounting for about 40 to 55 per cent of gross revenue,
      depending on whether manganese is recovered or not (see section 111.5). The real
      pressure on the economics of nodule mining will be felt when production expands
      sufficiently to cause a decline in nickel's price. Even at considerably lower
      prices for nickel, the advent of second and third generation nodule systems,
      with their reduced mining, transportation and processing costs, might well retain
      the economic attractiveness of the industry.

           The question, therefore, is what would be the most likely price floor for
      nickel? The demand for nickel is probably very responsive (elastic) to lower
      prices sustained over sufficiently long periods of time. Moreover, nickel is a
      substitute for a number of metals. Though it-would be difficult to determine
      the extent to which nickel can be substituted for some applications of copper,
      the ultimate floor for nickel might correspond to the price of copper. Since
      world demand for copper is about 14 times greater than that for nickel
      (7,886,000 tons versus 574,000 tons in 1972), there would be some scope for
      absorbing large volumes of additional nickel supply in some special uses of
      copper. The possibility of interchangeability of nickel and copper in some
    � markets is merely hypothetical and probably would not take place before the 1990s,
      if at all. If it should occur, however, it would radically change the relative
      importance of the nodule industry. In that case nodule mining could increase
      spectacularly and the industry would become a major supplier of copper as well as
      the largest source of cobalt, manganese, nickel, molybdenum, vanadium and possibly
      of other metals. This scenario, of course, is only valid if no control over the
      pace of nodule development is exercised by the Authority.

          85-/ $US 200/ton is the market price for standard Unit'ed States ferromanganese
      containing 78 per cent manganese.

                                                       100075

              III. PROMOTING THE RATIONAL DEVELOPMENT OF NODULE RESOURCES

         A recurrent theme in official and academic statements on nodules is tha~t
    they should be developed in a rational manner. This~ convergence of opinions is
    underscored in paragraph 9 of the Declaration of Principles86! which states that
    "the r6gime shall, inter alia, provide for the orderly and safe development an~d
    rational management of the area and its resources and for expanding opportunities
    in the use thereof". In order to promote the rational development of nodule
    resources, it will be necessary to identify the major policy objectives, and to
    examine them to ascertain the extent to which they may be mutually conflicting or
    complementary.

    1.   Identification of major policy objectives

         Several objectives have been proposed and analysed extensively in academic
    papers and in the discussions of the Sea-Bed Committee. They have been expressed,
    with varying degrees of clarity, in the Declaration of Principles and may be
    summarized as follows:

         (a) Encouraging the development of nodule resources

         For some time, it has been questioned whether known mineral resources are
    sufficient for sustained growth in material consumption. More recently, the
    sharp increase in raw material -prices caused major consuming countries to actively
    seek out alternative sources of supplies. The potential of the nodule industry
    has prompted industrial countries depending on imported minerals to assign a high
    priority to its development. These countries, over a period of years, have
    directed a huge research and development effort to solve problems posed by nodule
    mining and processing, so that now technology is no longer a limiting factor on the
    development of this industry.

         (b) Minimizing the impact of nodule mining on mineral exports of developing
              countries

         Developing countries have understandably voiced serious concern at the
    prospect of a new industry which may have a serious impact on their markets. The
    need for a controlled pace of nodule development is obvious for countries like
    Chile, Gabon, Ghana, Peru, Philippines, Uganda, Zaire and Zam'bia which are he-avily
    depcendent on the exports of minerals that will also be recovered from nodules. To a
    large number of other developing countries exports of minerals represent an
    important contribution to their balance of trade position. For them, a loss of a few
    million dollars worth of export earnings could also be quite serious, given their

        86/ General Assembly resolution 27149 (XXV).

                                                    00076

    perennial balance of payments difficulties. But the argument of balance of
    payments is not restricted to developing countries: advanced industrial countries
    which are large exporters of minerals and metals such as Australia, Canada, France
    and South Africa have also expressed such concern. Alleviation of balance of
    payments pressures is also an argument used by groups in importing nations
    requesting unilateral legislation to govern nodule development. 87/ The lr'ge
    measure of support expressed for minimizing adverse effects on developing country
    mineral exporters is thus explained.

         (c) Ensuring the participation of developing countries in the nodule industry

         Developing countries contend that the highly sophisticated nature of technology
    for nodule mining and processing and the heavy capital requirements involved
                 US-~ 250 r-iLin or --ore for each nodule venture) will limit the
    industry to the half-dozen most industrialized countries unless there are measures
    to the contrary. The smaller industrial nations also recognize their inability to
    compete with the industrial leaders in this endeavour. 88/ In addition to the
    potential of the industry itself, considerable spinoff benefits are expected for
    the shipbuilding, heavy equipment and metal based industries. The pivotal
    importance of the nodule industry was stressed by the President of the Shipbuilders
    Council of America:

         "In its maturity, deep ocean mining will undoubtedly contribute to an
         advancement of technology not only in shipbuilding industry but in the
         offshore petroleum industry while similarly endowing marine science and other
         human activities about which we have yet no conception." 89/

         (d) Maximizing revenues for the international authority

         From the inception of negotiations on an international regime for deep sea-bed
    mineral resources, it has been assumed that nodule mining would provide a new

        87/ "If S.1134 becomes law, U.S. industry will start immediate efforts to
    convert manganese nodules, which is now only a mineral curiosity, into material
    which will flow through the channels of world commerce and aid the United States
    in reducing its deficit balance of payments". Statement of Mr. T. S. Ary on
    behalf of the American Mining Congress, before the U.S. Senate Sub-Committee on
    Minerals, Materials and Fuels on May 17, 1973. Ore. cit. p. 136.
        88' Indicative of this concern is the alternative (C) of paragraph 25 of
    article 34 on participation of developing countries: "For the purpose of this
    article, States not having attained a level of marine science and technology
    permitting the exploration of the Area and exploitation of its resources, or not
    having the financial resources required to carry out such exploration and
    exploitation, shall be treated on an equal footing with developing countries".
    Renort of the Committee on the Peaceful Uses of the Sea-Bed and the Ocean Floor
    Ceycnd the Limits of National Jurisdiction, vol. II (1973), p. 96.
        89/ Hearings before the U.S. Senate Sub-committee on Minerals, Materials and
    Fuels. 93rd Congress, op. cit., np. 87-88.

                                                     00077

    substantial source of revenue for the international community. It is argued that
    since the most important economic benefits from nodule mining will accrue to the
    industrial nations developing nodule technology - which are also the major
    importers of minerals - the maximum possible revenues for the international
    authority should be exacted from nodule miners. Such revenues would thereafter
    be shared according to criteria favouring developing countries.

         (e) Preservation of the marine environment

         In a world increasingly aware of ecological interdependence, it was logical for
    the Declaration of Principles to include the guideline that activities in the
    area should be conducted in such ways as to assure "the prevention of pollution
    and contamination, and other hazards to the marine environment, including the
    coastline, and of interference with the ecological balance of the marine
    environment"'.

         (f) Conservation of nodule resources

         In recent years the rapid depletion of traditional sources of raw materials
    in many countries has brought into focus the need for careful husbanding of the
    finite resources of our planet. The Declaration of Principles, clearly identifies
    "the protection and conservation of the natural resources of the        ae" as a policy
    objective.

    2.   Harmonizing conflicts of interests

         Some of the above policy objectives can obviously conflict. A systems approach
    to sea-bed resource management could provide an optimum cost-benefit solution to
    the harmonization of conflicts if an acceptable list of priorities for the various
    objectives could be determined. The establishment of priorities is indeed the heart
    of the matter- and the Sea-Bed Committee has examined these points thoroughly over
    the past five years. Some basic underlying factors seem to be emerging.

         First, the policy objectives of each country or regional group largely reflect
    their interests as seen in the light of: (1) general market trends, and (2) the
    special position of their domestic industries vis-Ai-vis the future sea-bed mining
    industry. Future events may allay the fears of some countries, aggravate those of
    others, or change drastically their earlier perspective.

         There is a great degree of confidence in the future viability and scope of
    nodule mining. Industry officials are already contemplating second and third
    generation systems including such novel concepts as on-board metallurgical processing
    of nodules. The prospects of a fast changing technology make it all the more
    difficult for the international community to conceive and determine at this stage
    all the appropriate methods of managing sea-bed resources. If the likely impact of
    the first few mining operations can only be visualized in its broad perspective, what
    can be said of the second and third generation mining systems?  This rapi(  ne  of

          technological development underlies the need for giving the international
          machinery enough flexibility to adapt itself to changing conditions and to -dopt
          new resource management strategies which might be required to handle any new
          situation.

    t          Given the highly dynamic nature of nodule technology and the uncertainties
          clouding future market conditions it would be of little use to conceive roliLcy
          strategies to deal with possible situations beyond a time span of about one decade.
          In view of these considerations, it should be stressed that in this report: (1) the
          policy implications examined reflect the framework of interests as perceived in
          1974 and should therefore be periodically reviewed: and (2) the time span adopted
          for analysis of the implications of nodule mining cover the arbitrarily chosen
          decade 1976-1985.

               Another point relating to the harmonization of conflicting interests concerns
          the nature of trade-offs. The central issue of nodule management is the degree
          of control, if any, over the pace of resource development.. The variation in the
          approach to this question can be categorized somewhat simplistically as efficiency
          (free development of nodule resources according to market forces) versus equity
          (some control over sea-bed resource development). For advocates of free
          development, market forces would guide the nodule industry to expand as long as it
          would be profitable to do so,90/ thus securing the most efficient allocation of
          resources and benefiting consumers by satisfying their mineral requirements at the
          least possible cost.

               This model of resource allocation favoured by Western economists proceeds from
          a number of assumptions which are not all met in reality. It is obvious that
          perfect competition, free resource movement, and general access to technology are
          not true of the nodule industry. Also it must be recalled that the competitive
          model of resource allocation presupposes that the existing income distribution is
          socially and politically acceptable. Therefore all market-oriented developments
          that might favour consumers in industrial countries at the expense of traditional
          suppliers in developing countries will need to be closely scrutinized on equity
          grounds. 911

          3.   Balancing nodule development against its impact on mineral exports of

               developing countries

               (a) Basic approaches

               The proposals made on ways and means to facilitate nodule development while at

             go/ The theoretical equilibrium under free market conditions would be reached at
          that -point where additional units of investment into nodule mining would be only as
          profitable as investment in land mining projects or, for that matter, as profitable
          as alternative investments in other industries not related to mineral production.
             91/ It is generally agreed that an additional unit of income is far more
          illiortant in relative terms for countries at low levels of per capita income than
          for advanced countries.

                                                                  00079~~~~~I.

    the same time minimizing the negative effects on the mineral industries of
    developing countries may be classified under two general approaches: namely,
    compensatory and preventive.  These two approaches, though not mutually exclusive,
    are based on different premises. Under the compensatory approach, nodule
    resources would be developed with few or no controls but with some form of
    compensation provided to developing countries affected by sea-bed mining. In
    other words, action would not be taken until some disruption had occurred. The
    preventive approach would orient the development of nodule mining so as to keep the
    disruptions from occurring in the first place. There would appear to be no easy
    solution: the potential production of the major minerals in nodules (cobalt,
    manganese, nickel and copper) is in proportions quite different from world demand
    for these minerals. For example, the forecast of metal production from nodules
    in 1985 would be sufficient to supply 50 per cent of the estimated demand for
    cobalt, 18 per cent of world. demand for nickel, 6 per cent of demand for man:,anese
    and only 1.3 Der cent of demand for copper.

         If the preventive approach were to prevail all across the board and no metal
    market were to be significantly affected by the future Droduction from nodules, the
    pace of development of the nodule industry would be very slow indeed. In fact, one
    single nodule mining venture., of a size considered by industry as the minimum viable
    (one million tons of dry nodules per year), might be already too large and could
    affect the market for cobalt. It seems, therefore, that the harmonization of the
    conflicting interests involved would require that the preventive and compensatory
    approaches be combined in a politically acceptable strategy for development of the
    nodule industry.

         (b) Long-term planning: the preventive apDpoach

         One approach that has been supported by a number of countries is that sea-bed
    resources should be considered as complementary to traditional sources of supply.
    The translation of this general Precept into practice offers a number of
     Difficultieso For instance, it might be thought that sea-bed resources would have
      complementary role if they were developed specifically to supply that Part of
    I:~eand that could not otherwise be supplied by traditional sources. The problem
    with this interpretation is that demand, supply and prices are all interrelated, and
    if demand tended to outstrip supply, this imbalance would result in increases in
    prices to the extent necessary to bring demand and supply to a new equilibrium.

         An alternative approach would be to define arbitrarily the concept of
    comnlementarity in a dynamic sense, namely, in terms of future increases in demand.
    On th- other hand, if all future demand for the minerals that can be produced from
    nodules were to be supplied by this new source, this would amount to a Policy
    decision to halt further growth for traditional producers. Existing producers
    might find it difficult to exPand capacity and there would be a virtual impediment
    to the development of a number of land deposits which have recently been discovered,
    or may be discovered in the future. The exact extent to which the partition of
     future production from land and sea--ued sources is politically acceptable is still
    to be determined.  Moreover the views on the spci fic shares to be allocated to each

                                                      00080

    source will likely change with time. The most important factor in this
    consideration is still unknown, namely the relative efficiency (cost of Production)
    of the nodule industry as compared with land mines.

         Assuming that the complementarity approach for sea-bed production might be
    accepted in terms of a certain share of the increase in demand for the minerals
    concerned, a number of practical problems would remain to be solved. Since the
    likely metal production from nodules will be forthcoming in proTportions quite
    different from the demand for these minerals, what would be the basic guideline
    for the optimum pace of nodule mining? On numerous occasions industry officials
    and government representatives from countries developing nodule mining systems
    have indicated that the mainstay of the nodule industry will be nickel. 2__/ This
    position is explained in the following statement by Leigh S. Ratiner, the Director
    for Ocean Resources of the U.S. Department of the Interior:

         "'Our present understanding of marine miners' plans indicates that they will
         produce either three or four metals concurrently. Future metallurgical
         developments may enable the extraction on an economic scale of only the more
         valuable copper and nickel content of nodules. For the present, however, use
         of these techniques would require marketing of either three or four of the
         metal components. If one of these metals faces a difficult market situation
         and is an important source of revenue, the entire production process must be
         geared to market opportunities for that metal. Since nickel represents
         such a significant share of the gross value of marine mining production, and
         since its market opportunities may be restricted during the early phases of
         deep sea mining development by both the size and nature of nickel markets, it
         may be concluded that nickel will be the limiting factor on the growth of a
         marine mining industry for the foreseeable future." 93/

         Following this argument to its logical conclusion, Mr. Ratiner, on another
    occasion, suggested that on the basis of projected growth in demand for nickel
    between no~,w and the year 20005 some 20 to 90 production units, each producing

        92/ As a matter of fact, Summa Cornoration refers to nodules as "nickel
    nodules' instead of using the term manganese or ferromanganese nodules generally
    employed by the academic community.
        93/ Appendix by Leigh S. Ratiner, to a letter of Charles N. Brower to
    Senator J. William Fulbright dated 1 March 1973, copies of which were made
    available to members of the Sea Bed Committee.

                                                          00081

    approximately 3 million tons of nodule per year could be in operation by the
    year 2000. 944/

         It would seem therefore that the long-term planning of nodule development as a
    function of the increase in demand for nickel would be politically acceptable to
    countries developing nodule mining technology. The pace of growth of the nodule
    industry would, of course, vary depending on the share of the future increase in
    demand for nickel that the nodule industry would be permitted to supply. Moreover,
    the exact rate of growth in demand for each mineral produced from nodules will have
    important implications for future market penetration.

         Some actual figures might be helpful in assessing the magnitudes involved in
    long-term planning of nodule development as a function of the increase in demand
    for nickel. Assuming that future world demand will increase at an average of
    6 per cent a year (for the period 1962-1971 in the market economy countries it was
    6.5 per cent), by 1976 the world demand for nickel would amount to 724,000 metric
    tons. 95/ In that case, the expected  41,000 tons increase in demand for nickel for
    1976 could be supplied by approximately 2.7 million tons of nodules yielding an
    average of 15,000 tons of nickel ner million tons of dry nodules. This volume
    over time can be quite impressive. For instance, during the decade of 1976 to 1985
    the increase in demand for nickel at a 6 per cent growth rate would amount to

        94/ See statement of Mr. L. Ratiner at the hearing of the Sub-Committee on
    Minerals, Materials and Fuels of the United States Senate on 15 June 1973. These
    figures were apparently derived on the assumption that a production unit of
    3,000,000 tons of dry nodules per year would recover on the average 34,000 tons of
    nickel per year and that demand projections would be as follows:

                   Estimated world demand for nickel (in metric tons)

                                      Assuming a 2.4 per cent       Assuming a 6 per cent
                   Year                growth rate                   growth rate

    (a)            1975                      779,000                       926,000
    (b)            2000                    1,409,000                     3,9714,000

    (c) Growth in demand:  (b)-(a)           630,000                     3,048,000

    (d) Approximate number of
         mining units:  (c) ?  34,000          19                            90

       95/ Demand for newly mined nickel.  If direct use of scrap were taken into
    account, this figure would be considerably larger as in the U.S. projections
    presented by Mr. Ratiner (see foot-note 1 of mrlious page).

                                                   00082

    540,000 tons.  Approximately 36 million tons of high grade nodules 96/ could be
    authorized in 1985 to supply this increase in demand. Such a volume of nodules
    could be sufficient to commission six mining operations of the size proposed by
    Deepsea Ventures (1 million tons/year) and an additional 10 operations of the size
    which is reported to be planned by Kennecott Copper (3 million tons/year).  By
    contrast, industry officials estimate that by 1985 the capacity of the nodule
    industry should be around 15 or 16 million tons of nodules,97/ which coincides with
    the forecast in this report (15 million tons).

         The acceptance of nickel as the pace setter for nodule mining, has the very
    imrortant advantage of guaranteeing the interests of conner producers in developing
    countries.  o hile the demand for copper was about 14 times larger than the demand
    for nickel in 1972, the volume of production of nickel from nodules is likely to
    be some 15 per cent higher than that of copper.  Thus, the impact of nodule
    development on copper markets would be minor for the foreseeable future. ',8_/ For

        96/ Nodules writh 1.6 per cent nickel content, assuming a 94 per cent
    metallurgical efficiency in recovery of the metal giving an output of 15,000 tons
    of nickel per million tons of dry nodules.
        97/ A. Rothstein and R. Kaufman (Deepsea Ventures, Inc.) estimate that by 1985
    rerhars six nodule mining units mirht be in operation.  Two of these with a capacity
    of 1 million tons would recover manganese, while the four others - average rated
    caracit, , of 3.5 million tons - would not.  If all these units were to reach full
    carc- ity by 1985 about 16 million tons of nodule would be mined.  See 'The
    A>pnroaching I-aturity of Deer Ocean Mining - The Pace Quickens", in 1973 Offshore
    Technology Conference. V.I., pp. 323 ff.  Mr. T. S. Ary, Chairman, UIC Committee on
    ;Udersea  iineral Resources, in answer to written questions nroposed by
    -snator Lee i;etcalf in relation to hearings on S.1134, suggested that market
    c.nsi:erations would probably limit nodule mining to five operations of 3 million
    toLns/year by 1986.  on. cit., n. 183.
        9 / I-t is important, however, to keep in mind that the cumulative effect of
    different comnound rates of growth for nickel and copper could chanc-e the
    Proportional volumes of demand for these two metals over time.  For example, the
    [I times greater demand for copper in relation to nickel in 1972 could be
    considerably reduced by the year 2000 if demand for copper increased at lower
    rates and for nickel at faster ones.

                     Ratio of conner/nickel demand by the year 2000 at
                      different annual rates of growth for each metal

    4  __-____  ___ __ _   _ __ __-              ------ _-   -----_    _______________ -
           C ronner

              %"'                 1i        1          8                  6
          $f�                     6                   5                   1
                                  zoZ~ :  4          3                   2

                                                           00083

    instance, considering the unlikely possibility that by 1985 some 36 million tons
    of nodules would be mined, production of conper from nodules (468,000 tons) would
    araount to only 3 per cent of world demand.

         The role of manganese is perhaps the most controversial of all metals
    contained in nodules. Great uncertainty surrounds the likelihood of manganese
    recovery from nodules, as this mineral has a very low price as compared to copper,
    nickel and cobalt. Only one company in the United States, Deensea Ventures, has
    announced plans for recovering manganese in the form of pure metal. This company
    has indicated that it might recover 230,000 tons of manganese metal, from its
    proposed one million ton/year nodule operation, which would be far more than the
    existing world demand for manganese in metal form. There are some indications that
    DOMA in Japan plans to produce manganese from nodules, probably in the form of an
    ore-equivalent.

         It can be expected, however, that in time strong pressures 99/  will be
    generated within the nodule industry to recover the manganese as well. Technical
    innovation in metallurgical processing will eventually reduce the cost of manaanese
    recovery in the form of either pure metal, ferromanganese or a manganese ore-
    equivalent.

         Though the commercial feasibility of large-scale recovery of manganese from
    nodules is still to be demonstrated, several developing countries that ex-ort this
    mineral have expressed grave concern for the future of their domestic mines. Since
    manganese may be recovered from only 4 million tons out of the 15 million tons of
    nodules which are expected to be mined by 1985 (i.e. 27 per cent), it would seem
    that a planning guideline for manganese recovery, amounting to 50 per cent of the
    total volume of nodules mined, might be acceptable to those countries developing
    nodule systems.

         Considering the imponderables of long-term forecasting, it would seem
    preferable that any planning for nodule mining should be established in a flexible
    way to respond to market developments. This flexibility would be made more
    palatable to consumers and exporters alike if the authority's decisions were to be
    made according to predetermined limits. For example, the maximum level could be
    set at 100 per cent of the increase in demand for nickel and the minimum level at
    50 per cent. On this basis, the nodule industry would know that regardless of
    prevailing market conditions, they could be assured of at least an annual increase
    in production equivalent to half of the expected increase in demand for the
    guideline mineral.  The developing countries exporting nickel, manganese and coper,

       99/ Mianganese and iron would amount to over one third of the volume of
    tailings-that must be discarded by processing plants. The reduction of waste
    disposal costs would be another economic incentive for the recovery of this
    mineral as environmental requirements affecting slag heaps become more strict.
    i~oreover, policy considerations might play an important role in the possibility of
    inducing some Covernments to grant snecial subsidies for manganese recovery from
    nodules.

                                                      00084

            Table 7. Summary presentation of possible scenarios of
                       controlled nodule development

    (a) Basic guideline: rate of nodule mining as a function of increase in
        demand for nickel:

             minimum authorization rate - 50 per cent of this increase.

             maximum authorization rate - 100 per cent of this increase.

    (b) Additional limitation - recovery of manganese from nodules:

             50 per cent of the nodule mining authorized

    (c) Total volume of nodule mining which could be authorized by 1980 and
        1985 if nickel demand increases by 6 per cent per annum:

                             1980                      1985

             minimum -   7,700,000 tons             18,000,000 tons

             maximum -  15,400,000 tons             36,000,000 tons

    (d) Total volume of nodules from which manganese recovery could be
        authorized by 1980 and 1985 on the assumption of (c) above:

                             I;980                     1985

             minimum -   3,850,00  tons              9,000,000 tons

             maximum -   7,700,000 tons             18,000,000 tons

         * The figures used in the projected demand for nickel exclude the
    direct use of nickel in scrap form.

                                                    00085

    on the other hand, would be assured that the maximum increase of production
    forthcoming from nodules would not reduce their present volume of production since
    the additional Production from nodules would be geared, at least theoretically, to
    the increase in demand.

         Time lags in project implementation could serve as an additional factor in
    softening the impact of sea-bed production on mineral markets- 100/ If the
    international sea-bed authority were, for instance, to start granting permits in
    1976 for nodule mining (licences or joint ventures) 101/ equivalent to the cexpected
    increase in world demand for nickel for that year, the volume of nodules involved
    would be approximately 2.7 million tons. It is obvious, however, that commercial
    oroduction of metal from those 2.7 million tons of nodules would only reach the
    market a few years later. The enterprises involved would still have to finalize
    their investment projects, make the financial arrangements, build the mining
    system and the processing plant, and run the final tests before   starting
    commercial production. This lead-time would be a minimum of two years in
    exceptional cases, but more likely of three to five years for most firms. 102/

         What would be the likely impact of nodule development along the guidelines
    described above? A first approximation could be derived on the basis of the
    following assumptions: (1) the full volume of nodules (and manganese recovery)
    that would be authorized each year would be in fact contracted for with interested
    parties; (2) the average lead-time for marketing minerals would be three years from
    the date of the original contract (if the first contracts for joint ventures or
    licences are granted in 1976, then production would reach the market in 1979):
    (3) all ventures would start operation at their full rated capacity and would
    remain at that level thereafter; (4) average recovery from each million tons of
    dry nodules would be: 15,000 tons of nickel; 139000 tons of copper. 2,000 tons of
    cobalt and 230,000 tons of manganese (if recovered).

      100/ On the other hand, it might be decided that time lags in project
    implementation should be taken into account in the establishment of planning
    guidelines. The principle of complementarity would be interpreted as the granting
    of authorization for nodule mining in line with the expected increase in demand
    for the very year when commercial production would start. In the example of the
    text, it could mean that in 1976 authorization would be granted to supply the
    projected increase in demand in 1979, assuming an average three year lead time.
    In that case, the figure for maximum authorization during the period 1976-1985
    would be 43 million tons of nodules.
       101/ If on the other hand the Authority were to undertake nodule exploitation
    directly, the question of control would be obviously greatly simplified.
      102/ It is conceivable, on the other hand, that once the rules of the game are
    clearly defined, the leaders of the industry might schedule the activities of
    their implementation programme in such a way as to shorten the time between
    authorization and commercial production.

                                                      00086

              Table 8. Hypothetical mineral production from nodules based on
                        full utilization of the planninfg guidelines *
                                      (in metric tons)

                                           Nickel      Manganese  Cobalt        Copper

    Yotential production starting in 1980
         minimum authorization                42,000       320,000   5,500         36,000
         maximum authorization                84,000       64o,ooo0  11,000        72,000

    Potential production by 1985
         minimum authorization              175,000    1,300,000   23,000        150,000
         maximum authorization               350,000    2,600,000   46,000        300,000

    Estimated world demand.  1980             914,000   12,900,000   44,000   11,650,000
                             1985         1,220,000   16,400,000   70,000   14,900,000

    Share of ~world market in 1980
         minimum authorization               4.6%          2.5%       12.5%        0.3%
         maximum authorization               9.2%          5.0%         25%        0.6%

    Share of world market in 1985
         minimlum authorization             14.3%          7.9%         33%          1%
         . ~,imure authorization            28.6%         15.8%         66%           2%

         *  See Tabit 7.  Average lead time assumed as 3 years.

                                                           00087

        As can be seen in Table 8, the potential mineral production from nodules,
    within the constraints of the planning guidelines, could be quite substantial.
    It must be understood, however, that these are hypothetical figures. The maximum
    authorization would represent a potential of some 50 per cent more metal production
    from nodules than is likely to take place under free market conditions. Under the
    minimum authorization production of nickel, copper and cobalt would be
    approximately 25 per cent below the present plans of industry, though the estimated
    manganese recovery would be unrestricted (see Table 2).

         It could be concluded that the planning guidelines exemplified above are
    fairly in line with the plans of the nodule industry. These guidelines, however,
    would go a long way toward assuaging the fears repeatedly voiced by mineral
    exporting developing countries that the nodule industry will doom their domestic
    mining industry.

         The effectiveness of any system to regulate the pace of nodule exploitation
    will depend, of course, on the extent of the international area. If extensive
    limits for national jurisdiction are adopted, it is likely that some nodule
    deposits of commercial interest might fall within national jurisdiction, thus
    outside the control of the international authority. A number of high grade deposits
    have already been found in proximity to land areas.

         The planning approach exemplified in this report is just one of several
    possible solutions. Whatever planning strategy is deemed appropriate to harmonize
    the conflicting interests in sea-bed resource development, it will be necessary to
    define the regulatory instruments with considerable precision. 103/ On the other
    hand, it is clear that the international regime under negotiation cannot, even in
    its detailed rules, standards and procedures, predetermine every administrative
    procedure to be adopted by the international machinery. If that were so, there
    would hardly be a need for granting deliberative and executive powers to the
    authority. Planning, whether in centrally planned or market economies, is a
    continuous process that requires endless innovations and adjustments not only in
    methods used but also in goals.

         (c) An alternative approach - indirect controls

         A certain measure of control over the volume of mineral production from
    nodules could be obtained with the use of differential levies or royalties for each
    of the minerals to be recovered from nodules. The minerals which would be most
    affected by the nodule industry such as cobalt, manganese and molybdenum could be
    made subject to royalties higher than the average fiscal charge imposed on the
    recovery of nickel and copper from nodules.  This method was already described in

       103/ For example, the optimum size of a nodule operation may be larger than the
    nodule volume authorized for a given year, i.e., a 3 million tons project versus
    the 2.7 million tons that could be authorized in 1976.  The authority would need to
    institute procedures for dealing with a number of matters in the administration of
    a regulated system for nodule exploitation.

    previous reports by the Secretary-General 104/ and n~c:d not be repeatcd here   The
    implementation of such systems, however, would require considerable sophistication
    in the analysis of market trends and in forecasting the impact that different levels
    of royalties or levies might have on the operations of the nodule industry.

         (d) The compensatory approach

         As indicated above, it seems that the most feasible way to minimize the impact
    of nodule development on developing countries producing cobalt would be by r :; of
    compensatory payments. It is difficult to foresee the future behaviour of cobalt
    markets once large volumes of nodules start being mined because at present the
    market is highly concentrated in the hands of one single producer in Zaire. In the
    past, Zaire, acting as a price leader, has tended to reduce output when cobalt
    prices were falling. 105/ Whether or not Zaire continues its price leadership, the
    export revenue of cobalt producers is expected to decline sharply once the nodule
    industry matures. Compensation for these countries might therefore be in order. 1061

         It has been argued that such compensation would leave very little revenue left
    for distribution to the international community. One possible solution to this
    impasse would be to exact a contribution from those countries that would directly
    benefit from any drop in cobalt prices. This compensation might be in the form of
    an internal tax per ton of cobalt consumed in the industrial countries, whether
    derived from nodules or from traditional land sources, amounting, for instance, to
    half of the expected drop in price as compared to a base year.107/ In this way,
    consumers would still benefit from lower prices, and the interests of developing
    countries would be protected. A similar compensatory approach might also be
    envisaged to complement other measures used to minimize the impact on manganese
    producers.

      104/ "Possible impact of sea-bed mineral production in the area beyond national
    jurisdiction on world markets, with special reference to the problems of developing
    countries: A preliminary assessment" (document A/AC.138/36) and "Additional note
    on the possible economic implications of mineral production from the international
    sea-bed area" (document A/AC.138/73).
      105/ UNCTAD "Exploitation of the mineral resources of the sea-bed beyond
    national jurisdiction: issue of international commodity policy. Case study of
    cobalt" UNCTAD document TD/B/449/Add.1 of June 1973.
       106/ Some analyses have suggested that there might be insufficient revenues
    for the authority to compensate developing producing countries for actual or
    potential earnings foregone.  See UNCTAD documents TD/B/449/Add.1 and TD/B/483.
       107/ See document A/AC-138/36, p. 67.

                                                                                   I.0

                                                          00089

         (e) Short-term price fluctuation

         It has been suggested that the international authority should be empowered to
    deal with short-term price fluctuations. One possibility would be for the authority
    to limit or reduce the volume of production from existing nodule mining operations
    if the prices of some minerals were to fall.108/ It is apparent, however, that the
    compulsory reduction or suspension of mineral recovery from existing nodule
    operations would present a number of technical, economic and political difficulties.
    Moreover, it is doubtful whether an enterprise could subsist financially if it were
    required to suspend production even if only for a few months. An alternative
    approach that might be considered is the use of the International Monetary Fund and
    the World Bank compensatory financing schemes, which were conceived to assist
    countries that may be faced with shortfalls in export earnings due to unfavourable
    market developments.

         The potential role of commodity agreements for protecting the interests of
    developing countries exporters should not be over-emphasized. Commodity agreements
    are generally directed at stabilizing market prices for a given commodity on the
    basis of the existing market shares of the members. In the case in point, the
    disequilibrating factor would be the new sea-bed producers who, without any share
    of the market at present, could not be expected to accept the maintenance of the
    market status quo. None the less commodity agreements may have a future role to
    play that would be complementary to other measures designed to minimize the impact
    on developing countries.

    4.   Participation of developing countries

         Some general considerations are made on indirect and direct means to promote
    the participation of developing countries in sea-bed mining.

         (a) Indirect methods: -transfer of knowledge of resources and techniques

         It is obvious that little participation is possible in a vacuum of knowledge
    regarding sea-bed resources and the industrial techniques required for their
    exploraticn and exploitation. Given the nature of the industry, only a few
    entities in a handful of countries possess the necessary data and techniques and
    they are of course keeping them secret from all potential competitors. Thus, the
    first step in promoting some measure of participation by developing countries would

       108/ See article 36, paragraph ~40, alternative (E) of the texts illustrating area
    of agreement and disagreement on items one and two of Sub-Committee I's programme of
    work "to regulate the production, marketing and distribution of raw materials from
    the Area and, where appropriate, to take, in consultation or in collaboration with
    the United Nations and its appropriate specialized agencies, measures to facilitate
    the stabilization of world prices of the raw materials obtained from the Area,
    through inter alia reduction and suspension of production and international
    commodity agreements, whenever it deems that the production of such raw materials
    from the Area may have adverse effects on the economies of exporters of similar raw
    materials from developing countries." Report of the Committee on the Peaceful Uses
    of the Sea-Bed and the Ocean Floor 'ikwycjrid the Limits of National Jurisdiction,
    Volume II. Document A/9021 of 1973. (Alternative D of the same text contains
    similar provisions).

    be to institute a system for collecting and dissemi~nating information on nodule
    resources and mining and processing techniques. As is generally known, industrial
    and developing countries alike require that all data on resource surveys or
    prospecting be divulged to the relevant authorities. It might be considered
    appropriate, therefore, that all 4information collected by enterprises engaged in
    the prospecting of international sea-bed resources be shared with the Authority.

         It has been suggested that the Authority should organize training programmes
    for nationals of developing countries on -the various subjects related to the
    exploration and utilization of sea-bed resources. The usefulness of such programmes,
    however, should not be overestimated. Historically, programmes of transfer of
    technology, more often than not, have fallen short of their objectives. In an
    industry just developing a new and sophisticated technology, it can be expected that
    almost all the experienced specialists will be employed by nodule miners, thus
    making it unlikely that they would be available to conduct training courses and in
    the process divulge proprietary information. Moreover, the rapid advance that can
    be expected in nodule technology would tend to outdate knowledge gained in training
    programmes before it could be put into practice.

         (b) Direct methods - joint ventures

         The priority that developing countries have given to their participation in
    sea-bed mining can be best understood in terms of the experience that some have had
    with their own natural resources and their ability to exercise control over their
    exploitation. In a number of instances, these countries were unable to effectively
    control investment plans, marketing practices, and other managerial decisions of
    great importance to the local economies. This pattern has been clearly evident in
    the oil industry where conflicts of interests have become more apparent between
    the worldwide interests of the major petroleum firms and the national interests of
    the host State where the venture is located. 109/

         Joint ventures are becoming a common feature of the international mining and
    petroleum industries. It has been suggested that the future of the international
    petroleum industry will be one in which joint ventures with State companies, or
    service contracts and production-sharing arrangements, will be the order o-f the
    day.LIO/ Participation of developing countries in the exploitation of sea-bed
    resources could be fostered in two types of joint ventures. One would be the
    association of companies from developing countries with enterprises of industrial
    nations possessing sea-bed technology. It is obvious that in this case participation
    would be accomplished in a direct manner with business groups from developing
    countries participating with risk capital and reaping any benefits obtained.

       100/ C. W. Friedmann, "Joint Exploration of Ocean Bed Resources: some
    Organizational Aspects", in Ocean Enterprises, A Special Report on a Preliminary
    Conference held in preparation for the Pacem in Maribus Convocation,
    28 June-3 July, 1970.
       110/ L. C. Stevens, "Joint Ventures in the International Oil Industry", in
    Petroleum Review, October 1973.

                                                       00091.

        A more indirect way of participation would be through the Enterprise
    proposed by the 13-Power draft.111/It is likely that the over-all objective of
    control over nodule exploitation might be accomplished by the regulatory powers of
    the international sea-bed authority. Nevertheless, there will still be considerable
    scope for participation in the decision-making process within the individual nodule
    mining units to warrant the establishment of joint ventures between interested
    parties of advanced countries and the Enterprise. A host of questions relating to
    financial arrangements, location of processing facilities, hiring of personnel,
    management and marketing 112/ practices,,can so drastically affect the profitability
    of individual mining ventures as to make an active and direct role desirable for
    the international sea-bed authority in each individual venture. The participation
    of the Enterprise in joint ventures, moreover, would provide the necessary feedback
    for the Authority to adjust the rules, standards and regulations of sea-bed mining
    to the real needs of both the industry and the international community at large.

    5.   Revenue for the international machinery

         It has been suggested 113/ that the "take" of the international authority should
    neither amount to a hidden subsidy nor to a disincentive as compared to land mining
    operations. Any differential subsidy or disincentive would encourage inefficient
    allocation of world resources. It must be said, however, that this principle of
    "equivalent fiscal charge" is easier to conceptualize than to put into practice.

         The tax burden on land mining operations varies dramatically from country to
    country and even from one mining operation to another, thus leaving open the
    question of what -would be an "equivalent fiscal charge'". The adoption of the
    "average" tax charge in existence in the major mineral producing countries would
    not necessarily be more desirable than either the lowest or the highest existing
    fiscal charges. In fact, the fiscal charge of land-based mining ranges from a
    negative tax (subsidy) to very steep charges equivalent to over half of the market
    value of the metals produced. 114/

         The equivalent fiscal charge principle alone cannot supply an operational method
    to determine the appropriate share of the international authority in the revenues of

       III/ For example, the granting of discount prices to subsidiaries or associated
    firms and the use of product distribution through third parties.
       1121 "Working paper on the re'gime for the sea-bed and ocean floor and the subsoil
    thereof beyond the limits of national jurisdiction", submitted by Chile, Colombia,
    Ecuador, El Salvador, Guatemala, Guyana, Jamaica, Mexico, Panama, Peru, Trinidad and
    Tobago, Uruguay, Venezuela, in document A/8421.
       113/ D. B. Brooks and F. T. Christy, Jr., "Memorandum on Suggested Operational
    Guidelines for an International Regulatory Authority for the Sea-bed", in The
    United Nations and the Bed of the Sea (TI), 21st report of the Commission to Study
    the Organization of Peace, New York, June, 1970.
       1-14/ See "Additional notes on the possible economic implications of mineral
    production from the international sea-bed area", document A/AC.138/73, pp. 18-19.

                                                      00092

    the sea-bed mining industry. A suggestion often made is to establish the highest
    possible fiscal charge on nodule mining compatible with maintaining the necessary
    incentives to ensure a steady flow of investments in nodule mining.       Though
    conflicting in the short-run, these two objectives are in fact compatible in
    the long-run, If enough incentives are given, the nodule industry will develop
    faster, thus increasing the revenue base of the Authority. The crux of the matter
    is then the quantification of a prospective level of return on investment that
    would encourage the large flow of funds necessary for the commissioning of nodule
    mining systems. A first approximation would be to survey the actual return on
    comparative investments in manufacturing and mining industries in the countries
    developing nodule mining technology.

         For example, the average return on investment 115/ for the whole manufacturing
    sector in the United States was 10.8 per cent in 1971 and 12.1 per cent in 1972.
    What is more relevant for the future nodule industry is that in the United States,
    the average return in metal mining (23 companies) was 10.5 per cent in 1971 and
    10.4 per cent in 1972, while the average return in the non-ferrous metals
    industry (52 companies) was much lower: 5.0 per cent in 1971 and 7.2 per cent in
    1972.116/ Considering the risks involved in a totally new technology for mining
    and processing and the novel institutional arrangement to be established for
    resource exploitation in the international area, it seems reasonable to expect
    that risk capital from advanced industrial countries would require a minimum
    prospective return on investment somewhat higher than these average rates of
    return. Since the rate of 15 per cent has been mentioned by industry officials,
    in informal discussionsl1i7_/as their minimum target, this figure is used as a
    rough rule of thumb in this analysis.

         (a) Value of nodules versus value of processed minerals/metals

         A prerequisite for any estimate of the profit potential of the nodule industry
    is the determination of what stages of production should be considered in defining
    the "international sea-bed mining industry". Should the value of nodules on board
    the mining ship (ore at the mine site) serve as the base for calculation, or the
    market value of the processed final products marketed by the industry? The method
    agreed for this calculation could affect quite dramatically the revenue potential
    for the international authority. It can be roughly estimated that the nodules on
    board ship will be worth between 6 and 10 per cent of the value of the final
    products after the metallurgical processing is completed. 118/

       115," Net worth (investment capital plus non-distributed profits).
       116/ First National City Bank, Monthly Economic Letter, April 1973, pp. 6-7.

       117/ Marne Dubs, at the 9th Annual Conference of the Marine Technology Society,
    Washington, D.C., 10-12 September 1973.
       118 Mining costs of $US 6/ton of nodule plus some $3 of profits for an
    approximate value of $9/ton on board ship. The value of metals extracted from
    nodules might range from $90 to $170/ton (depending on whether manganese is
    recovered or not).

                                                       000913

         On several occasions the renresentatives of countries developing sea-bed
    mining systems have indicated that they expect the nodule industry to generate
    substantial revenues for the international community. Moreover, the concept of
    the common heritage of mankind would seem to give precedence to the definition
    that would best benefit the international community as a whole. It could be
    expected that those countries wishing to set up nodule processing plants in their
    Territory would be doing so on behalf of the international community. The host
    country would be tradin7 off its usual share of net revenues or fiscal charge over
    the metallurgical processing stage for a number of real benefits. For instance,
    nodule processing will nrovide local employment and will induce the creation of a
    number of ancillary activities to supply some of the inputs of the industry and
    even more important, to process further the metals/minerals produced. Aside from
    these important economic benefits, the security which comes from having a steady
    internal supply of mineral might be a sufficient reason for advanced industrial
    nations to forego their customary tax revenue from activities carried out within
    their borders. 119/

         The following considerations on the revenue potential for the international
    machinery assume that the base for calculation will be the value of metals
    produced by the nodule industry. This approach, if generally agreed upon, would
    need to be considerably refined to take into account a number of specific problems
    that can be foreseen such as the definition of "final products". Subsequent stages
    of fabrication such as the production of alloys, plates, sheets, tubes, wires, etc.,
    are not considered here. By -the same token, the sale of some by-product chemical
    reagents such as chlorine 120/ or the use of the tailings for the manufacture of
    construction materials or other uses will not be considered in the estimates of
    the revenue potential of the nodule industry.

         The determination of metal prices for the purpose of computing the share of
    the international authority will need to be closely scrutinized. For example, in
    some countries with domestic price controls, like the United States, copper prices

       119/ The waiver of taxes over certain economic activities is not so unique.
    Some advanced and developing countries grant tax--free status to manufacturing
    companies located within some ~'free port zones", when these activities are geared to
    the export market. The system of tax credit, however, has a direct parallel with
    the nodule industry. In most industrial countries, companies operating abroad are
    permitted to deduct from their tax bill all taxes paid to foreign government. This
    procedure has been extensively used by the multinational petroleum and mining
    companies.
       120/ Deep-Sea Ventures has indicated that the resulting chlorine from their
    hydrochlorination process can be a great plus in the financial picture of their
    metallurgical orocess. See R. Kaufman and A. J. Rothstein "Recent Developments
    in Deep-Sea Mining" in Marine Technology Society 6th Annual Preprints, 1970.

    may be considerably lower than in other markets, e.g. the London Metals Exchange.
    More serious is the possibility that intentional manipulation of prices could have
    the effect of reducing the take of the Authority. A common practice of
    multinational corporations to minimize taxes is to sell at a low price the
    commodity produced in a high tax country to an affiliate in a tax haven, that
    henceforth would proceed to market the product at prevailing prices. 121/ This
    procedure could also be applied domestically if the party mining and processing
    nodules had interests in other industries or activities using the metals produced.
    Another situation that must be considered is that of countries with currency
    controls that would make it difficult to remit the share of the Authority abroad;
    this problem could be very serious if the currency is inconvertible and the country
    exercises strict control over its foreign trade.

         (b) The profit potential of the nodule industry - preliminary estimates of
              revenues and costs

         A preliminary investigation of the aross profit potential of the nodule
    industry can provide the necessary ground work for determination of the authority's
    take. The difficulties involved in trying to estimate future revenues and costs of
    an industry when much of the pertinent information is proprietary cannot be
    overemphasized. Even in well-established industries a cost benefit analysis for a
    new project must always be evaluated with care. Thus a prospective cost-benefit
    analysis for the nodule industry must be viewed as a first approximation to this
    crucial, if rather obscure, aspect of the future industry. To this end, a number
    of assumptions must be made to establish the basis for the estimates on costs and
    revenues.122/ Most of these assumptions have been derived from information made
    rublic by the nodule industry.

         The estimate of gross revenues or sales is, conceptually, a straight-forward
    calculation. It can be made by multiplying the expected volume of production of
    each metal by their expected future prices. The estimated volume of Production Per
    million tons of dry nodules is presented in table 1.

         Forecasts of future commodity prices are always of a conjectural nature. A
    considerable degree of uncertainty will be involved if the time span is over five
    years and a major new source of supply must be taken into account. Thus, some
    conservative assumptions will be made for metal prices during the first decade of
    the nodule industry. These prices are below current market prices of early 1974
    which with the accelerating process of world-wide inflation will in all orobability

       121/ See J. S. Arpan, International Intercorporate Pricing (New York, Praeger,
    1971).
       122/ See R. Branco, "The Tax Revenue Potential of Manganese Nodules", in Ocean
    Development and International Law Journal, vol. 1, No. 2, 1973.

                                                                               00.0

                                                           00095

    be exceeded in the following years. These price assumptions, conservative as they
    may be, would serve for a comparison with capital and production costs estimated
    on present basis, and provide a first approximation to the prospective financial
    return of the nodule industry. 123/

         The assumed prices used in table 9 for calculations of estimated revenue of
    two possible sizes of nodule mining operations are all below present market prices.
    The greatest variations were in manganese metal price assumed as under half of
    current market price and cobalt assumed as 2/3 of current price to allow for the
    expected drop in prices once these metals are recovered on a commercial scale. 124/
    The price of nickel is assumed as about 10 per cent below present levels and the
    price of copper (us $0.80/lb), substantially below the high levels reached in recent
    months (up to US $1.10/lb.). Minor metals, including molybdenum (currently
    US $1.90/lb.), vanadium (US $1.50/lb.), silver and others are assumed to have an
    average price of US $1.50/lb. This latter price assumption may turn out to be the
    most conservative of all, particularly in the case of nodules containing platinum,
    since this metal alone may in fact be worth more than the other metals. 125/

         On the basis of these assumptions, the estimated gross revenue for mining
    operation of one million tons per year producing manganese metal would be
    approximately US -170 million. Only one firm so far (Deep-Sea Ventures, Inc.) has
    indicated that it intends to recover manganese in the form of metal. It seems that
    the other companies in the United States, Europe and Japan are not considering the
    recovery of manganese. If no manganese is recovered, the estimated revenue for a
    3 million ton/year operation would be US $268 million. These are the sizes of
    mining operations generally mentioned as being planned in the United States. 126/

         Several attempts have been made in recent years to estimate capital
    requirements and mining and processing costs for different sizes of nodule

       123/ These assumptions on prices must not be construed as projections or
    forecasts of metal prices in the 1980s but just as working assumptions for
    comparison with present cost estimates.
       124/ See section II, on the probable impact of nodule mining.
       125/ ECAFE/CCOP, op. cit., p. 42.
       126/ L. S. Ratiner, locus cit. and A. J. Rothstein and R. Kaufman op. cit.

                                                                                  0..9

                                                 00096

    Table 9. Estimated revenue of two possible sizes of nodule mining operations

                                 1 million ton/year             3 million tons/year
                         Metal             Value of      Metal              Value of
                         Production        Production   Production          Pro' ,ction
                         (thousand tons) (US $ million) (thousand tons) (US $ million)

    Manganese-/               230.0            80.5

    Nickel-/                   15.0            49.5          45.0             148.5

    Coppe/r-                   13.0            22.9          39.0              68.6

    Cobalt-/                    2.0             8.8           6.0              26.4

    Minor metals-/              2.5             8.2            7.5             24.7

                 TOTAL       262.5          $169.9          127.5            $268.2

    Notes:

         a/ Long term price of manganese metal assumed as US $350/ton (as against
    '.33/1b. or US $730/ton in December 1973) to take into account the impact on
    the rather small market for manganese metal.

         b/ Price of US $1.50/lb. or US $3,300/ton (US $1.62 in January 1974).
         c/ Price of US $0.80/lb. or US $1,760/ton (US $1.05 in December 1973).
         d/ Price assumed as US $2.00/lb. or US $4,400/ton (as against US $3.10/lb.
    in December 1973).
         e/ Varying quantities of molybdenum (US $1.90/lb. in December 1973), vanadium
    (US $1.50/lb. in December 1973), zinc (US $0.80/lb. in December 1973), silver
    (US )45/lb. in December 1973) and others, all assumed at an average price of
    US "1.50/lb or US $3,300/ton. This assumption would be meaningless for nodules
    containing platinum.

                                                       00097

    ventures.127/ Many of the earlier estimates tended to be rather high.
    Uncertainties and unknowns were generally allowed for with large upward margins
    against errors. This caution is understandable given the novelty and complexity
    of nodule systems. For instance, nodule density, the topography of the ocean
    floor and the efficiency of the gathering apparatus (mining head) will influence
    mining costs. And so will the water depth and the efficiency of the system to
    lift the nodules from the ocean floor to the mine ship. The size of ore carriers
    and the round-trip distance between mine site and processing plant will determine
    the transportation cost.

         But it is the processing cost that has probably caused the widest variation
    in total cost estimates. It is obvious that the metal content in nodules, plant
    capacity (daily throughout) and the specific circumstances of plant location
    (distance from port, environmental constraints, labour costs, cost of reagents and
    other inputs) will all influence the cost of processing. It seems, however, that
    the assumptions on the specific metallurgical processing system used for the
    estimates are the single most important reason for the high cost figures generally
    suggested. Estimates of processing cost based on pyrometallurgical treatment

       127/ John Mero, The Mineral Resources of the Sea, (Elsevier Publishing, N.Y.,
    196m5-- pp. 313 ff.
         P. E. Sorensen and W. J. Mead, "A Cost-Benefit Analysis of Ocean Mineral
    Resource Development:  The Case of Manganese Nodules", American Journal of
    Agricultural Economics, Vol. 50, No. 5, December 1968, pp. 1611-1620.
         A. Kaufman, "A survey of the Economics of Ocean Mining", paper prepared for
    the U.S.-Janan IMarine Mininr- Panel Joint Meeting, Tokyo, 13 March-3 April 1970.
         F. L. La Que, "'Deep-Ocean Mining: Prospects and Anticipated Short-Term
    Benefits", in Ocean Enterprises, an occasional paper published by the Center for
    the Study of Democratic Institutions, June 1970, pp. 17-27.
         G. L. Hubred, "New slant on the economy of manganese nodules'", Ocean Industry,
    August 1970, pp. 26-27.
         G. E. Bollow, "Economic Effects of Deep Ocean Mineral Exploitation", Master
    Thesis for the Naval Post-graduate School, 1971.
         H. J. Meiser and E. Muller, "Manganese nodules - a further resource to cover
    the mineral requirements?:', in Meerestechnik, No. 5, October 1973, pp. 145-150.
         John Mero, "Potential Economic Value of Ocean-Flcor Mlanganese Nodule Deposits",
    in Ferromanganese Deposits of the Ocean Floor, (ed.) D. R. Horn, (National Science
    Foundation, Washington, D.C.o 1972).
         G. Claus, "Theoretical and Experimental Investigations of Deep Ocean Mining
    Systems and Their Economic Evaluntion", 2nd International Ocean Development
    Conference, Tokyo, 5-7 October  1972: pp. 1925-1955.

                                                   00098

    are around US $50 per ton of dry nodule, 128/ and those on hydrochlorination at
    around US $30. 129/

        The actual costs of mining, transporting and processing the nodules and
    marketing the metals produced will only be known after the first production unit
    starts operation. Even then, costs are likely to decrease as efficiency of
    operation improves and also as the industry develops more advanced systems.  At the
    present time, any estimate of costs must be viewed with care. The task has been
    made somewhat easier by the recent disclosures of two American companies. Officials
    fron Deeph-Si- Ventures Inc. published 130/ a range of estimates of capital
    costs and total operating costs for several sizes of production units, which is
    reproduced in figure 7. They indicated that for their own organization an
    economic model was used that permitted them to estimate the cost of investment
    and operations with considerable assurance. For other sizes, however, the range
    of estimates provided in figure 7 was based mostly on the estimates of others
    adjusted within 50 per cent to 400 per cent depending on their evaluation of the
    reliability of the third party's figures. It can be inferred, therefore, that the
    actual estimates of costs for the type and size of operation planned by Deepsea
    Ventures would fall within the range shown in figure 7 for a one million ton/year
    prduction unit. The range of estimates for other sizes are crude approximations
    of doubtful reliability.

         The information provided by an official of Kennecott Copper, Inc. _31/
    revealing. He suggested that the nodules could be gathered at the ocean floor and
    lifted on board ship for about US $6 per ton.132/ The transportation costs to shore
    would run between $3 and %  per ton.1l3/ Metallurgical processing could be done
    for between 0lO to $15 or between  l12 to $18, depending on whether or not strict
    environmental regulations were enforced. He summarized that the average cost could
    be about $9 per ton of nodule delivered at the shore plant plus $13 for processing
    for a total of $22 per ton. He suggested that to be on the safe side a range of
    :20 to ~30 per ton could be used.134/ Dubs also indicated that total investments to

       128/ Meiser and Muller, op. cit.
       129/ Rothstein and Kaufman (1970), op. cit.
       130/ A. J. Rothstein and R. Kaufman, `The approaching maturity of deep ocean
    mining -The pace quickens", in 1973 Offshore Technology Conference Preprints,
    pp. 323-34k.
       131/ Mr. Marne Dubs, Director of the Ocean Resources Department, gave these
    figures during the question and answer period, following the presentation of his
    paper "Metal markets, economics and ocean mining", at the 9th Annual Conference of
    the Marine Technology Society, held in Washington, D.C. during 10-12 September 1973.
       132' This estimate of mining cost is in line with the estimates of G. Clauss,
    on. cit. ($6.20 to $6.56/ton) for different hydraulic lift systems.
       133/ Other estimates of transportation costs are: $4/ton (Mero), $4.80/ton
    (Clauss) and ~6.30/ton (Sorensen and Mead).
       13h4/ These figures are noticeably lower than the range of $35 and $55 derived from
    figure 7 for an annual production of 3 million tons of nodule.

                                                          00099

    Figure T. Capital and operating costs vs. production

      (costs based on full stream production at outset)

                    TOTAL CAP ITA14 COST V$ PPJ)DU.~TjcN

        10I 0

                  TOTAL OPRTN CSSV.  P RODUCT I -

       u~~~  SO ~ S
            5.0 -   RE4

      '0:z'7:   PRODUCTION  MILLIONS OF TONS PER YEAR  DRY ORE

    Source:  A. J. Rothstein and R. Kaufman, "The

              approaching maturity of deep ocean min2.ng

              The pace quickens"', in 1073 Offzhore

              -Technolorr- Conference Prenrints,  p. 31t0

    bring such a 3 million ton  operation on stream would be between 250 to 280 mil lion
    dollars. Since Dubs' figures apparently reflect the actual estimates of his
    company's proposed nodule system they could be used for cost-benefit estimates of
    a 3,000,000 tons mining operation.

         A first approximation  to the gross "p rofit" potential of nodule mining,-
    before the "'take` of the authority (operational net revenues) is indicate-,, in
    table 10 which summarizes the estimates of gross revenues, operational costs and
    total investment. It is not very likely that the low estimate of return on total
    investment -- as well as the high estimate - will actually be realized because its
    computation assumes the most -pessimistic assumptions in every case: low gross
    revenue, high total operational costs and high total investment. This low estimate
    of return (43 per cent and 54 Der cent respectively for I and 3 million tons
    operations), however, has the merit of sounding a cautious note for future policy
    making. 135/

         In the future, after the best nodule deposits are exhausted, ore bodies with
    lower grades will probably be mined. By the same token, prices of some metals,
    in particular cobalt, manganese and nickel, might also fall as the volume of nodule
    recovery mounts. The impact of these developments on the profitability of the
    nodule industry will probably be less serious than it might be thought. The reason
    is that investment and operational costs are also likely to fall. 1(

         (c) The share of revenues of the international authority

         The estimates of operational results computed above for the nodule industry
    provide the necessary basis for a consideration of the possible share of revenue
    for the Authority. The exact extent and form of this share will depend on the
    nature of the regime and the manner in which the exploitation takes place.

         The share of the Authority, whether in the form of profit participation or
    taxation, should be effective in generating maximum revenues for the Authority,
    It should also -induce the most efficient allocation of sea-bed resources among
    potential sea-bed miners. It is well known in economic geology that the best grade
    ore body of a region is several times more valuable than the "average" ore grade,
    The distribution and grade of nodule resources of the ocean floor, as on land, are

       135/ These figures on the estimated return on total investment assume that
    depreciation allowances according to standard practice were included in the cost
    estimates given by the industry representatives mentioned. But even if that were
    not the case, and an additional allowance of, say, 10 per cent over total investment
    were made, the operational results would still be very attractive. For the one
    million ton operation they would range from a low of 33 per cent to a high of 99 per
    cent with a medium estimate of 53 per cent return. The 3 million ton operation would
    also fare very well with returns ranging from a low of ~44 per cent to a high of
     84per cent with a medium estimated return of 65 per cent.

       136/ It has been the experience of every major new industry that costs of
    production tend to fall sharply once the industry matures (i.e. plastics, colour TV,
    mini-computers, etc.).

                                                         00101                  1.

    Table 10. Estimated operational results of two possible sizes of nodule mining
                              units (millions of $US)

                                       1 million tons/year       3 million tons/year
                                       High   Medium   Low       High   Medium   Low
                                a!
    (a)  Estimated gross revenue-/      188    170       154       296     268      242
                              b I
    (b)  Estimated total costs-'         76      66        56       90       75      60
                              c/'
    (c)  Estimated net revenue-         132CL 104          78C/    236/   193       1522!

    (d)  Estimated total investment-/  180    150        120       280     265      250

    (e)  Return on total investment!/  109%/  69%         43%0/    94%-/   73%       54%/

         ./ Using the figures of table 9 as medium, the high and low estimates were
    computed as 10 per cent greater and 10 per cent lower than the medium.
         i,/ High and low from Rothstein-Kaufman (1 million tons) and Dabs (3 million
    tons); medium is the arithmetic average.
         c/ High estimated net revenue (c) calculated as high (a) minus low (b), low
    (c) as:  low (a) minus high (b).
         0/ High return on total investment (e) is: high (c) divided by low (d);
    low (e) is:  low (c) divided by high (d).

                                                         00102

    very uneven. Some areas with high nodule concentration, high metal content, ideal
    ocean floor topographic conditions and proximity to processing plants would be
    considerably more attractive than the "average" nodule deposit. If allocation of
    mine sites is made by some arbitrary means (first-in, first-served basis- random
    distribution of ocean floor blocks to interested nations, etc.) some of the best
    mine sites might be allocated to parties that may not even have the capability to
    mine the nodules.  Moreover, the authority would not receive any extra revenue
    with the allocation of the choice mine sites, even if they were to go to the most
    efficient producers.

         Though the "most efficient producer" is only a theoretical concept, it serves,
    in fact, as a guideline in most schemes for allocation of mineral resources. The
    method used is to auction the riglit of exclusive exnloitation to interested
    parties. 137/ Under Pr auction system the exploitation rights for a riven site iould

       137/ The advantages of the auction system for nodule resources were described
    by two authorities in mineral economics:
              "The auction mechanism provides several advantages over a system that
         awards rights to the first claimant or over a system that awards rights on the
         basis of non-economic criteria. First, it helps to ensure that the most
         efficient producers will get the exploitation rights. This is because the
         exploiters with the lowest costs will be able to bid the greatest amount.
         Under a "first-come, first-served~ arrangement, there is no assurance that
         exploiters will be efficient. And under a system where non-economic criteria
         are used to allocate rights, this, by definition, would award rights to the
         less efficient. It would also tend to distribute wealth by awarding rights
         rather than by providing shares in royalties and auction revenues.
              Second, the auction mechanism provides the least arbitrary means for
         choosing among competing claimants. Competition among claimants may not be
         great for the manganese nodules of the deep sea-bed for many years to come.
         But eventually, as the demand increases for such resources, the competition
         will become important.
              Third, the auction mechanism approximates a fair value for the
         exnloitation right much more effectively than any other system. The exploiter
         bids no more than he feels he can afford. This permits him to take into
         consideration the degree of risk attached to the operation, the value of the
         market, and other economic variables. It also builds in a large degree of
         flexibility and provides for an automatic response to the changes in
         conditions of risk, market, etc. It can, and should be combined with royalty
         payments so that the world community can share in production values.'3
         David B. Brooks and Francis T. Christy, Jr., "Memorandum on Suggested
    Operational Guidelines for an International Regulatory Authority for the Sea-Bed",
    in The United Nations and the Bed of the Sea (II), 21st Report of the Commission
    to Study the Organization of Peace, New York, June 1970, pp. 29-30.

                                                          00103

    be awarded to the highest bidder. Refusal prices and other conditions to protect
    the public interest could also be imposed.

         Tn summary, the determination of the take of the Authority should meet several
    objectives: (1) maximize revenues for the Authority, (2) assure the necessary
    financial incentives to attract capital and technology into the nodule industry-
    and (3 promote the allocation of choice mine sites to the most efficient producers.
    These objectives could be met by establishing the share of the authority as made up
    of two component parts. The first component would be equal for all nodule mining
    ventures and would be established at a level that would assure the necessary
    financial incentives for the industry. The second component would be different for
    each venture and would be designed to derive that extra revenue that interested
    parties would be willing to pay for the right to exploit the choice mine sites.

         (i) The basic component of the Authority's share of revenues

         The basic component, common to all operations, could be determined in
    several ways. It could be based on the right of exclusive access to the resource, as,
    for instance, the payment of rental fees per square kiloretre of area leased. 138/
    It could be based on production, such as a royalty over the value of output, a levy
    per ton of mineral recovered, or in a more crude form a fee per ton of nodule
    mined. It could also be based on net revenues (profits) such as a tax over profits
    or a direct sharing of profits in the case of joint-ventures with the Authority.
    These three approaches are not mutually exclusive. On the contrary, they are often
    combined in national legislations to reinforce each other in securing a fair share
    of revenue for the government.

         A take based on net revenues may assume quite distinct legal forms. In
    financial terms, however, a 50 per cent tax on profits is essentially the same as
    a partnership with equal sharing in the profits of the venture. This general
    approach has been traditionally favoured by fiscal experts and business groups
    because of its intrinsic flexibility. It permits the government and the business
    entity to benefit equally in cases of exceptionally favourable market conditions
    resulting in high profits.

         The shortcomings of a tax on, or participation in, the profits (operational
    results) of a business venture are mostly of an administrative nature. Computation
    of "taxable" profits can easily become a highly contentious affair often resulting

       138/ Concession taxes related to land area can be ipplied both to the exploration
    and to the exploitation stages. They can include deposits providing a minimum
    "?ouarantee" to the government if the concession is not explored or exploited. These
    taxes seldom amount to an important share of the total take of the government. They
    are Generally designed to compensate the owner of the property that will be disturbed
    by the mining activities. They serve, however, the important function of
    discouraging speculation by concessionaries who are not interested in carrying out
    the exoloration or commercial mining of' the area. See J. N. Behrman, "Taxation of
    extractive industries in Latin America and the impact on foreign investors", in
    P. F. !4ikesell (ed.) Foreign Investment in the Petroleum and Mineral Industries
    (Baltimore, the Johns Hopkins Press, 1971), pp. 56 ff.

                                                       00104

    in disrutes Between the fiscal authorities end the firm concerned.  Despite the
    excensivi_ experience of advanced industrial countries in tax enforcement, it is
    knorwn that a number of procedures can be and often are used to reduce the magnitude
    of taxable profits.  The use of r-uch procedures is particularly common where
    nultinl.ntional corporations are involved and when some buying or sellinag takes Place
    in -dore than one country. 139/ These practices have been extensively described in
    the literature and much attention has been given in recent years to their
    control, 1h0/

         If the sha're of the iAuthority is established as a tax on profits, exhaustive
    retulations will be requir ed on methods to compute taxable profits.  The novelty
    of an international machinery with fiscal powers would need to be studied closely.
    It is obvious that most of the potential] points of' discord in the computation of net
    revenues could be avoided if the Authority itself were a partner in the sea-bed
    Liningz venture and had an active role in management.

         'axes on Production or sales have the opposite characteristics of those
    levied on profits� They are much simpler to administer as the tax guidelines are
    easier to determine, i.e.9 volume of production or value of sales.  On the other
    hand, these taxes are not very flexible to changes in operational conditions.  When
    prices reach very high levels the  enterprise is able to reap much higher net

       !13'/ The United 'sTations report ,  iultinational Corporations in World Development
    (ST/ECA/]190 - FJew York, 1973)) slummarizes in a section on profit management
    nr,pe 34-'35):
              "Dividends and royalty payments are not the only means whereby
         multinational corporations withdrawl profits from a foreign subsidiary.  Profits
         canl be recorded in other units of a global system, including holding companies
         located in tax havens, through control of the transfer prices for goods and
         services supplied by the parent company or exports to other affiliates.
              ':The importance of these contrcls in influencing the net profit before
         local taxes depends largely on the proportion of total purchases and sales
         t;ied to other affiliates.  Prices charged for tied imports have been shown in
         some instances to be far above prevailing "world" prices, and conversely those
         for exports have been below world prices.  As already noted, overpricing,
         narticularly for wholly-owned affiliates  has been used as an alternative to
         robyalty payments.  Considerable variation exists, however, in the amount of
         overpricing or underpricing and its over-all frequency is not known."
       14!/ lFor an indepth analysis of multinational practices to reduce tax liability
    in host countries. the reader is referred to: J. S. Arpan, International
    Intercorporate Pricinr (New York, Praeger, 1971); United Nations, "Establishing
    transfer prices in allocation of taxable income among countries" (ST/SG/AC.8/L.3 -
    ;'Pew York, 1973); and J. Schullnan, 'Transfer pricing in multinational business",
    'D. B, A. thesis, Harvard UIniversity., 1967.

                                                       00105

    profits than it would be possible with a tax on profits. When operational
    conditions are unfavourable due to fall in sales revenues or sharp increases in
    costs of production actual profits are sharply reduced or even wiped out- in such
    cases, the payment of royalties might constitute an excessive burden to the
    enterprise. For this reason royalties are generally set conservatively at levels
    compatible with the likely financial position of firms during unfavourable veers.

         But the question still remains:  what could be the actual share of revenues
    of the authority that would meet the requirement of providing the necessary
    incentive for the industry, namely guaranteeing at least a 15 per cent return on
    investment for nodule ventures? The determination of such shares - whether based
    on gross revenues or on net revenues - generally requires detailed studies on the
    likely operational results of the industry.  The data available for the C-stimates
    of revenues and costs of the future nodule industry used in this report are clearly-
    of a preliminary nature. Therefore, the figures presented. must be understood
    as first approximations requiring further refinement.

         From the figures in table 11 it could be tentatively concluded that a possible
    share of the Authority at 30 per cent of gross revenues (sales) 141/ or '50 per cent
    of net revenues (profits) would still make nodule mining a rather attractive
    commercial proposition even considering the risks inherent in a new industry.
    The medium estimate of return on invest.ment after payment of the Authority's
    share is quite similar for both me-chods:  for the 1 million  tons operation 35 per
    cent and for the 3 million tons size 43 per cent and 36 per cent.  As expected,
    the range between high and low estimates of operational. results is much wider for
    the 30 per cent share over gross revenues than for the 50 per cent share over net
    revenues, regardless of the size of operation.  The limiting point is the low
    estimate of return (18 per cent) for the 1 million ton size with the share of the
    Authority set at 30 per cent of gross revenues.  The 3 million ton operation would
    seem to fare considerably better:  the low estimated return would be 28 per cent
    with payment of a 30 per cent share on gross revenues, and 27 per cent with a share
    of 50 per cent on net revenues.

         The method of financing total investment will also affect the operational
    results of the equity capital invested in the nodule venture. Industrial and mining
    companies generally borrow a substantial proportion of their total capital
    requirements for a new venture.  This orcrortion may be as high as 90 ner cent in
    exceptional cases.  It would seem reasonable to assume that firms from advanced
    countries would probably borrow at least 50 per cent of the total capital_

       141/ A share of 30 per cent of gross revenues ma.y seem rather hiFh at first sight.
    In many countries royalties of ulp -to 20 per cent (PNexico anr.d Lthf  nited qtrte,)  tre
    payable over the value of mineral output.  In the United State- draft Convention _   l
    the International Sea-Bed Area it is proposed that miners should ray the Authority
    the equivalent of 5 to 40 per cent of the gross value ,t the site of oil and gas,
    and 2 to 20 per cent of the gross value at the site of other minerals (appendiy /.
    No. 10.2).  It must be recalled, however, that the "take" is rade up of royalties
    plus concession fees, incorre taxes, and other charges.

                                                        00106

    Table 11.  Estimated operational results of two possible sizes of nodule mining
               operations after payment of two alternative shares of revenues to the
                                         Authority
                                 (in millions US dollars)

                                    1 million ton/year       3 million ton/year

                                    High   Medium  Low       High   Medium  Low

    Estimated net revenue before
      payment of Authority's
      share:                         132       104    78      236       193   152

    Possible shares of the
      Authority:
      30% share over gross
        revenue (royalty)             56        51    46       89        80    72
      50% share of net revenue
        (profit split)                66        52    39      118        96    76

    Estimated net revenue after
      payment of Authority's
      share:
      with 30% share over gross
        revenue                       75        53    33      146       113    79
      with 50% share of net
        revenue                       66        52    39      118        96    76

    Estimated return on total
      investment after payment
      of Authority's share:
      with 30% share over gross
        revenue                       63%       35%   18%       58%      43%   28%
      with 50% share of net
        revenue                       55%       35%   22%      47%       36%   27%

         Source: table 10.

                                                                  ~00107             I~~/..
                                                            00107

    requirements for a nodule mining venture. 142/ Borrowing wi~ll improve the return
    on equity as long as the rate of interest Fay-able is less than the rate of return on
    total investment. l143/

         The calculations of return on equity investment shown in table 12 are based
    on the assumption that the liability over borrowed capital would rest with the
    original investor. These computations show that the return on equity investnment,
    even in the case of the low estimate, would seem quite attractive with either
    method of determining the Authority's share. Return on equity appears to be most
    attractive (over 44 per cent) for the larger size of operations (3 million tons of
    nodules per year). 1414/

       142/ The practice of multinationals is quite interesting,:
              "The capital structure of a newly established subsidiary generally has a
         large proportion of locally raised debt if it is a joint venture, much less
         if it is wholly-owned. Studies of United States investment in Australia and
         Japan have shown that contributions of technology are likely to be capitalized
         in joint ventures, but not in wholly-owned subsidiaries. This difference
         may partly explain why wholly-owned subsidiaries have generally reported a
         higher return on book equity than joint ventures. Further differences in
         financial policy are evident, especially in the early years of existence:
         wholly-owned subsidiaries are -provided with special support services at low or
         zero cost; royalty payments are temporarily forgiven: dividends are postponed.
         On the other hand, in later years, parent companies expect to be able to move
         funds between subsidiaries on demand."
    United Nations report (ST/ECA/190), op. cit, p. 35.
       143/ The liability for interest payment is also important if the share of the
    Authority is based on net revenues. The interest payment can be treated either as a
    liability of the nodule venture or of the parent company providing the equity capital
    and technology. In the -Porirer case, the Authority would effectively be subsidizing
    half of the cost of borrowing if the share of the Authority amounted to 50 per cent
    of net revenues. Conversely, it might be interpreted that in joint ventures the
    Authority would enter the partnership with the resources of the international
    community while the associated enterprise would provide all the capital and
    technology required. In that case, the liability for payment of interest and
    principal would lie with the original investor and not with the joint venture itself.
    This problem would not occur if the share of the Authority were based on gross
    revenues.
       l144/ It is assumed in these calculations that the nodule mining companies would
    not be subject to additional national corporate taxes on their profits. Since
    industrial countries provide for tax credits in their fiscal codes, the domestic
    tax liability of these companies might in fact be negative. The companies might be
    able to claim some deduction on their domestic taxes from other operations,
    equivalent to the difference between their payments to the Authority and the tax
    they would have paid if the nodule industry were entirely of a local nature. As is
    well known, mining companies in industrial countries generally benefit from special
    tax advantages (depletion allowance, accelerated dclpreciationl, etc.), that tend to
    reduce their tax liability.

                                                       00108                     I.

    Table r    Estimated return on equity investment (50% of total investmcrnt) of two
               possible sizes of nodule mining operations (assumed interest rate cn
                                   borrowed funds = 10%)

                               (in millions of US dollars)
                                                I million tons             3 million tons
                                                High   Medium   Low    High  Medium  Low
    Net revenue after payment of Authority's
      share:
      - as 30% of gross revenue                    75        53    33      1146     li3    79
      - as 50% of net revenue                      66        52    39      118       96    76

    Interest payment = 10% over half of total
      investment                                    6         8     9       12       13    14

    Net revenue after interest payment
      - with 30% share of gross revenue            69        45    24 134           100    65
      - with 50% share of net revenue              60        44    30      106       83    62

    Estimated return over equity (half of
      total investment)
      - with 30% share of gross revenue           115%       60%   27%    107%       75%   46%
      - with 50% share of net revenue             100%       59%   33%      85%      63%   44%

         Source: tables 10 and 11.

                                                         00109

        (ii) Auction of mine sites

         A second component of the Authority's share of revenues in nodule mining could
    be derived from auctioning the mine si{;es.  Anr auction system to be effective would
    have to take into account the rather small number of enterprises actively engaged
    in developing nodule systems.  The numerous precedents in auctioning offshore
    blocks in the oil industry might be helpfult in designing appropriate procedures for
    the nodule industry.

         The first issue in a possible aucticli system would be the choice of sites which
    would be opened for bids.  In the oil industry the appropriate agency of the
    government determines the specific blocks of its continental shelf to be offered in
    auction.  It decides on the delimitation of the blocks and their exact location.
    This procedure might hbve serious disadvantages in the nodule industry, particularly
    in the initial years, since the international authority would have limited knowledge
    of nodule distribution.  Moreover, suci  procedure would unduly penalize the companies
    that have spent large sums prospecting the ocean floor for the most desirable
    potential mine sites.  Instead, it might be preferable to permit the interested
    parties to indicate the specific locations on which they wish to bid. In that case,
    the Authority could set a deadline to receive notifications of one possible mine site
    from each interested party. On the predetermined date, the Authority would publicize
    the specific locations of the ocean floor for which it would entertain bids a few
    months latsel 145/

         The obvious question, however, is whether there would be any real competition
    for mine sites.  It might be argued that, since only a few (6 to 8) enterprises
    or groups seem to be actively engaged in developing nodule systems,  these groups
    might arrange'among themselves not to bid on each other's sites.  Two factors would
    minimize this danger. First, the number of companies or groups potentially
    interested in nodule mining is quite larvge.  In fact, it might be said that the

       145/ The question of whether tc esti;:i h a world-wide grid for potential sea-bed
    mining blocks is discussed below in section 11I.7 on conservation of nodule
                                                       ne SOU r/ e                  ee
    resources.

                        -,                            00110

    majority of large oil and mining companies in the world are potentially interested
    in sea-bed mining. 146/ It seems reasonable to expect that once nodule mining is
    proven to be commercially viable many other firms will enter the industry.

         The second factor that would enhance the chances of competitive bidding is the
    possibility that some form of control over the pace of nodule development might be
    adopted. If the Authority adopts a system of control similar to the one discussed
    above (III.3.4), a certain volume of nodule mining would be authorized each year.
    Using the figures presented in table 7 as an example, by 1976 the Authority might
    authorize projects to mine approximately 2.7 million tons of nodules. Assuming that
    1976 would be the first year of provisional entry into force of the international
    regime, at that time it is likely that all the 7 or 8 most active groups would try
    to obtain authorization to go ahead with their programmes and at the same time
    assure the exclusive exploitation rights over their desired sites. Considering
    the likely sizes of operation, these groups might request authorization to mine an
    annual volume of 19 to 22 million tons of nodules, or approximately 6 to 7 times as
    much tonnage as may be granted that year. The companies in that case would have to
    include in their bids - particularly in the first  few years - a factor for nriority
    over time 147/ as well as priority over a specific mine site.

       146/ This interest can be seen in the participation of 32 firms from 6 countries
    (United States of America, Canada, France, Federal Republic of Germany, Australia
    and Japan) in the CLB system tests of 1972. These firms paid a minimum fee of
    ~US 50,000 to participate in these tests. It seems likely that a number of other
    firms might enter the nodule industry by means of "purchased technology". The
    multinational groups established so far are primarily aimed at a co-operative
    development of technology. It can be expected that once a nodule system becomes
    operational, one or more members of that group might be tempted to operate alone.
    One additional factor in the possible future expansion of the industry is the
    programme of Howard Hughes.  His nodule mining system, presently undergoing tests
    in the Pacific Ocean, may be available to other interested parties. In fact Summa
    Corporation has not yet finalized its plans for the commercial stage of nodule
    exploitation. A number of alternatives are under consideration: (a) to mine and
    process the nodules alone; (b) to set up a joint venture with a firm, or firms,
    experienced in metallurgy and marketing; (c) to mine nodules for sale to other
    parties,. and (d) to build and sell complete nodule mining systems to interested
    parties.
       l147/ It might be countered that these 7 or 8 groups would attempt to arrange among
    themselves a time schedule as well as an agreement not to bid on each other's claims.
    The likelihood of such arrangements is not very great because of the importance of
    the time element in business and the difficulty to enforce such an agreement in the
    face of so many unknowns. For instance, company X that would be accorded priority by
    the other firms for the first year might disclose a mine site with such ideal
    conditions that one or more parties to the "gentlemen's agreement" would be tempted
    to repudiate the arrangement and try to obtain control of that site with a high bid.
    Moreover, the other several dozen potential nodule miners would also have a role to
    play in assuring the competitiveness of an auction system for sites. These
    latecomers could take a short-cut and instead of spending several million dollars
    over several years in exploration programmes, might simply spend equivalent sums as
    their bid prices for the choice sites that would be disclosed by the leaders in the
    industry.

                                                           00111

         The nature of bids would need to be determined if an auction system is adopted.
    Two basic possibilities could be contemplated, namely the full payment of a certain
    sum which would constitute the bid price (as in the oil industry) or the offer to
    make payments larger than those statutorily determined, over gross or net revenue,
    once production commences, 148/ Each method has advantages and disadvantages. A cash
    price for a site has the advantage of simplicity; the site would simply go to the
    highest bidder. The cash price has also the advantage of discouraging speculators
    from sitting on choice sites, though speculators can also be discouraged by the
    establishment of minimum work requirements (a schedule of minimum annual
    expenditures) and by surface rental fees. The disadvantage of the cash price is that
    it increases the financial burden of getting started in the nodule industry. As a
    result, the miner will attempt to raise the cut-off grade of the ore body and to
    speed up production schedules. 148/ These procedures do not lead to good resources
    conservation practices.

         Bids offering additional participation in gross or net revenues by the
    Authority would avoid some of the disadvantages of cash prices. On the other hand,
    they would be quite complex to evaluate. Decisions on "the best bid" for the
    Authority could lead to contention depending on the method of evaluation of bids.
    For instance a bid offering 4 per cent additional royalty might in fact be more
    attractive for the Authority than a bid offering 5 per cent depending on the
    prospective schedule of cash flow for both projects and the rate of discount used
    for the purpose of project evaluation. 149/ Still another alternative is the
    combination of royalty and bonus in the auction system. 150/

         In conclusion, it could be said that the revenue potential for the Authority
    from nodule exploitation is quite attractive. A prerequisite for the determination
    of the take of the Authority is an agreement on the type of regime to govern the
    exploitation of nodules. The formulation of an ideal, or a desirable, take would
    only be possible after a decision is made on "who may exploit the area" and "in
    what form the exploitation may take place". Once this decision is made, further
    studies on the economics of nodule mining would be necessary to determine the most
    appropriate levels for each component of the take of the Authority.

       148/ See A. P. H. Van Meurs, Petroleum Economics and Offshore Mining Legislation
    (Amsterdam, Elsevier Publishing Co., 1971) pp. 87 ff.
       149/ See United Nations, Manual on Economic Development Projects, (58.II.G.5)
    New York, 1958; and O.E.C.D., Manual of Industrial Project Analysis in Developing
    Countries, Paris, 1969.
       150/ "It may be that because of the high levels of risk and uncertainty in much
    of' the public domain land, the optimum leasing system might include a combination
    of royalty and bonus bidding', J. W. Sprague and B. Julian, "An analysis of the
    impact of an all-competitive leasing system on onshore oil and gas leasing revenue",
    Natural Resources Journal, July 1970, pp. 515-531.

                                                       00112

      6.Preservation of the moarine environnent

         Despite the universal       Fiecct, oi, tlhe need for mreasures to preserve then
    marine environment in all activities of 2\p Io'-atj on at' the international area
    and exploitation of its resoiurces,, tht t.anslation of -this principle into
    practice offers a number c-f difficulties.  TIhe xe'oblem centres on the Jefinitioni
    of what constitutes- an interference wit  the   oLrc~balance of the mairine
    environment.  IL, is on the blsis of suech de'iit   fW   operatioinal starulardr-
    for activities in the area could! be e~,stablishe-d

         The amount of research on the dee~r sea. envi--V c  t is- at,'most aegliaible
    compared to the multitude of T,_'Dr-3Gra!cwu  concerrn._, 'Ji' Ghe ecological processes
    of the shallow coastal en-vironment.  But ove-n i- tll~ J-itei, case,* scientists are
    far from unanimous in their opinion  a  t rv b;  e,- tain specific activities
    interfere significantly with the ecoolnF-1-al bajan~e of' the marine environment.
    It is obvious, therefore, that at the mo'Oent 1(here is a serious gap of knowledge
    on the ecology of the deep ocearis.  Thoug~,h --,oae reuo,-,areh on the environmental
    impact of nodule mining has been carr5(-,d ou~l i Vic United States, 151/ and the
    United Nations has comriissioned ~a tdyof thi~s1D~t  the data existing- at`
    present would not be sufficient I    "hlK1I Lp1' ainvronmental standards.

         Most of the environmental <Kherv.itions -r,,j ox  far wrere based on the:
    int~i_. _trent omeration of urctot~v~  3--ifti:i- syslilt-,-q in relatively shallow
    waters - un-cer 1,000 metres (iCh.T: '1  e 0 eco6g cl iriact of the oeainof a
    -large mrinl:' 2g ystem in 4i,ooo to 5,~'' ( i ~etires v7,v1e- 1-oh, and in some cases
    800 miles -from the_ nea-test 1 cnad  ;-    rIb bly cnl1 bcc Jicaessed in its entirety
    when conee  Ioperations have i-)ee:  Woo  way fr eonsr .jine. Moreover, the natuire
    of bottom sx-L-Anuts and. heothic AI~e- is ]`kly to vary from site to site.  Ocean
    currents thro)u,,out the xater colujmn    va wter c~ri'r-cteristics (teri-erature,
    salinity, Etc.) might also be dil'-Vereat d-zrendin,~ (n tthe location.  Last but not
    least, the Particular methods of'           scI~~  u-,a~rntion of' sediments will have
    different impact on ti-e bentbi.~   LiPi nfene4s    or instance, the
    continuous line bucket (CLB},I sy-;terl-  CjS-'Hj!0Fl(1   ha- n  only the nodules.. to the,
      sufae.  The hydraulic and airi i.   "nin  ss~c _Iei    the other hand, will
    transport large quantities of colel Lu- .oma water (i   'I,   nutrients) as well _-s-
       cdmnts to the warmer w~aters3 at. 'he   raeI 2

       151/ See: T. C. Malone. C. Gari,'c-v~ an" 1). F, Pa els, "Potential Environment,,l]
    Imoact of Manganese-Tiodule M41inir' ii- [hei Deepf Sea',~ in 1-973 Offshore Technology
    Conference Pre-prints., vol. I, p-p 120-13~; C. G. WellinrT, "Some Environmental-
    Factors AssociateO with Deex  cc    Mi  <   8th !Annual Marine Technology Society
    Meetingq, 1972; A. F. Amos, C. Ga=-r'--'e~ K. C. Haines Dand] 0. A~. Roels, "Effects of
    Surface-Discharged Dee-, ;5e,- Min4rc  f~:~,"  Jouirnal. of Marine Technolory
    Society (1972) 6, Tlo. 11, ipr.  mO
       152/ T - C . Mal one  C  rqref   1r  . 2.o Pe]IF  (7,I o. Cit, p.1i

         Given these circumstances, it might be desirable to determine the appropriate
    standards for protecting the ecological balance in three stages. First, to
    incorporate in the regime general principles for the preservation of this
    environment and the competence to establish and enforce standards. As a second
    line of defence, environmental impact statements could be required from all
    companies and groups requesting contracts or licences to mine nodules. Finally,
    the Authority could progressively develop detailed rules, standards and
    regulations, based on its accumulated experience. 153/

         The above considerations refer primarily to deep-sea-bed mining. It must
    be borne in mind, however, that at present approximately 95 per cent of the ocean
    pollution originates from vessels. 154/ Pollutants are primarily introduced into
    the marine environment by collisions and other maritime casualties, loading and
    bunkering operations, and operational discharges. The matter of standards and
    regulations for these activities will be considered by the Third United Nations
    Law of the Sea Conference, with particular reference to the work done by the
    Tnter-Governmental Maritime Consultative Organization.

    7.   Conservation of nodule resources

         The concern for conservation of sea-bed resources expressed in the
    Declaration of Principles reflects the fact that nodule deposits are among the
    last mineral frontiers in our resource-hungry world. The concept of resource
    conservation, however, is not always clearly understood. In a nutshell, "the
    conservation of non-renewable resources is effected by rational, efficient use
    and long-term exploitation plans, and by the prevention of waste through
    inefficient production and treatment techniques or otherwise". 155/

         The basic approach to resource conservation is to maximize the long-term
    utilization of a resource. To this end the individual operator may have to be
    discouraged from undertaking certain methods of resource exploitation that might
    be commercially attractive in the short-run. Conservation methods with respect
    to nodule resources would fall into two broad categories: (1) over-all
    management of the international area and (2) regulation of mining operations.
    The issues of resource conservation, with some alternative approaches for each
    case, are presented in summary form in figure 8.

       153/ Fcr effective protection of the marine environment, as for other policy
    objectives, the Authority should be invested with sufficiently broad powers and
    flexibility to adjust its standards and regulations to its accumulated knowledge
    of the marine environment and to new circumstances with which it may be
    confronted in the future.
       154/ Competence to establish standards for the control of vessel source
    pollution, working paper presented by the United States of America, docuoment
    A/AC.138/SC.I1T/L.36 (1973).
       155/ United Nations, Natural Resources of Developing Countries:  Invws;t[i.tion,
    Development and Rational Utilization (New York, 1970, document E.70.TI.B.2), _. 39.

                                                     00114

                     Figure 8. Summary presentation of issues and alternatives
                                relating to sea-bed resource conservation

    A.   Management of the international area

         1. Decisions relating to space (surface boundaries)

         (a) Over-all subdivision of the international area
             (i)  On an ad hoc basis as requested by sea-bed miners

            (ii)  According to master grid

         (b) Size of individual blocks

             (i) As requested by miners

            (ii)  Equal size for all blocks

           (iii) Variable sizes pre-determined by grid
                  - blocks of one degree square as defined by meridians
                  - size determined by geological, morphological and other considerations

         2. Decisions relating to time

         (a) Reservation of areas for future uses

             (i) Area returned to Authority (5/4 of initial area authorized for exploitation)

            (ii) Alternative bands with width of 2 degrees of longitude running from pole to pole

           (iii) Discretionary decision by the Authority

         (b) Annual authorization of surface area, or nodule tonnage, for exploitation
             (i) No limits - as requested by interested parties

            (ii) Controlled nodule development based on principle of complementarity with land-
                 based production

         (c) Duration of exploration and exploitation permits - work requirements

    B.   Regulation of mining operations

         1.  No minimum recovery efficiency required

         2. Control aimed at avoiding wasteful mining methods

         (a) Unmined areas of blocks

             (i) Unminable zones - topographic barriers

            (ii) Areas with nodules below "cut-off" grade

         (b) "Sweep" efficiency

             (i) Limited manoeuvreability

                  - Continuous Line Bucket (CLB) system

                  - "Vacuum cleaning" (hydraulic) and airlift systems

            (ii) Extensive manoeuvreability - bottom crawling devices

         (c) Dredge efficiency
                                                                  00115                       ...

         It should be stressed that these issues are to a considerable extent
    interdependent. Thus, a given strategy of resource conservation would take
    account of each one of these areas. For example, a master grid for the
    internation~al area with blocks of 50 km x 50 km (2,500 kin2) could be established;
    every two adjacent rows of blocks (100 km wide) would be available for
    exploitation and the adjoining two reserved for future use; each enterprise would
    be allocated one block for a certain number of years, subject to the metal
    production plan approved by the Authority. This hypothetical approach would
    resolve the over-all subdivision requirement for the international area and the
    size of individual blocks, while automatically reserving half of the best mine
    sites for future use. It would facilitate the control of nodule development so
    as to minimize the possible impact on developing countries exporters of minerals.
    It would prevent the speculative holding of large areas of top grade nodule
    deposits by a few operators, while at the same time, minimizing the need for
    detailed work requirements (the usual means of discouraging speculative holdings).
    Finally, it would provide an intrinsic regulation of minimum recovery efficiency. 156/

         Management of the international area, from a resource conservation point
    of view, will require decisions with regard to space and to time. The spatial
    or geographical question has many similarities with the offshore oil industry.
    The two basic elements in the equation are the subdivision of the international
    area into "blocks", or potential mine sites, and the size of these blocks. Two
    alternatives are possible with respect to the subdivision of the area. The first
    is simply to leave it to the interested parties (the nodule miners) to indicate
    the shape and specific location of desired blocks. This approach makes over-all
    resource management more difficult and may lead to some waste since the area
    left between the chosen blocks may be of such odd shapes and small size as to
    make its exploitation unattractive. This situation can be visualized in the
    hypothetical case A in figure 9, where a substantial buffer area might be left
    unused.

         The other approach is to subdivide the international area in a rather
    homogeneous fashion as is generally done for the offshore oil industry. This
    would mean the establishment of a grid with parallel blocks of the same shape.
    The grid could be either of a global character with all blocks similarly defined
    by geographic co-ordinates, or of a more regional character, where the size of
    blocks would vary according to the geomorphic characteristics of the sea-floor,
    latitude, nodule density and grade, etc. In the hypothetical example of figure
    9 B, the grid would be based on meridians of latitude and longitude. This
    rather simple and straightforward case would result in progressively smaller
    blocks with distance from the equator, as can be seen in table 1.3.' The desirability
    of such a master grid would depend on considerations about the most appropriate
    block size.

       156/ For example, an enterprise wishing to mine 3 million tons of nodules per
    year could be notified that only after five years of mining activities would it be
    granted another block; if the nodule density at that site were known to be about
    ii lb. per square foot, or a total of about 50 million tons for the whole block, it
    means that after five years of exploitation some 15 million tons or nodules would
    be recovered, representing- 'in irnplicil, recovery efficiency of 30 per ('ent.

                                                         00116                   I.

              Figure 9. Two hypothetical cases of subdivision of the
                                    International Area

    A.  International Area subadivided        33.  Interuationzal Area subdivvidci
        on an ad. hoc basis i-itLh block-s                        with a t~lobal
        shaped as request(ed by nodulde           grid based on neridiuns of
       miners                                     latitude 'nd 1cn(;itub

                                                                      30
                                                                      20

        --                               00       0           =

                                                                      20

                                                                       30

                                                   0  20  00 40  50

                                               00117

             rTable 13,   r~ao   one-Je-;rt-,O E~are bloclks (in square kilometers)

           Latituic~ ~ ~~~~~~~   Arca     1 t) 'titU(     Area in lu2         Latitude        Area 5.n  in"

     0-  10            12 )300. .110                        10),643           6-   106,124

    10I               12,3G5            31io1,534                             610.. o-20         5,9'K
      C)0O, 0                                                 04260~ 63,574
              -5~~~~~~~~-S
        ' 0                              1. 22)  3    4U1,0                   630- 611'555
                                12,2~Tt'   J  -i~c)         10,1390 7                           5,3552
               0~~~~~~~~ 00
     5   60             '2               3      6(           i o,o6,r         650)-. 6'60        5,162
     6,   7      1      2 ,2'            360  370             9,4               6~604,964
          70  J        1~~~~~.~~077           30              9,8.15          67060              4755
         ~   )C       12,173            3~2-. 2<M             9,684           680- 6Q0           4,564
                        0  0  12~~~~~~~~~~~~145  0  0                         -~~~~~~~~~~~~~~0  0
                              jj~~ 53)    C)0                 9,550           b9 - 70             ,2
                      �)   AL  12,102   4~~~~~~~~~3Khl~~~    9,414           7Q0~~~~~~~071l0    4,15`

             150- i~~~i~  1;) ,023  ~~~~i2~- )30 ' A 9,132                    72- 703

                        *~~~ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~                          0

                   0    U  11,37:3      4L~~~~~~~~ ~~O       3,607             0~9 7 733,121
                       /~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~                           0
             6  T     i1,3i~~~~~~~~          47(~h10         8,934           7603  770          2,10
                                          0-   ~0               70    0

    6:0  LO 11,5J                       77 r4                 8,5347          77 - 778           2 ,69 1
                        0~~~~~~~~~~~~~~~~~                                            0
    IT                 11",:h      4 7     0  ,f              8,213           7  77 79 80r
       1               1I(,J           14s.   0i              8, i             8-70                h
    9'  63c   4       9                       50)             8,057           75 -U0             2,273
                  "0~~~~~~~~~~~ ~~                    ~      ~~~~~~~~~~ 11,9  S  L,83  RO-v       ,05P
    210                                  5 lL  520 ~         7,726            810- 820'         1,844

      2)'             -1.      31                            7, 386           830)  8).         1,412

       -  21~~~~ '�~~  iii,2;?'(          .0~~~~~~~~~5        7,212           80 501,196
       2502            1.1,133          55(. 56              7,036            850 - 860            979

                  ?6K  n~~~~~~~~~o'~~~~5  5~~~~~~K ~~6,858                    360- 870             762
     20- 20                                0   ,670
             27 - 2.1  1(i,950          ~~~~~~~~57 -53        o7              87-8           5       44
                  2    i~~~~~~~~,i51 ~~~~~~~  590 ~~~~~6,1195                 880- 89032
     2-0    0                                                                    0-   0
         2) .~~~~ 33 ~L0,749             59c) 600             6,310           89   90        l og

                    .J1JI'e:    csm,~~cal0~vrsin   ables (:;urich, Amiran and Schick, 1961),

         A nuuber of factors have to be taken into account in the determination of
    mine-site size for the nodule industry.  The consideration that is generally
    advanced is that the mine size must be sufficient to provide the necessary nodule
    tonnage for -the normal operation of the mining equipment and processing plant
    during their expected lifetime.  It is reasonable to expect. that in '.ost
    industrial couttries, these facilities would be depreciated in less than 10 years.
    Since nodule mining is a new i.nustry at the beginning of its developnr:ent, it
    catn be expected that its rate of technological progress will make for a rapid
    obsolescence of plant and equipment.  Tf the size of the mining, blocks is to be
    deterrined so as to provide the necessary feedstock throughout the lifetime of the
    croject., it seems that this period could be arbitrarily defined within the span
    of 10 to 20 years.  The need. of sufficiently large mine sites for this purpose
    is strongly questioned. by one company developing nodule systems.  International
    Nickel Co. 157/ has 'proposed that each licensee be ?ranted exclusive rights of
    access over an area of 2,500 kr2, with a buffer zone of at least 5 lun left between
    blocks 'to prevent encroachment.  These smaller mine sites would prevent a
    speculative "land grab" by a few companies.  Once the nodule depo its of one site
    have been depleted the miner would be granted another block, which could
    conceivably be one adjoining to the first one.

         The problem of determining an "appropriate" block size is comrounded by the
    fact that nodule density and grade change from site to site.  Moreover, recovery
    efficiency of the different mining systems under development may vary considerably.
    Given these factcrs, three alternative approaches regarding mine size are
    possible:  (a) variable sizes as recuested by the sea-bed miner; (b) a standard
    size for all blocks regardless of locality or proposed production capacity; and
    (c) variable sizes predetermined by master grid.

         An indication of what might be the claims of future miners as to the size
    required for their projects was given in a paper prepared by officials of two United
    States companies. 158/  Using a comprehensive formula, the authors estimated
    that within the range of' assumptions suggested for the variables in their formula,
    the tract area with an average density of 1.5 lb. per square foot, required for
    an annual production of 3 million tons of dry nodules over 20 years could range
    from 32,668 km2 to 127,043 km2.  While the proposed formula seems most useful, the
    assumptions used for the calculations would have to be critically examined as to

      157/ IhCO, "An Approach to International Pegulation of the recovery of Deep
    Sea Ferro Manganese Nodules", mimeograph, January 1973.
      258/ J. 1%. Flipse, ii. A. Dubs anrd B1. J. Greenwald, "Preproduction M'an-'anese
    Nodule Mining Activities and Pequirements", in Mineral Resources of the Deep
    Sea-Bed, op .cit., 15 March 1973.

                                                      00119

    their applicability to the real situation of nodule mining. 159/  It seems
    reasonable to assumle tehat nodule miners would want to obtain control over as large
    an area as possible of top grade sites.

         The other aspect of management of the international area for resource
    conservation relates -to the time element.  The issues involved are:  (a) reservation
    of areas for future use; (b) annual authorization of surface area, or nodule
    volume, for exploitation and (c) the duration of exploration and exploitation
    permits. This last point is a common feature of all mining legislation and is
    generally associated with work requirements for the periods in question so as to
    prevent speculative holding of sites.  The possibility of setting up a programme of
    controlled nodule development with maximum annual authorization of a certain
    tonnage of nodules for exploitation would depend on the nature of -the regime and
    future decisions of the Authority.  This question is discussed at greater length
    in section III.3 above.

         The reservation of areas for future use is a question having to do as much with
    equity as with resource conservation. It is generally agreed that in the absence
    of rules to the contrary a handful of firms from the most advanced countries could,
    in a few years, acquire rights over the best mine sites throughout the world's
    oceans. Later comers - developing countries as well as the small industrial
    countries - would have a very limited role to play, if' any. This, of course, would
    apply if resource exploitation is carried out directly by the interested parties
    through licences. It has been suggested, therefore, that it would be in the
    interest of the world community at large to reserve part of the best nodule sites
    for future use.

         This objective could be achieved in three different ways as illustrated in
    figure 10. One possibility wou-l.d be to reserve three quarters of the initial
    area granted for exploration for future use; the nodule miner might then be
    requested to return this part to the Authority upon commencement of the exploitation
    stage.  This approach is likely to guarantee quite attractive sites for future
    generations of miners since the quality of nodule deposits is not likely to vary
    greatly from that of the adjoining sites retained by the initial miner.

         If the Authority establishes a master grid based on meridians, another
    possibility would be to hold for future use alternative bands with a width of 2  of
    longitude running from pole to pole. This method would automatically divide the
    ocean floor into adjoining areas which  could be exploited in the first years and
    those that would be reserved for later use.  For example, it is known that the
    most extensive and interesting deposits of nodules are in the North Pacific lying

       15)' It is interesting to note that the bill prepared by the American Mining
    Congress proposing interim legislation for deep sea-bed resources and which is
    presently under -onsideration by the United States Congress indicates that
    exclusive exploration rights should be granted over an area of 40,000 km2.  A.
    provision is m;de that once exploitation starts, the miner would retain l/4 of'
    the area (10,000 km2) returning the remainder 3/4 to the "international registry
    clearinghouse".

                                                        00120

    Fi:-Ilre 10   Three possible apzroaclies to tlhe reservat~ion of' nro~ r" ('-Hrr u-,
                            (The area shlOe 3 wo-Ld be. reserv,-j" fur 11m

    A. Reserve the area             B. Reserve two                   .(hnu
       returned to the                 alternative rows.               C~0L
       Authority after                runnin.- from U to               soirc. 3)
       the epqloration                 S in the master                 o'thc n'cc- fi.C-
       sliage                          grid

          0                   ~ ~~~~~~~~~~0 0 i       I

                                                                  00121

    in an east-west band between 6�N and 20�N and extending from 110�W to 1800W. 160/
    If alternate bands of 20 longitude were drawn over this general area, it can be
    said that, half of the best mine sites, in principle, would be available for
    exploitation while the other half mould be held in abeyance for future use.

         A third method would be a discretionary decision of the Authority regarding
    general areas which might be made available for exploitation, therefore holding the
    remainder of the international sea-bed area for future use. This approach is the
    one generally adopted by coastal countries for offshore hydrocarbon resources. The
    difficulty in applying this approach to the management of deep sea-bed resources is
    that knowledge about the precise location of high grade nodule deposits is limited
    to the few companies that are actively engaged in nodule exploration programmes.

         In a more strict sense, resource conservation is aimed at the actual regulation
    of mining operations. The objective is to avoid wasteful mining methods which tend
    to be adopted when a company holds the mineral right over a very large property.
    In these cases, the company attempts to maximize short-run profits by mining only
    the highest grade ores leaving behind ore which would be normally considered of
    commercial recovery grade. But existing knowledge of nodule mining technology
    is insufficient for the establishment of detailed regulations. The Authority,
    however, could set up minimum targets for nodule recovery below which no
    exploitation activity would be permitted.

         The desirability of setting up these minimum recovery targets is illustrated
    by the examples in the paper "Pre-production manganese nodule mining-activities and
    requirements". 161/  In this paper it is estimated that with existing technology,
    nodule recovery might be as low as 9 per cent to a maximum of 35 per cent of the
    total volume of nodules in place. The Authority might wish to consider whether it
    would be in the long-run interest of the international community to permit nodule
    mining operations which might leave behind 91 per cent of these important mineral
    resources. Recovery efficiency is a function of several factors, the most important
    of which are the percentage of total area that would remain unmined, the dredge
    efficiency and the sweep efficiency of the system.

         The unmined area of a block depends on topographical barriers on the one hand
    and on nodule grade on the other. It is possible that part of an exploitation
    block might contain nodules below the cut-off grade in which case this area would
    not be worked over by the mining company. The paper suggests that 10 per cent of'
    a mine site is likely to contain nodules below the cut-off grade. 162/ It seems,
    however, that if the block size is not excessively large only a negligible
    proportion of the total area might contain nodules below the "cut-off" grade. The

       160/ D. R. Horn, B. M. Horn and 14. M. Delach; Ocean Manganese Nodules Metal
    Values and Mining Sites, NSF Techniral Report No. 4  Washington, D.C. 1973.
       161/ Flipse, Dubs and Greenwald, op. cit.
       162/ Ibid.

                                                       00122

    cut-off grade, of course, remains to be defined. As for the unmineable zones,
    which in the quoted industry paper are suggested to range between 15 - 25 per cent
    of the total area, the applicability of these figures would again depend on the
    size of the mine site. The larger the mine site - the paper considered mine sites
    as large as 750,000 square kilometres - the greater the likelihood of a significant
    proportion of the total area being covered with topographic barriers.

         Dredge efficiency is the capability to collect the nodules lying within the
    "sweep" of the minehead. The industry paper uses 3 assumptions: 30 per cent,
    50 per cent and 70 per cent. These assumptions probably reflect the capabilities
    of the mining systems under development by Deepsea Ventures and Kennecott. In
    their own words: "At the present stage of development of the technology, it is
    unlikely that ocean miners will be able to approach a pick up efficiency of
    i00 per cent". 163/

         The same could be said of the sweep efficiency. The industry paper works
    with assumptions of 45 per cent and 65 per cent of the total mine site. It can be
    visualized how difficult it will be to control the movement of a towed dredgehead.
    This system will work like a giant vacuum cleaner with a suction head perhaps
    15 metres wide (50 feet) dangling from the mine ship by about 5,000 metres of
    semi-flexible pipe. Given the currents throughout the water column, even with
    precise steering of the mine ship to a course exactly 15 metres parallel to the
    previous run, the mine head at the bottom could be sweeping a new row anywhere
    within a 150 metres path. One mining company, after several computer simulation
    exercises, was forced to conclude that the best procedure would be to simply sweep
    the mine site at random.

         Given the stage of existing technology both dredge efficiency and sweep
    efficiency must be rather low. But regulation of mining operations cannot be
    logically based on a level of technology which is some 5 to 10 years prior to
    actual commercial operations. It is obvious that considerable progress can be
    expected from the leaders of the industry, such as TV monitoring of the mining
    operations, sophisticated guidance systems for the dredge head and other devices.
    It is also possible that mining systems with bottom crawling devices will become
    operational, thus increasing both pick up efficiency and sweep efficiency.

      163/ Op. cit., p. 655.

                                                 00123

          UNITED NATIONS
                                                                        Distr.
                                                                        GENERAL

          THIRD CONFERENCE                                               A/CONF.62/26
       ON THE LAW OF THE SEA                                             6 June 1974
                                                                        ORIGINAL:  ENGLISH

                           REPORTS SUBMITTED BY THE UNITED NATIOTTS
                             CONFERENCE ON TRADE AND DEVELOPMETT

                      Note by the Secretary-General of the Third United
                          Nations Conference on the Law of the Sea

         The Secretary-General has the honour to communicate the attached note of the
    Secretary-General of UNCTAD, dated 21 May 1974, referring to the reports prepared
    by the UNCTAD secretariat. These reports will be available, in limited quantities,
    in Caracas.

     74-15619                                                                           /...

                                                           00124

                  Third United Nations Conference on the Law of the Sea:
                          rote by the Secretary-General of UNCTAD

    1.   The secretariat of UNCTAD has prepared a number of reports, within its field
    of competence, on issues relevant to the business of the Third United Nations
    Conference on the Law of the Sea. The Trade and Development Board has requested
    that they be transmitted to that Conference, for consideration, and this note is
    submitted accordingly.

    2.   It should be recalled that the question of mineral production from the
    sea-~bed first arose within UITCTAD as a result of General Assembly resolution
    2750 (XXV) of 17 December 19705which requested the Secretary-General of the United
    Nations to co-operate with the United Nations Conference on Trade and Development
    (and other bodies) in order to:

              "(a) Identify the problems arising from the production of certain
        minerals from the area beyond the limits of national jurisdiction and examine
         the impact they will have on the economic well-being of the developing
         countries, in particular on prices of mineral exports on the world market;

              "(b) Study these problems in the light of the scale of possible
         exploitation of the sea-bed, taking into account the world demand for raw
         materials and the evolution of costs and prices;

              `r(c) Propose effective solutions for dealing with these problems."

    3.   In accordance with that resolution, the UNCTAD secretariat co-operated with
    the Department of Economic and Social Affairs of the United Nations secretariat
    in the preparation of relevant studies, and reported on this co-operation to the
    Committee on Commodities at its sixth session. In the discussion of this subject
    at the Committee's sixth session, representatives of developing countries stated
    that they attached great importance to the subject-matter of General Assembly
    resolution 2750 A (XXV); that the co-operation envisaged in the resolution should
    be regarded as referring to UNCTAD at the intergovernmental as well as the
    secretariat level; that provision should be made for the Committee on Commodities
    to be informed of, and to discuss, developments in this field on a continuing basis;
    and that an opportunity should be provided for an examination of the matter at
    the third session of the Conference. Similar views were expressed at the eleventh
    session of the Trade and Development Board.

    4.   The UNCTAD secretariat initially carried out a preliminary over-all review of
    the main issues of international commodity policy arising from the potential
    production of minerals from the area of the sea-bed beyond the limits of national
    jurisdiction. The results of this review were incorporated in certain reports
    by the Secretary-General of the United Nations to the Committee on the Peaceful
    Uses of the Sea-Bed and the Ocean Floor beyond the Limits of National Jurisdiction
    (documents A/AC.138/36 and A/AC.138/73) and were presented to the United Nations
    Conference on Trade and Development at its third session as document TD/113/Supp.h.

                                                         001.25

    5.   The United Nations Conference on Trade and Development, in resolution 51 (III),
    adopted at its third session, decided that

         "the question of the economic consequences and implications for the economies
         of the developing countries resulting from the exploitation of mineral
         resources shall be kent constantly under review by the Conference and its
         subsidiary organs, in particular the Trade and Development Board'"

    and it invited the Secretary-General of UNCTAD

         'to continue to study the measures necessary to avoid the adverse economic
         effects which the exploitation of the sea-bed ... beyond the limits of national
         jurisdiction may have on the nrices of minerals exported primarily by
         developing countries, and to propose specific and detailed measures in that
         connexion".

    6.   Accordingly, the UNCTAD secretariat continued its examination of these
    matters, with the initial objective of assessing, through case studies of individual
    minerals, the possible quantitative impact of the production of minerals from
    the sea-bed on world marklets and the export earnings of the developing producing
    countries. The results of the first case study to be completed - relating to
    cobalt - were summarized and commented upon in document TD/B.449 and Add.l,
    presented to the Board at its thirteenth session. In response to a request made
    by the Conference in another part of resolution 51 (III), the Board, at its
    thirteenth session, also had before it a report by the FAO secretariat on "Possible
    adverse effects of the exploitation of the sea-bed beyond national jurisdiction
    on fishery resources? (TD/B/447).

    7.   At its thirteenth session, the Trade and Development Board noted the reports
    contained in documents TD/P/447, TD/B/449 and Add.1 and requested that these
    studies, together with a summary of the views expressed thereon at that session,
    be transmitted to the Third United Nations Conference on the Law of the Sea for
    consideration.

    8.   Since the thirteenth session of the Trade and Development Board, the UNCTAD
    secretariat has completed a further case study, relating to manganese ore, which,
    in the spirit of the Board's decision, should also be brought to the attention of
    the Third United Nations Conference on the Law of the Sea.

    9.   Accordingly, in pursuance of the aforementioned request of the Board, the
    followin. reports are transmitted for presentation to the Third United Nations
    Conference on the Law of the Sea. (The list takes into account the desirability
    of document TD/B/hh449 being read in conjunction with an earlier report by the UNCTAD
    secretariat (TD/113/Supp.h); the possible interest of Governments in the econometric
    study on which the report on cobalt is largely based; and the availability of a
    further case study, relating to manganese ore (TD/B/483 and Add.l).)

                                                       00126

                     Title                           Symbol                   Date

    Commodity problems and policies:  mineral         TD/113/Supp.4            March 1972
      production from the area of the sea-bed
      beyond national jurisdiction: issues
      of international commodity policy:
      report by the UNCTAD secretariat

    Possible adverse effects of the                   TD/B/447                 June 1973
      exploitation of the sea-bed beyond
      national jurisdiction on fishery
      resources: report by the FAO secretariat

    Exploitation of the mineral resources of          TD/B/449                 June 1973
      the sea-bed beyond national jurisdiction:
      issues of international commodity policy

    Exploitation of the mineral resources of          TD/B/449/Add.1           June 1973
      the sea-bed beyond national jurisdiction;
      issues of international commodity policy:
      case study of cobalt

    The impact of cobalt production from the          TD/B/(XIII)/Misc.3       July 1973
      sea-bed:  a review of present empirical         (available in
      knowledge and preliminary appraisal (by         English only)
      Professor F. Gerard Adams, consultant)

    The effects of production of manganese from       TD/B/483                 April 1974
      the sea-bed, with particular reference to
      effects on developing country producers
      of manganese ore: report by the UNCTAD
      secretariat

    An econometric model of the manganese ore         TD/B/483/Add.1           April 1974
      industry

    10.  The text of that part of the Report of the Trade and Development Board on its
    thirteenth session which contains a summary of the views expressed on documents
    TD/B/447, TD/B/449 and Add.1 at that session (paras. 45 to 58 of document TD/B/474)
    is reproduced as an annex to this note.

    11.  Studies by the UNCTAD secretariat of the possible impact on world markets, and
    on the export earnings of developing countries, of the production of copper and
    nickel from the international area of the sea-bed are currently in progress for
    presentation when completed to the Trade and Development Board or/and the Committee
    on Commodities. Copies of these reports will be transmitted, when available, to
    the Third United Nations Conference on the Law of the Sea; the report on copper is
    expected to become available in the course of June 1974.

                                                                                  002

                                                        00127

                                         Annex

                 Extract from Report of the Trade and Development Board on
                 its thirteenth session, held at the Palais des Nations,
                      Geneva, from 21 August to 11 September 1973 1/

          E. The exploitation, for commercial purposes, of the resources of the
              sea-bed and the ocean floor, and the subsoil thereof, beyond the
              limits of national jurisdiction (Conference resolution 51 (III))

    45. The representative of the Secretary-General of UNCTAD introduced the
    secretariat's progress report prepared in conformity with Conference resolution
    51 (III) (TD/B/449) and the summary of a case study of the possible effects of the
    rroduction of cobalt from the sea-bed on the world market for this mineral
    (TD/B/449/Add.l). Te stated that studies of the potential consequences of the
    Production of manganese ore and nickel from the sea-bed were being undertaken.
    In the secretariat's opinion there were two possible methods of protecting existing
    'roducers of minerals against rossible adverse effects of the mining of these
    minerals from the sea-bed: the preventive method and the compensatory method.
    For the reasons given in the study relating to cobalt it considered that the
    compensatory method would probably be ineffective and that for this reason
    alternative methods might have to be considered.

    46. The representative of the FAO introduced the study prepared by the FAO
    secretariat in response to the invitation of the Secretary-General of UNCTAD
    regarding the possible adverse effects of the exploitation of the sea-bed beyond
    the national jurisdiction on fishery resources (TD/B/447). He emphasized that the
    study was a preliminary one inasmuch as the limits of national jurisdiction were as
    yet undefined and as the existing state of knowledge regarding the subject did not
    Permit the drawing of definitive conclusions. He drew specific attention to the
    passages in the document which concerned the harmful effects on fisheries of the
    discharge of toxic substances into the sea. He pointed out that research was
    needed to determine the potential effects of the exploitation of the sea-bed on
    the biological resources of the sea.

    47. The representatives of several developing countries emphasized the competence
    of UNCTAD, in accordance with General Assembly resolution 2750 A (XXV) and
    Conference resolution 51 (III), and in keeping with the discussions that had
    already taken place in the Board and the Committee on Commodities, to study the
    question of the economic implications of the commercial exploitation of mineral
    production from the sea-bed and ocean floor beyond national jurisdiction, to
    propose measures for dealing with possible adverse effects of such exploitation
    and to keep under constant review both in the Board and through its subsidiary
    organs, especially the Committee on Commodities, the complex problems arising from
    mineral production from the sea-bed. One such representative stated that these
    studies showed that UHCTAD's analysis of the economic consequences of such
    exploitation could be carried out without trespassing on the competence of other
    forurr! s.

         1/ Document TD/B/474" to be r- <effced as part of document A/(015 in
    Official Records of the General ,           `renty-eiphth Session, Supplement No. 15.

                                                         00128

    48. They attached importance to measures taht should be evolved and adopted to
    avoid any possible adverse impact on world markets for {he minerals concerned.
    The representatives of several developing countries urged that such measures
    should be adopted before the commencement of commercial exploitation in order to
    ensure that exploitation could be regulated so as to preclude developing Producing
    countries from being adversely affected.  Such preventive arrangements could be
    effective only if the sea-bed authority was empowered to undertake direct
    exploration of the area by itself or by means of joint ventures or service
    contracts, thus ensuring direct control by the sea-bed authority. An economic
    and development planning unit within the authority itself, which could monitor on
    a continuing basis the effects of exploitation of sea-bed minerals on land-based
    production in developing countries, should form an integral part of any system of
    control.  These representatives were of the view that in this regard all States
    ought to observe the moratorium on the exploitation of the sea-bed beyond national
    jurisdiction recommended by General Assembly resolution 2574 (XXIV) and Conference
    resolution 52 (III).

    49. The representative of a developing socialist country of Asia stated that the
    international seas beyond the limits of national jurisdiction and the resources
    thereof should in principle belong to the peoples of all countries. He reiterated
    the competence of UNCTAD to propose measures necessary to avoid adverse economic
    effects which exploitation of the sea-bed might have on the prices of minerals
    exported primarily by the developing countries and he called on all States engaged
    in activities in the sea-bed area beyond the limits of national jurisdiction to
    cease such activities before the establishment of an international regime.

    50. The representative of a developed market economy country noted that his
    country had supported a proposal made in the United Nations Committee on the Sea-Bed
    to establish, within a proposed international sea-bed authority, a commodity board
    aimed at regulating mineral production from the international area of the sea-bed.
    It was the hope of this delegation that such an international board would benefit
    both developed and developing countries.

    51. The representatives of several developed market economy countries were of the
    view that, since the conclusions which might be drawn from the studies were still
    tentative and since many economic aspects of sea-bed production were as yet
    uncertain, no firm conclusion or recommendation regarding measures or approaches to
    avoid market disruption could be reached at this stage. Moreover, they considered
    that these questions were the primary responsibility of the United Nations Committee
    dealing with the sea-bed and would be discussed subsequently at the Conference on
    the Law of the Sea. They also wished to avoid any action which might prejudice the
    conclusions, or duplicate the work, of the forthcoming Conference on the Law of the
    Sea,

    52. The representative of one developed market economy country observed that the
    UNTCTAD secretariat's views on possible consequences of the exploitation of sea-bed
    resources on the export earnings of developing countires were interesting, but that
    these consequences could not be the only criteria relevant to this mntter.

                                                                                 / 012

                                                              00129

    53. The representative of a developed market economy country said there was a need
    to consider the orderly exploitation of sea-bed resources and that the question of
    the conservation of such resources should be taken into account.

    54o Several of the representatives participating in the debate stated that in
    conformity with General Assembly resolution 2750 A (XXV) and Conference resolution
    51 (III), UNCTAD should continue to study the problems arising from the commercial
    exploitation of the sea-bed and strengthen and supplement the present studies.
    They urged that close liaison should be maintained by the UNCTAD secretariat in
    its future work with the secretariats of other United Nations bodies concerned with
    these questions.

    55. The representatives of some developed market economy countries emphasized that
    care should be taken to avoid duplication of work. The representatives of several
    developing countries emphasized that in view of the competence of UNCTAD in the
    field of international commodity policy, it should study the possible adverse
    imrlications of sea-bed production and propose remedial measures.

    56, The representatives of a developing country said that the use for military
    purposes of the sea-bed and ocean floor might prejudice the future constructive
    use of the resources in question. He suggested that the organizations within the
    United Nations system, among them UNCTAD, should keep this aspect of the subject
    under review.

    Action by the Board

    57. At its 380th meeting on 8 September 1973, the Board noted the reports
    contained in documents TD/B/h47, TD/B/449 and Add.1 on this matter.

    58.  Bearing in mind that the exploitation of the sea-bed was still in a
    preliminary stage and that more knowledge had to be gained regarding exploitation
    processes and their possible effects on the conservation and utilizaticn of living
    resources, and noting further that this matter was under consideration by the
    Committee on the Peaceful Uses of the Sea-Bed and the Ocean Floor beyond the
    Limits of National Jurisdiction acting as a preparatory committee for the Third
    United Nations Conference on the Law of the Sea, the Board requested that the
    studies mentioned above, 1/ together with a summary of the views expressed thereon
    at its present session, be transmitted to the Third United Nations Conference on
    the Law of the Sea for consideration, and noted that the secretariat intended to
    carry out case studies on manganese and nickel. The Board noted with interest
    the FAO study on fisheries resources of the seas and oceans.

         1/ For the further views of delegations and a statement by the Secretary-
    General of UNCTAD on this matter, see the summary record of the 380th meeting
    (TD/B/SR.380).

                                                         00130

                                                                       Distr.
                                                                       GENERAL
                                                                       TD/B/483
                                                                       23 April 1974
                                                                       Original  ENGLISH
    United Nations Conference on Trade and Development

    TRADE AND DEVELOPMENT BOARD
    Fourteenth session
    Geneva, 20 August 1974
    Item 4 of the provisional agenda
       THE EFfCTS OF PRODUCTION OF MANGANESE FROM THE ./A;A-BED, ITI.l PARTICULAR REFERENCE
                   TO.EFFECTS ON DEVELOPING COUNTRY PRODUCIERS OF. MANGATESE ORE
                               Report by the UNCTAD secretariat

    1.   The attached report presents a quantitative assessment of the impact of the
    production of manganese from the ocean floor upon the land-based manganese ore
    industry and, in particular, upon developing country producers of manganese ore.
    It is the latest in a series of reports which deal, in a quantitative manner, with
    the question of the effects of commercial development of the mineral resources of the
    sea-bed beyond the limits of national jurisdiction.

    2.   In accordance with resolution 2750A (XXV) of the United Nations General Assembly
    and with resolution 51 (III) of the third session of the United Nations Conference on
    Trade and Development, the UNCTAD secretariat has been investigating the economic
    consequences for the developing countries of such utilization of sea-bed mineral
    resources.   After discussions of this subject at the sixth session of the Committee
    on Commodities and at the eleventh session of the Trade and Development Board, the
    secretariat submitted to the third session of the Conference the results of its
    preliminary over-all review of the entire question.  /   Subsequently, the secretariat
    embarked upon a deta:.led quantitative assessment of the effect  of commercial
    development of sea-bed mineral resources.   Thus far, the quantitative assessment has
    focused upon the derivation of numerical estimates of the impact upon the markets for
    each of four metals and, in particular, upon developing country producers of these
    commodities.   The metals concerned - cobalt, manganese, nickel, and copper - are the
    most valuable constituents of the manganese nodules found in such profusion on the

         _/ "Mineral production from the area of the sea-bed beyond national jurisdiction:
    issues of international commodity policy: report by the UNCTAD secretariat"
    (TD/113/Supp.4).   Subsequently, the text of this report was incorporated in the
    relevant report by the Secretary-General of the United Nations to the July/August 1972
    session of the Committee on the Peaceful Uses of the Sea-Bed and the Ocean Floor beyond
    the Limits of National Jurisdiction, under the title "Additional notes on the possible
    economic implications of mineral production from the international sea-bed area"
    (A/AC.138/73).

    GE. 74-44439
                                                          00131

    ocean floor.   The vehicle for the derivation of these estimates has, in each case,
    been an econometric model of the market in question.   Results pertaining to cobalt
    were presented to the thirteenth session of the Trade and Development Board 2 and
    figures for copper are being made available to the fourteenth session of the Board.  /
    As noted above, the present paper provides numerical estimates of the effects of
    sea-bed production of manganese, with particular reference to effects "on developing
    country producers of manganese ore.   The econometric model on which the present
    analysis is based is desdribed in an addendum to this paper "Al econometric model of
    the manganese ore industry" (TD/B/483/Add.l).

    3.   The next logical step in the over-all quantitative assessment is to integrate
    the four mod$ls computationally and to simulate the interaction between the levels
    of sea-bed and land production of the four metals.   The development of such an
    integrated structure of relationships would enhance the capability of the secretariat
    systematically to utilize new knowledge of sea-bed production technology and coste as
    such knowledge becomes available.   It would then facilitate the implementation by
    the secretariat of the decision, taken at the third session of the United Nations
    Conference on Trade and Deveiopment, that "the question of the economic consequences
    and implications for the economies of the developing countries resulting from the
    exploitation of mineral resources shall be kept constantly under review". A/

              "lExploit~ation of the mineral resources of the sea-bed beyond national
    jurisdiction:  issues of international commodity policy.   Note by the UNCTAD
    secretariat" (TD/B/449) and "Case study of cobalt" (TD/B/449/Add.l)
        J/  "The effects of production of copper from the sea-bed, with particular
    reference to effects on developing country producers ofocoper" (TD/B/484).   A report
    r. colsequences for the nickel market is being prepared jby an UNCTAD consultant.
              Proccedinf!rs of the United Nations Conference on Trade and Development,
    Third Session, vo!l.I, ReCort and amule:es (United Nations publication,
    Sales ito: E.73.IT.D.4), pp.78-9.

                                                             00132

                                               Contents

                                                                                   Paan~ths

      I.   SvMan~racL  orC2 usions                                                  4-16

     II,   LajLor premis s Pnd scope of the anal sis                               77-23

    III,   Effects of sea-bed -roductior on 'Uhq land-based
           mang3~anese ore xnciustry                                               24-27

     TV.   Eff-s o                                     isea-boed nproduction otn dertI22jacLuo3  y
           '~roducer f of  npanlnse o'_                                            28-33

      V.   Sensitivity of results to assumptions                                    34-37

                                                                00133

                                 I.  ,,3UI4PRY MAlD CONCLUSIOJS

    4.   This paper presents the results of:an analysis of the effects of the ,mining
    of manganese nodules from the ocean floor on the land-based manganese ore industry
    and, in particular, on the developing country producers of such ore. These results
    are based on an econometric model of the manganese ore industry - summarized on
    page 17 - and fully described in TD/B/483/Add.l.

    5.   The analysis is related to a base came set of premises, which can be summarized
    as follows.

         (a)  The range of sea-bed production'leiVls which can realistically be
    anticipated over the projection period (1974-8C0)5 is taken -to run from a low of about
    442,000 metric tons of ,ilafnanese ore in 1980 to a high of about 4,420,000)O metric tons
    of ore in the same year.

         f(b)  Production of manganese ore from the sea bed is assumed to be planned,
    broadly, on principles similar to those relatinhg to land-based 'production.  This will
    lead to a pa: tial, though not pound-for-pound, displacement of land-source supplies
    by ocean-source supplies.

         (c)  The share of tne developing countries in aggregate land-based production
    will remain approximately constant at its current level over the period.

         (d)  Real Gross national product in the industrialized countries which are the
    principal consumers of manganese ore is assumed to grow during the projection period
    at recently observed rates.  Further details of these assumptions and information
    about other assumptions made are provided in chapter II.  The base case premises just
    summarized should be regarded as merely a reasonable reference case for study.
    Alternatives to certain key assumptions and the effects of these alternatives on the
    analytical results are considered in chapter V.

    6.   The principal results which flow from the base case premises and which pertain
    to the manganese ore industry as a whole are as follows (see Chapter III for details).

    7.   Aggregate consumption of manganese ore in the developed market economies and in
    the developing countries is expected to increase at an average annual rate of about
    -.8 per cent between 1974 axnd 1980. 5/ This is a somewhat higher rate of increase
    than the average over, say, the last two decades.  It reflects the anticipated

         5/  All physical quanlitites and values are aggregates of the developed market
    cornomies and developing coumntries. Published data on the manganese economies of the
    socialist countries were  insufficienil to permit representation of these countries in
    the econometric model on which -'athe analysis is based.  All quantities aald values
    refer to manganese ore of met;allurgical gracde.  'Data limitations prevented inclusion
    of chemical-,rade, battery-gradc, or ierruginous maznganese ore within t;le model.
    Consumption ol' metallurlical-grade ore, ]-owevw:r, represents about 90 poer cent of
    total consumption of all tpes ':,f manipanrs( ore.

                                                        00134

     relatively high rate' of growth of steel production in the developing countries and
     an increase in the share of production by such countries in the total.  Sea-bed output
     of manganese ore vrill affect the price of such ore.  However, since consumption of
     manganese ore is very price-inelastic, consumption is umlikely to vary with sea-bed
     production.

     8.   Production of manganese ore from land sources will, of course, be affected
     by ocean mining operations.  In the absence of sea-bed production, land-based output
     is anticipated to grow at an annual average rate of 4.2 per cent. Given a moderate
     level of sea-bed production, _/ this rate will probably drop to about 1.5 per cent
     per year.  In the last year of the forecast period (1980), the reduction in land
     volume will be from 12.6 million metric tons to 10.4 million metric tons, a reduction
     of about 18 per cent. /

     9.   The price of manganese ore is expected to be fairly insensitive to the level
     of sea-bed production. Without production from the ocean floor, price is expected
     to decline by about 1.1 per cent per year under the influence of continuing high
     production capacity, United States Government stockpile deliveries, and imports from
     the socialist countries. This rate of decline will accelerate to only about 1.6
     per cent per annum under the assumption of a medium level of sea-bed output. The
     difference in prices between the two situations in 1980 is the difference between
     $17.3 per metric ton and $16.8 per metric ton. 8/ The effect of ocean mining
     development on the price of manganese ore is moderated by the fact that sea-bed
    production will to some extent supplant land-based production. Hence the effect of
     the former on total supplies will be mitigated.

    10.  The base set of assumptions also has implications for the export earnings of
    developing country producers of manganese ore. 2/ In the absence of an ocean mining
    development, the export earnings of the developing countries from the sale of
    manganese ore are expected to rise at an annual rate of about 3.1 per cent over the
    forecast period. This gain reflects the conflicting effects of an anticipated slight
    decline in price, offset by a moderate rise in export volume.  With a medium level of
    sea-bed production of manganese ore, export earnings would probably decline by about
    2.0 per cent per year between 1974 and 1980.  These differential rates of change
    imply a very substantial difference in export earnings in 1980 as between the no
    sea-bed production case and the medium sea-bed production case, the difference
    between $93.7 million in the first case and $65.6 million in the second, a reduction
    of approximately 30 per cent (see chapter IV for further details).

         _/ This is the "medium 2" sea-bed production case shown in table 1 below.
         7/ All quantities are gross weight of ore. An analysis in terms of weight
    of metal content would also have been of interest but was precluded by data
    limitations.
        8/ This is a world average f.o.b. price per ton of metallurgical-grade ore,
    gross weight.
        2/  figures on another indicator of the impact on developing country producers,
    namely value of annual production, are given in table 7 below.

                                                         00135

    11. As noted, the results given above rest upon a particular set of assumptions,
    the base set,  It is of interest to determine how the flgures of developing country
    export earrings might change in response to plausible variations in certain key
    assumptions. (see chapter V).

    12.  It could, for examples be assumed that the developing countries' share of
    aggregate land-based production would decline because they would feel the full
    effect of the dis, .acemcnt- of land suppli.s3 of manganese ore by sea-bed production.
    This would be the 1robable result, fior example, if sea-bed production were to be
    utilized mainly in the United States which is a distinct possibility, at least over
    the first few years of the forecast period.  Under these circumstances, and with a
    medium level of sea-bed output, the exporL revenues of developing countries from
    the sale of manganese ore would decline at an annual average rate of 6.3 per cent
    falling to 048.5 million by 1980.  In that year, such earn;lngs would be about
    21 per cent lower than :if the impact of sea-bed production had been shared equally with
    the developed market economies and 48 per cent lower than if there were no ocean
    mining.

    13.  Similarly, it might be assumed that the average growth rate of the industrial
    countries, which are at present the principal consumers of manganese ore, would be
    less than historically experienced.  Under the influence of a temporary (two-year)
    reduction of growth in these countries, and given a medium level of sea-bed production,
    export earnings of developing countries from the sale of manganese ore would be
    relatively lightly affected.  Tinder a sustained reduction of growth (one-half the
    recent historical rate) - once again with a medium sea-bed output - such earnings
    would suffer quite drastically, however, falling to $54.2 million in 1980, a decline
    of 4.5 per cent per year between 1974 and 1980.  In the latter year, earnings would
    be approximately 17 per cent less than if growth hat been sustained at its historical
    rate.  Such earnings would be 42 per cent less than if growth had been sustained
    and the sea-bed development had not occurred.

    14.  All the above results obtain under an assumption of a fairly moderate scale of
    ocean mining operations.  Under an assumption of a high - but not impossibly high -
    scale of operations, the effects would be even more severe.

    15.  The table belonw dra-ws together the main analytical results relating to the
    effects of sea-be  production on export e rnings of' develop- lg country producers of
    manganese ore.

                                                              00136

                       Exhort earnin gs ofveloping countries from
                                   manganese ore in 1280

                                       Under alternative assumptions regarding:
        Under the base
       set of assumptions            Developing countries            Reduced growth in
                                       share ~f land              the industrialized
                                         production                  countries a/

        No         Moderate         Developed    Developing       Temporary     Sustained
       sea-bed       sea-bed         countries'   countries'       reduction     reduction
      production    production       production   production
                                   displaced    displaced

                                         (ous million)
        93.7          65.6             86.5          48.5            62.8          54.2

    a/   Taken here as the 11 major consumers of manganese ore.

    16.  The figures presented in the table above suggest that some sort of sea-bed
    regulatory regime will probably be required in order to protect the export earnings
    of developing country producers of manganese ore. Regulations could pertain to
    offering prices, production, or offers to sell the output from mining operations, or
    some combination of these. On the other hands a compensatory approach to protecting
    the export earnings of developing countries would probably not be successful. Under
    any sea-bed case considered, losses in export earnings of the developing countries
    amount to about 50 per cent of the value of sea-bed production. Since the latter
    represents gross revenues, without deduction for operating costs, depreciation and
    amortization, and return on capital, the prospects for compensating the developing
    countries for loss of export earnings solely from the sale of sea-bed production
    of manganese ore do not appear bright. Thus, a system of regulation in which losses
    are prevented, rather than compensated after the fact, would seem to be indicated.
    Definitive statements on these matters, however, must await a joint analysis of all
    four principal sea-bed metals, an analysis in which interactions among the various
    metals and between  land and ocean operations can be systemat cally examined.

                                                       00137

                         II. MAJOR PRMiLISES AND SCOPE OF TIHE ANALYSIS

    17.  This chaptcr describes the base set of assumptions on which the bul'k of the
    results presented in the remainder of the paper depend.  It also suLmaarizes the causal
    re l.ionhllip:  embodied in the ecolino,ietric model utilized to derive conclusions from
    t}�:.e assuloptions.  Finally, some lixiitations of the analysis are also discussed.

    1...  rflne first set of assun-otions adooted relates to the levels of sea-bed production
    oi .;:anganese ore.  The levels of sea-bed production considered in this report - in
    co7.iaon 1 with the other reports in this series - are based upon premises 1which appear in
    the United Nations Sea-Bed Committee document.   /  'ihlese premises are as follows.
    Each sea-bed mining operation yields an annual production of manganese nodules of
    ,3, 000 metric tons, equivalent to 1,000,000 metric tons dlry weight.  These contain,
    on the average, 30 per cent manganese, 1.5 per cent nickel, 1.5 per cent copper, ancd
    O.5 per cent cobalt by weight.  Recovery fectors are 93 per cent, 96 per cent,
    9) n r cent and 96 per cent, respectively.  Oni these assumlptions, the Sea-Bed Comlmittee
    report proc-eds to derive the il!lplied quantities of metals for various numbers of
    mnini.g onc)rations in a single year.  The patterns of expansion of mining operations
    trr:ated in the present report appear in table 1.  These five patterns, in conjunction
    with the other assumptions stated in this paragraph, yield the five cases of sea-bed
    outnut of :nalganese ore shown in table 1.  The production fiutre for a giveni nulber of
    mining o-erations slo-nm in table 1 differs from that for the smuie number of operations
    shorn in tl-e Sea-Bed Committee report.  'iThe latter asslmles that all of the manganese in
    ca  iven quantity of' noc1ules will be produced as pure metal; in this report, it is
    assvlmed that all such manganese will be produced as maFnganese dioxide, one of the
    nl+,oen~eiate products in the separation processes currently ubnder study.  Given the
    zio-ro.:enta: l costs associated with the isolation of manganese beyond the dioxide s-tLage,
    ;c g,-, ive:n tlhe fact that relatively little manganese is cons-iuned as pure metal, it hgs
    seemed mnore realistic to assume that processing ceases at the manganese d.ioxide stage.
    The latter iJ, a coruo;ln manganese mineral and comipletely suited to the production of
    ferroalloys, the forrn in which most manganese is constuned.

    19.  Anothler ararently important assumption relcates to the extent to whi:ch sea-bed.
    'r:,)djuctio;  is viewed as displacing land-bacse( production of mang'Canese ore.  As
    .!a tioned in the preceding, paragraph, the manganese content of sea-bed nodulecs is
    :.ch higherl   than that of arny other ,oetal.  About 30 ncr cent of a unit of nodules
    (by weiifht) is manganese.  '.ecn con!pared with projected consumnption of maungcaneso ore,
    ::he f utr,. outnut oi' such ma.terial fro:li the sea-bed - while not overwhelmin.g in
    !n"nitud: - is still fai.rly significant. 11/  A key question thenl in assessing the
    i'mact cf ocean minir': on the dcveloping), coutntries, is how this new souLrce of supply
    '_ill inpir.nge u)oon the traditional lanld-based industry, or more specifically, how the
    - r ducti 7) ---vels of land-based producers will be affected by the ocean mining
     m o ..c... T'here are two extreme assucptions in this regarcl.  One assunution might
    b,- tbht seoa-bed  rodcluction wil]l simply constitute a net addition to land source
    oe,_tpu', th.e latter continuir.g to grow at some predetermined rate.  Alternatively,
    an: t-hcr na Llghtior r..izlt be that sea-bed production will dislace an equal amount of
    la_-d-based ozut-,:ut.  Neither of these assunptions seems very realistic, however.

         1/'  "PTossible imcact of sea-bed mineral production in the area beyond national
    ,jr: .rict tion  o,' worl-l mi1arklets, Wi:[th special reference to the problems of developing
       co;-';: 1.a rurelr-imlnary asse;ment." (A/AC.e/35).

         i/~  Ir n-. mrost extreme case - the 1980, high, sea-bed production case - output
    fr-:, 'Ce er-c�.:, flo'.r '!coud repTresent aboutl 29 per cent of total urojected consumption.
                                                              00138

                                                          Table I

                                           Sea-bed. Drod~uction: alternative cases

           Loll sea-bed production  IC Kdium I sea-bed p~roduction  Medium 2 sea-bed -oroducti on  Hi-enh sea-bed production

               i~o.  I  Sepbed                      Sea0�  bed.0                  Seabed   bSo-a-bed
              _in~g   /o UO t iioija    oduction'                     mina  -~rodc~ttiol,;            a~nn    - ro duc t ion'/

     1974A    00          .               0.0        0.0                1.0            _               "  T.0    0.442

          1975k    0.5   0. 2)21          0.5        0.221              2.0         .83              2.0         0.88%

    1 9704    1.0        0.442           1.0         0.442              3.0        1.53 5-).0                   1.3-0

     ;1977I   1.0         0.421.                      0.0662            4.0         1.-770O           5.0        2.210

     1978~  1.0422 0                                 0.887,             5.0220                       7.0         3.090

    A;1979~  .0    0 .442                 2.5         1.1i00             6.0        2.650       1      .         3.970

      ~i1980   . 1.0   O  ./,,           3.5.30                         7.0        5.05 0           10.0        4.420

        . "' uiulative number in operation during a given year.

        3 iliiions qf metric tons, gross weight, of ore.

    The levels of sea-bed production considered here are too great not to supplant sone
    land-based production; on the other hand, there does not ueemr to be any reason to
    suppose that ocean production will be completely substituted, pound-for-pould, for
    lacld-derived ore. 12/  A reasonable intermediate case flows from the idea that the
    production of manganese ore from both sources will be planmned on more or less the samne
    principles.  I   As a consequence, sea-bed production will be substituted for
    lanmd-based production to some extent, but not to the extent of a pound-for-pound
    disolacement of the latter.  The notioll that production from both supply sources will
    be plonlled similar y seems particularly p] usible in the lig,'t of existing ties
    between the parent firms of mangalnec ore coiapanies ~and the member finns of the
    several consortia engaged in sea-bed mining research.  Although this approach seems
    reasonable, it is not inevitable.  Accordingly, the sensitivity of the principal
    results to the assumption on -the extent of displacement of land-based by sea-based
    production is also exanined (see chant-ler V).

         12/'  Obvioul.ly, the extent of displacement of land-based production by ocean-based
    production depends on the relative asking prices of the two supply sources.  This, in
    turn, translates into a question of relative cos-ts of production.  It is sometimes said
    that sea-bed manganese production will be "justified" by revenues derived from the sale
    of :ickel} copper, and cobalt.  The argument is that the four metals will be produced
    1.nrier c,lndi-;ions of joint costs7-Rwhich will be more than covered by revenues from the
    s.rle of copper, cobalt, and niccel \7 and that therefore the mlanganese produced canl be
    viralll.ly given away.  'This argme;t overlooks the nature of -the production processes
    currently under consideration, howrever.  Certainly, the four metals will be mined
    jointly.  Ncvertheless, they will be separated sequentially, at least, in the processes
    currentl.y being considered.  In all these processes, manganese is extracted last and
    wi. th attelndant of costs which are truly incremental to this particular metal.  At the
    app-'opriate point of the production process, a decision will be forced upon the
    coerators of the processing facility.  The alternatives will be: either bear the costs
    of disposal of the leach liquor after extractionof cobalt, nickel, and copper only,
    or, bear the net cost (possibly negative since marginal revenues may exceed marginal
    costs) of extracting mangamese by further processing and then disposing of the waste
    liquor.  The choi-e will be made on the usual basis of comparing net benefits (or
    losses) associated with the alternative courses of action.  Although the marginal
    costs associated with extraction of mrianganese are not definitely l]uovm as yet,
    iiap.ti.4ons are that they will be a sizeable portion of the current -rice of manganese.
    Hei-,ce, there is no reason to antici.ate a wholesale displacement of land-based
    production by sea-bed nroduction.

         1/  To implement this notion within the context of the model developed in the
    addeildmra to this docu.erlt (TD/B/4er//Add.1), it is necessary to modify the production
    equation proposed for the :Uo4el, whilch L: r0/.2, - ./LEI))? =          [/G e <Lr  U(4),
    -where O/L:D and K/LND are output and capacity, respectively of land-based manganese
    ore production facilities~, C/:CG is ar-greg.ate consumptioil of maiganese ore, and U(4)
    is a raun�orn elemep.t in t'hle relatioenship.  However, givenll ea-bed production and
    asarminrg both supply sotu'ces alrc 1]annrcQ similarly, the equation becomes:
    (0/ID  o-:- /SEA) - (/LIrD -- Kx/SEA)] = , [C/AGG .- (IK/LIND   K/EA)  -:- U(4), where
    O/SEA and K/SEA are output e.nd capacity, respectively of sea-based production
    facilities.  The hyoothlesi E; is3 that the varia'tiorn of total  output from total
    prod-uctive capacity is p-roportioral to thie variation of consunption from total
    produc tive canacity.  Given the l.il ,Iy rigidity of sea-bed production levels over the
    fairly short time hlorizio; uLnder consideration, it is probably safe to take sea-bed
    act-La. output as, in fact, identical to soa-bed cacn)acity output.  This malces it
    possibl: t'o sir.lify tha equ].Ticn above to-
    (O/LI  -       )      [/AGG-  (TX/ :I-,D -  /SEA)] 'T(4).

                                                                   00140

    20.  For the operation of the model, it was also necessary to make certain assnmptions
    about the future time paths of variablesexogenous to the model.  Ferroalloy production
    and crude steel production in the 11 leading consuming countries outside the socialist
    countries are asswmled to grow during the period 1974-80 at average annual. rates of
    4.5 per cent and 4.4 per cent, respectively.  14/ Alternative assumptions in this
    respect are considered in chapter V, United States Government stockpile roleases ,re
    assuled to be in the order of z4,00000 metric tons per year over the period. 15j/  let
    imports into the developed market economies and developing coulntries from the
    sacialist counetries are projected to grow tt a somewhat higher rate than lthat
    historically observed, reaching   - level Oc 17 million metric tolls in the last
    forecast year.  lThis acceleration reflects factors inflluencing both im,oorts from alnd
    exports to the socialist countries.  Lnports from the socialist co'untries are expected
    to grow faster ilhan in the past.  Suclh imports should be spurred by a somnewhat higher
    future rate of steel production in the developed and developing countries as a whole.
    In addition, imports from the socialist countries into Westerln Europe have sig;lificant
    transport cost advantages over imports from sources in Africa, and an improved
    political climate should permit such imports to occur.  On the other hand, it may be
    difficult for ex:ports from market economy countries to socialist countries in
    Eastern Europe to maintain a constant market share, given the inherently large
    transport cost advantage of USSR ex-ports to other socialist countries of Eastern hu-opp.
    ThMle combined effects of the trends rfill probably be an increase in the rate of growth
    of net imports of manganese ore into developed and developing countries from the
    socialist countries. 16/

    21, These various assumptions are used in the econometric model to derive the
    analytical results presented in the following sections.  Before presenting these
    results, it wouldl seem useful to give a brief summanry of some of the principal causal
    relationships found in the manganese ore industry and embodied in the econometric
    model.  17/  These relations can be suimuariized as follows.  Alnual consumption of
    rla:ng'rlnese ore in the 11 major consl.ming countries can be closely related to feroio:llo
    production and steel production irn these countries.  Annual consumption in the
    remaniling developed market economies and in the developing countries, although also
    ultimately dependent oin ferroalloy production and steel production, can be simp:ly, ai d
    successfilly, specified as a time trend.  Production of mangaxnese ore, in an anialytical
    period as short as one year, depends oil production capacity in the manganese ore

         1i/  blhcreas consumption of manganesp ore in these countries depends explicitly
    on ferroalloy procactiol! and steel produc Lon in the economesric model, consumzption jil
    the remainder of the area is specified as a time trend.  The latter trend is
    consistent with the observed growth of steel production in the samne area of about
    i0L per cent per year.

         !5/  These releases have been qu1te volatile and 400,000 metric toils should be
    teice  as simply an average aimnual figur~e over the forecast period.

         _!/  These projections are essentially arbitary.  However, in the context of the
    model used the effect of sea-bed broduction on the export earnings of developing
    country producers of manganese ore is not affected by the assumption made regarding
    thUe mapgitude of the net trade in rnananese ore of the socialist countries of
    aste urln Europe .

         A,/  For a detailed descritjion of the model, see TD/B/483/Add.l.

                                                         00141

    industry, with fluctuations from capacity levels being determined by consumption
    dcuring the year.  Finally, the annlal price of manganese ore is influenced by the level
    of conmercial stocks and by United States Government stockpile releases.  These
    rclationships (specified as to mathematical form and numerical constants), with a few
    logical identities, comprise the econometric model.

    22.   'lThe assumptions outlined in paragraphs 18 to 2% and the econometric model
    briefly described above, imply certain conclusions.  The conclusions which pertain to
    the land-based mansganese ore industry as a whole are discusseu in chapter III, while
    -those which pertain to the'developing countries specifically are dealt writh in
    chapter IV.  Although the assumptions adopted constitute a reasonable context in which
    to deduce the effects of sea-bed production of manganese ore, they are not the only
    preimlises hrlich could have been adopted.  It is of interest, then, to investigate how
    the results of the analysis vary as certain key assumptions are varied, and, with
    this in mind, the sensitivity nf the analytical results to the assumptions made is
    considered in chapter V.

    23.   Finally, certain limitations of the analysis should be noted.  For example, it
    deals with high-grade metallurigcal ore only and does not consider chemical-grade,
    battery-grade, or ferruginous ores.  As a practical matter, for the industry as a
    whole this restriction is less serious than it may appear, since consumption of
    h1igh-grade metallurgical ore represents at least 90 per cent of total consumption
    of all types.  Moreover, because of data limitations, the manganese ore industry
    within the socialist countries has been excluded from the analysis.  Since, however,
    the primary interest is in the manganese ore industries of the developing countries,
    this limitation is also not too serious,  Production in the socialist countries is
    :liostly consumed within the groups and consumption in the socialist countries is mostly
    satisfied by internal production. Finally, the level of sea-bed production is not
    Miade dependent on the price of manganese ore.  In the prevailing uncertainty regarding
    .;ea-bed production technology and costs, this limitation seems unavoidable.  However,
    at each level of sea-bed output of manganese ore considered, the projected price of
    such ore is assumed to be sufficient to make revenues exceed costs of production of
    private producers.

                                                             00142

                   III.  EFFECTS OF SEA-BED PRODUCTION ON THE IAND-BASED
                                  MANGANESE ORE    INDUSTRY

    24. kTable 2 presents projections of manganese ore consumption by the eleven leading
    consuming nations, by other consumers, and the total of both. In each case, only
    one projection is presented, since manganese ore consumption will not presumably vary
    with the source (sea-bed or land) of the ore utilized. The relatively high rate of
    growth of consumption in the 'other consul-rsl category is, in large measure, a
    reflection of anticipated high growth rates oP steel and ferroalloy production in
    the developing countries.

    25. Table 3 depicts the levels of land-based manganese ore production under
    alternative levels of sea-bed production of such ore. In addition, a projection of
    land-based output-in the absence of sea-bed exploitation is provided for comparison
    purposes. In the absence of sea-bed production, output of ore from land sources is
    projected to grow at an average (compound) rate of 4.2 per cent per year. This is
    about the rate of change experienced in recent years. However, as ocean-floor
    production rises, land production is partly displaced until in the presence of a high
    level of sea-bed production, land-based production actually declines slightly over the
    projection period. The absolute declines in land-based production shown in the high
    sea-bed production case in 1977-79 are due to the magnitude of the increases in
    sea-bed production relative to those in aggregate consumption in those particular
    years. Total production of manganese ore from both the sea-bed and land sources is
    given in table 4.

    26. Estimates of the future-price of manganese ore are provided in table 5. It
    will be observed that, even in the absence of sea-bed production, the price of
    manganese ore is expected to decline slightly. Consumption will continue to grow,
    of course, but United States Government stockpile releases, imports from the
    socialist countries, and levels of production capacity (relative to levels of steel
    production) will continue to exert pressure on prices. The increasing pace of
    sea-bed mining - from the low to the high cases - has had what is, at first glance,
    a surprisingly moderate effect on prices. The explanation is that to some extent
    ocean-source supplies will supplant land-source supplies and, consequently, the
    effect on total supplies will be mitigated. 18/

    27. The values of sea-bed production implied in tables 1 an- 5 are shown in table 6.

         18/ If, however, there is no displacement of land-based production, the effects
    of even the medium 2 level of sea-bed production are considerably more severe
    (see table 9).

                                           Table 2

                       Consumption of manganese ore: actual 19699 and
                                   projections for 1974-1980
                                   (millions of metric tons)

                                      11
                                   principal                Other               Total
                                  consumers ej           consumers  /

         Actual 1969                 6.73                     1.56        |      8.29

                lj74                 7.88                     457        1      10.4
                1975                 8.20                     2.83              11.0
                1976                 8.53                     3.11              11.6
                1977                 8.88                     3.42              12.3
                1978                 9.24                     3.77              13.0
                1979                 9.61                     4.14              13.8
                1980               10.00                      4.55              14.6

         Average annual
         percentage change,    1    4.1                      10.0                5.8
         1974-80

    a/ Belgium, Canada, Federal Republic of Germany, Italy, Luxembourg, Netherlands,
        Sweden, United States of America.

    bJ/ Others.
    Source: See annex I, 'A note on data employed', in the addendum to the present
             document (TL/B/483/Add.l).

                                                                 00144

                                           Table 3
                   Aggregate production of manganese ore from land sources
                                  (Millions of metric tons)

                            No   7  -Low          Medium 1 i Medium 2        High.
                         sea-bed     sea-bed      sea-bed      see-oed     seeabed
                        production  production  production  production  production

    I Actua2 1969           8.88           -           -            -

            1974           9.85         9.85         9.85        9.53         9.53
            1975          10.30        10.10        10.10        9.67         9.67
            1976          10.70        10.40        10.40        9.76         9.76
            1977          11.10        10.80        10.60        9.82         9.49
            1978          11.50        11.20        10.90        9.90         9.26
            1979          12.00        11.70        11.20       10.10         9.13
            1980          12.60        12.30        11.70       10.40         9.41

     Average annual
     percentage change      4.2          3.8         2.9          1.5 -a/    -0.2 a/
     1974-80

    a/  If sea-bed production in 1974 is ignored, these figures fall to 0.9 and -0.8
        for the medium 2 and high sea-bed cases respectively.

                                           Table 4
                       Aggregate production of manganese ore from both
                                   sea-bed and land sources
                                   (Millions of metric tons)

                            No         Low        Medium 1 I Medium 2        High
                         sea-bed     sea-bed   i sea-bed       sea-led     sea-bed
                        production  production  production  production  production
                           K-  -1------ --. I--- --              .----- --  _ _
    Actual 1969             .8 ._                       _

            1974           9.85         9.85         9.85        9.97         9.97
            1975          10.30        10.30        10.30       10.60        10.60
            1976          10.70        10.80        10.80       11.10        11.10
            1977          11.10        11.20        11.30       11.60        11.70
            1978          11.50        11.60        11.80       12.10        12.40
            1979          12.00        12.10        12.30       12.70        13.10
            1980          12.60        12.70        13.00       13.50        13.80

    iAverage annual
     percentage change!   4.2           4.3          4.7          5.2 a 5.6 a/
     1974-80

    a/  If sea-bed production in 1974 is ignored, these figures rise to 5.4 and 5.8
        for the medium 2 and high sea-bed cases respectively.
                                                     nni t lz

                                            Table 5
                                  Price of manganese ore _
                                       ($US/metric ton)

                            No         Low        Medium 1     Medium 2     High
                         sea-bed     sea-bed      sea-bed     sea-bed      sea-bed
                        productions production  production 'production  production

    Actual 1969           18.0

            1974          18.5         18.5        18.5         18.5         18.5
            1975          18.2         18.2        18.2         18.2         18.2
            1976          18.0     j  18.0         18.0         17.9         17.9
            1977          17.7         17.7        17.7         17.6         17.6
            1978          17.5         17.5        17.5         17.3         17.2
            1979          17.4         17.3        17.3         17.0         16.9
            1980          17.3         17.2        17.1         16.8         16.6

     Average annual
     percentage change    -1.1         -1.2         -1.3         -1.6        -1.8
     1974-80

    a/  Metallurgical grade ore of average purity, world average f.o.b. price,
        gross weight.

                                            Table 6
                        Value of sea-bed production of manganese ore
                                        (Millions of $US)

                     Low             Medium 1           Medium 2    i        High
                   sea-bed            sea-bed           sea-bed            sea-bed
                  production        production         production         production

     1974            0.00               0.00               8.17               8.17
     1975            4.02               4.02              16.10              16.10
     1976            7.95               7.95              23.70              23.70
     1977            7.82              11.70              31.80              38.90
     1978            7.73              15.50              38.20              53.20
     1979            7.64              19.10              45.00              67.20
     1980            7.59              22.70              51.90              75.30

                                                                   00146

              IV.  EF0SKT"TS OF SEA-MBD P.FODUCTIONi ON DEVELOPDIG COUNTRY PRODUCERS
                                       OF U'TdGAlJESE ORE

    ^' .  ITr this section, tu;o measu-ements are oresented of the impact of the sea-bed
    rLirng phenomenon on 'the developing coiuntry producers of manganese orc.  Estimates
    co  the value of developing countries7 o' utput of manganese ore are shown in table 7,
    and estimates .f These countries' export revenues from the sale of such ore are
    giVer! in table 8.

    29.  In making the trarsition from an analysis of the effects of sea-bed exploitation
    or: the whole i.nd-istly to an analysis of its effects on developing countries
    )ecifically, t-he following identity has Been employed:

         x/)C = C/DC - C/+)C , '/VDC - LI/DC

         :here X rep2esents exports; 0, output; C, consumption; H, imports; and,
    qIT  inventory c]henge; the suffix DC indicating the developing countries.  Given the
    production of devreloping countries 0/)C, the value of such production can be estimated.
    Given the production, consumption, imports, and stock change of developing countries,
    their exports can then be derived using the above equation.  In turn, given exports,
    export revenues can be estimated.

    30. Since future levels of aggregate land-source production of manganese ore have
    already been estimated (table 3), the production of the developing countries (O/DC)
    can be derived by applying these countries' share of the market to that total. A
    key element then in deducing the effects of sea-bed mining of manganese ore on the
    developing country producers of such ore is the determination of the share of the
    developing countries in future land-source production. The share of the developing
    countries in total production has been declining since the mid-1960s.  There have
    been two principal reasons for this decline. First, certain leading developing
    country producers of manganese ore - Ghana, Morocco, India - have suffered from
    depletion of their deposits of metallurgical grade ore (in the case of India, this
    has been accompanied by a desire to reserve such ore for an expanding domestic
    steel industry.)  Secondly, another developed market economy - Australia - has
    become a major producer with the opening of new efficient mines.  These two develop-
    ments have been to a considerable extent offset by the continued expansion of the
    industry in certain, other traditional developing country producers, especially in
    Brazil, and by the emergence of Gabon in trie mid-1960s as a leading producer. In
    view of such individual country trends, and in the light of present knowledge of
    new mining projects, it is estimated that the share of developing countries in total
    land-based production will remain approximately constant at its current level until
    1980.  The projection of market shares is always precarious, of course, and this
    pattern should be re�?arded as merely a reasonable base estimate.  The sensitivity
    of the results riven below to variations in this assumption is examined in Chapter V.

    31.  The other elements in the equation determining developing countries' exports of
    manganese ore are more tralctable.  Imnorts by the developing countries of such ore
    can be taken as virtually z;rIc, ,in,' the principal developing consumers (the
    principal developing .':l:;:l-mdeers) .have .ubstantial. leposits of mIntallurgical grade
    ore,.  Stock level chamg'es in thill d!Velt)pinglt countries are taken as the same
    proportion of aggregate stock level changes as they have been in recent years.

                                                          00147

    Finally, consumption of manganese ore in the developing countries has been estimated
    on the basis of projections of steel production in each of the principal developing
    producing comuntries.

    32. The effects of sea-bed manganese ore production on the value of such ore
    produced by the developing countries is shown in table 7. In the medium 2 and high
    sea-bed output cases, actual declines in the value of developing countries' production
    are indicated. Even in the medium 1 case, the rate of growth of these countries'
    production is seriously affected. The effects of ocean-floor production are, perhaos,
    more dramatically revealed in a direct comparison of the value of developing countries
    production, in the case of no sea-bed production, with the values of production in the
    various sea-bed cases. S:ch a comparison shows that sea-bed mining will reduce the
    value of production of manganese ore by developing countries in 1980 by between 3 and
    29 per cent, depending on the particular case considered.

    33. Even more drastic are the effects of sea-bed production on developing countries'
    export revenues from manganese ore. As table 8 shows, in both the medium 2 sea-bed
    case and the high sea-bed case, declines occur in export revenues.  Furthermore,
    revenues in 1980 fall by between 5 to 42 per cent in the absence of sea-bed production.
    It will be remembered that sea-bed production will apparently cause only moderate
    declines in the price of manganese ore (see table 5). These declines will be limited,
    however, precisely because of fairly substantial inroads by ocean floor production
    into land production, thereby moderating the growth of total supplies.  This same
    displacement of land-based output, combined with a moderate decline in price, will
    result in serious declines in the value of production and export revenues from
    manganese ore for developing countries. Indeed, under any sea-bed case considered,
    losses in export earnings of the developing countries amount to about 50 per cent of
    the total value of sea-bed production.

                                                                00148

                                          Table 7

                            Value of production of manganese ore
                                   by developing countries
                                       (Ilillions of $ US)

                           No      ''   Low         Medium 1       Medium 2   i   High
                        sea-bed   I  sea-bed        sea-bed        sea-bed       sea-bed
                      production  i production    production    production    production

    Actual 1969          96.1 e

           1974         100.0         100.0          100.0          97.1           97.1
           1975         103.0         102.0          102.0          96.8          96.8
           1976        4106,  103.0                  103              .C          96.0
           1977         108.0         105.0          103.0          94.8          91.7
           1978         111.0         108.0          104.0          94.1          87.8
           1979         115.0         112.0          107.0          94.5           85,0
           1980         121.0     1   117.0          110.0          95.7           86.0

    Average annual
    percentage
    change 1974-80        3.3            2.7           1.6          -0.2           -2.0

                                         Table 8

                  Export Earnings of Developing Countries from the sale
                                    of man nese ore
                                     (M4il.lions of $ US)

                            No           Lowr    I   Medium 1       Medium 2      High
                          sea-bed       sea-bed       sea-bed        sea-bed     sea-bed
                        production    production    production    production  production

    Actual 1969          6E.1

           1974          78.0            78.0           78.0          74.1         74.1
           1975          80.3            78.4           78.4          72.4         72.4
           1976          82.5            76.6           78.6          70.7         70.7
           1977          84.5            80.6           78.7          68.8         65.1
           1978          87.0            82.9           79.1          67.2         59.8
           1979          90.1            85.9           80.2          66.2         55.1
           1980          93.7            89.4           81.6          65.6         54.3

    Average annual
    percentage
    change 1974-8;        3.1              2.3    I      0.8          -2.0   i   -5,0

                                                        00149

                            V., SENSIT3IVITY OF FOSUTS' TO AISOIJIMPTIONS

    34. This section considers the sensitivity or' the. etiinatlee of export earntings
    of developing country proce'dures uf manganese ore to changes, in dertain key
    assumptions. VariatPe)ns in. thrpre aniumpt-ions are considered. the amount of
    dioplac-r~ment of land-basod prcdnxtc,11cn of. manpanese~ ove b6' Ben-bed production; the
    state of the market of develr_-pin~l countries in ]isndbasled output; an h    rate of
    ,growth in -total --ea. -produo~ in th  idu-mlied2untri.es.  To avoid a plethora
    OXf results, the, ef'fects of  ritoni~n a si~von  1o0pir  aeso onLyi   h
    co1'ntext of the mediwum 2 s-bdctae.

    35. Consider, firs~t the vziriatiot) ir the degrec- of dioplacement of aggregate
    land-based production by sen--bed! P-r"(t."tion.  PIE note.d '~rir(para. 19), the
    assumption that. sea-bed produ ctior  w il j be j,:I1arnned an,  otously to Is ndbse
    _~rcducticon led to. only part~al diellectemernt 'nf stupplieb  xm the laltterr '0ource.
             The  ffecs onexpot eaning  cC  he  soetee~itufvbiori  - one in which there
    is no displacement, th~e o-ther in vhich         j.ee;i pouyid-for-pound displacement - are
    presented in tables 9. The rlasults, va.ry, sivrprisirngly little from the central case
    Df partial displacf-men.+ of' land s(~pplieie.  Al though export vol)ume aises when there
    is no displacement and face whei -theire- to pound-fo-r--pound displaceuient, price
    falls more Tapidly in the fornei-~ c~ane than in the latter. The diet effect is that
    the entire range of' var:ia Lion in 1960, fro-m one extreme -:age to the other, is only
    o'f the order of 6 per cent.

    36. Variation of the assumption ab~out the market share, of developing countr~y
    producers would, howoever, result in substantial variation in the estimated nffects
    cin the eiport revenue of developixing? countraies. Variation in the market position of
    these countries is implied bry slue~rnative assumptions regarding the delivery
    location of sea-bed production. If', for example, it is assumed that all sea-bed
    production over the period arises from Japanelse owined mining facilities and is
    utlilized in Japan, then land-based production in developed market i-c~onomies
    (Australia and South Africa) will be principally af._,ted  and developing countries
    will gain in market share.  If, on tle other hand, r 11 sea-bed production is
    conducted by United Scatea firms find ir, Pllocated to the United States market,
    then developing country produces (Gf-.bon, Brazil) will be principally affected,
    and lose market share, Since both)U they United States and Japan are A-eading
    developers of ocean-mining sRyaitteo, anJ ajnce aeveral. offher-nations are actively
    engaged In research too, either assumpiqtion is extreme.  Nevertheleos, they are
    interesting assumptions in that tf_)get1-,r they delimrit the possibilities.  The
    effecte, of both on bho mangane)sec ore- smport earning,- :f developing. countries are
    presented in table 10, As the table reve91-9, ini both cases the- export earnings
    of the developing countrie   ife  con,,Aderably from th;,. central case in which
    the burden of displacement cf st~ic  from traditional sourtces is shared equally
    by the developed market eocnornies and Ioth  developing coauntries.  The difference-
    -in results solely depends cii .,hic~h pniLwp 'liprs the 1-11rderi of displacement; prices
    are the same in Either case?,  In IK8,the -reduction In the export earnings of
    the developing cct1r nE i ni the    (~d~  :f 17 pe-r cent reiiative bo. the base
    case, if' these            ovj~riccar the i'`Q.l buvdcen of dirplaoement.  In the same year.,
    the increase in t.'-Vir sarnings is abo?,Vc -:per cent relative to the base case if
    t11he devr-loped Marl". ; ~z~',bv I                bdn      en in the latter cas,,
    of course, there is a reduc~Lc~n Df albout 0 posr cent in the developing countries'
    export earni-ngs, -it, compripf1;or vit~h thep sit~~Ption in which there is no sea-bed
       itp  at a'-.I bea~~n                 f -    A-  t ~            ~
    production is supplanted.

                                                            00150

    37.  Similarly, the export earnings of developing country producers of manganese
    ore are seriously affected by variations in real growth rates in the economies of
    the principal consumers of such ore. I2/ Two alternative situations are considered:
    one in which growth is reduced over the whole period to one-half of the historical
    growth rate; and a second in which no growth occurs from 1973 to 1974, one-half
    the historical rate from 1974 to 1975, and the full historical rate from 1975 to
    1980. Results appear in table 11. The temporary reduction in growth would cause
    only a moderate decline in export earnings below the base case - about 4 per cent
    in 1980. The sustained reduction in growth, however, would result in a drop in
    export earnings of about 17 per cent in that year.

         1/ In this analysis, changes in real growth rates of such consumers are
    represented by changes in growth rates of ferroalloy and steel production by
    those countries.

                                                      00151

                                                               Table 9

                               Export earnings of developing countries from the sale of manganese ore
                           under alternative assumptions regarding displacement of land-based productiorn

                              No displacement             Partial displacement-      /  Ton-for-ton displacement
                        Export     Export  Export      Export     Export  Export      Export     Export  Export
                        earnings   orice   volume      earnings   price   volume      earnings   price   volume
                        (millions  ($ US/  (millions  (millions  ($ US/  (millions  (millions  (U$ US/  (millions
                        of $ US)   metric  of metric !of $ US)   metric  of metric  of $ US)   metric  of metric
                                   ton)    tons)                 ton)    tons)                   ton)    tons)

                  1974    75.60    18.50       4.08       74.10   18.50       4.00      73.50'  18.50       3.97
                  1975    75.10    18.10       4.14       72.40   18.20       3.98      71.50    18.20      3.92
                  1976    74.10    17.70       4.20       70.70   17.90       3.95      69.40    i8.00      3.86
                  1977    72.60    17.10       4.24       68.80   17.60       3.92      67.30    17.70      3.80
                  1978    71.00    16.50       4.30       67.20   17.30       3.89      65.70    17.50      3.74
                  1979    69.60    15.90       4.38       66.20   17.00       3.89      64.70    17.40      3.72
                  1980    68.10    15.20       4.48       65.60   16.80       3.91      64.20    17.30      3.70
                                                                                    I

    D   Average annual
        percentage
       change 1974-80 I  -1.8       -3.3       1.5        -2.0    -1.6        -0o4  !  -2.3       -1.1       -1.2

       a/ Medium 2 sea-bed case

       b/   Base case assumption

       Note: In the absence of sea-bed production, export earnings of developing country producers in 1980 would
             be approximately $ US 93.7 million.

                                                 Table 10

               Export earnings of developing countries from the sale of manganese ore under    */
         alternative assumptions regarding developing countries' share of land-based productionr

                            Sea-bed impact                                          Sea-bed impact
                          borne by developed       Sea-bed impact shared  borne by developing
                           market economies.                                           countries

                       Export   Export  Export    Export   Export  Export    Export   Export  Export
                       earning- price   volume    earnings price   volume    earnings price   volume
                      (millions ($US/  (millions (millions ($US/  (millions (millions ($US/  (millions
                       of $TJS)  metric of metric  of $US)  metric of metric  of $TJS) - metric o;f metric
                                 ton)    tons)               ton)    tons)               ton)    tons)

                1974     77.4    18.5      4.18      74.1    18.5      4.00     71.4     18.5      3.86
                1975     79.0    18.2      4.34      72.4    18.2      3.98     67.2     18i.2     3.69
                1976     80.3    17.9      4.49      70.7    17.9      3.95     62.8     17.9      3.51
                1977     81.2    17.6      4.63      68.8    17.6      3.92     58.6     17.6      3.34
                1978     82.6    17.3      4.78      67.2    17.3      3.89     54.7     17.3      3.17
                1979     87.3    17.0      4.95      66.2    17.0      3.89     51.4     17.0      3.02
                1980     86.5    16.8      5.16      65.6    16.8      3.91     48.5     16.8      2.89

    Average annual
    percentage change
    1974-80                1.9    -1.6     3-1 -2i0 -1.6    -0.4                 -6       -.6

    a/ Medium 2 sea-bed case.
    _/ Base case assumption
    Note: In the absence of sea-bed production, export earnings of the developing country producers
           in 1980 would be approximately $US 93.7 million.

                                                         Table 11

                            Ex)ort earnings of devcloping countries from the sfale )f manganese
                                ore under alternative assumptions regarding growth rates*a/

                                 Impulse reduction       Continuation of histDrical    Sustained reduction
                                     of growth                   growth /                     of growth

                              Export   Export  Export    Export   Export  Export    Export   Export  Export
                              earnings price   volume    earnings price   volume    eLrnings price   volume
                             (million;  ($TJ/  (millions (millions ($UJS/  (millions (mlllions ($US/  (millions
                              of   S) mtric of metric  of $US) metric  of ri  of  metric   U metric  ol -US   mtric of metric
                                        tDn)    tons).              ton)    tons)'               torl)    tons)

                       974t    71.3    18.5       3.35  74.1    18.5           4.00      71.3    18. 5  3.85
                       1975     68.4    18.2      3.76       72.4    18.2      3.98.    68.4    18.2        3.76'
                       1.976    66.8    17.8      3.75       70.7    17.9      3.95.     65.3    17.8       3.66'
                       1977     65.2    17.5      3.73       68.8    176       3.92.    6?.0    17-5        3.55
                       1978     63.9    17.2      3.72       67.2    17.3      3-.89     59.0    17.1       3.44
                       1979     63.1    16.9      3.74       66.2    17.0      3.89      56.4.   16.8    3-35'
                       1980     62.8    16.6      3.78       65.6    16.8     3.91       54.2  16.5         3.28

           Average annual
           per cent change                 i.
           1)74-80               -2.1    -1.8    -0.3        -2.0    -1.6    -0.4         -4.5    -1.9    -2.6

    O_    *a/ MIedium 2 sea-bed case.
    Can    b/ Base case assumption.   Changes. in growth rates in the major developed countries are
              represented by changes in ferroalloy arid steel production.
           Note: In the absence of sea-bed production, export earnings of developing country producers in 1980
                  would be approximately $93.7 million.

                                                                       Distr.
                                                                       GENERAL    ,
                                                                       TD/B/483/Add. 1
                                                                       23 April 1974
    United Nations Conference on Trade and Development                   Original:  ENGLISH

     TRADE AND DEVELOPMENT BOARD
     Fourteenth session
     Geneva, 20 August 1974
     Item 4 of the provisional agenda

                     AN ECONOMETRIC MODEL OF THE MANGANESE ORE INDUSTRY-'

                                             Contents

                                                                              Parara hs
                    Introduction                                                  1-  4
                I.  Consumption                                                   5 - 11
               II.  Production                                                   12- 22
              III.  Price                                                        23- 26
               IV.  The Complete Model                                           27 - 28
                V.  Verification of the Estimated Structure                      29 - 31

                    ANNEXES

                I. A note on data employed
               II. A note on statistical assumptions

     _/   TThis model forms the basis for the analysis given in document TD/B/483,
          entitled "The effects of production of manganese from the sea-bed, with
          particular reference to effects on developing country producers of
          manganese ore".

     CE.74-4444C

                                                        00155

                                          INTRODUCTION

    1.,  This paper Rdscribes an econometric model of the manganese ore industry.  The
    model was developed in order to explore the implications of the exploitation of sea-bed
    mljaznanese nodules for developing country producers of manganese ore. An attempt has
    also been made to keep the mathematical system as simple and flexible as possible -
    consistent with the needs of realism - in order to make the meaning of the model
    intuitively clear; and in order to facilitate the application of the model to other
    problems confronting the manganese ore industry.

    2. The model consists of seven equations in seven jointly dependent variables -
    rcnsumption in the eleven leading developed market economy consumers, consumption in
    -he remaining devreloped market economies and in the developing countries, aggregate
    consumpuicn, production, price, commercial stock change and commercial stock level. _/
    All va:iables in the model are annual rates.  All quantities are aggregates over the
    developed Im.arket economies and developing countries.  The quantities refer to gross
    weight of ore.  Although a model containing quantity variables defined in terms of
    weigh!t of rntal content would also have been of interest, it was not possible to
    develon such a model owirng to data limitations.  Coefficients in all equations were
    estimatcod by ordinary least squares (OLS) over the 18-year sample period 1953-1970.

    3.   Cert;in limitations of the model should be noted.  For example, the model deals
    with metallurgical-grade ore only and does not cover chemical-grade, battery-grade,
    or ferrlufinous ores.  However, this restriction is less serious than it may appear,
    since consumption of metallurgical-grade ore represents at least 90 per cent of total
    consLmpticn of all types.  Also, because of data limitations, the production and
    ccsrsn+-tiorE of manganese ore within the socialist countries have been excluded from
     Lc pvser  ' analvsis.  Since, however, the primary interest is in the manganese ore
    :-ustri4s ot dcveloping countries, this limitation is also not too serious.  Account
    ;.?.,  .wveve:. been taken of the flow of (net) exports from the East European socialist
    ^o~;r.trze to WVestern Europe; which is the point at which manganese activities within
        -) c.'i'lit countries impinge upon those in the developing countries.

    ;.�.  TIr each equation, the following statistics are provided:  R2  and t values (the
    Pe:-ter cpper?  unr'er the appropriate coefficient estimates).  All R  are statistically
    ji-.niricant and. in fact, very high.  All coefficient estimates are statistically
    rignificant at the ten per cent level, except the coefficient for United States
    CD'ver:ue-  t stock change in -the price equation.

         i/   The' figures for commercial stock levels used in this addendum have been
    alc.-lated on the basis of the (algebraic) sum of commercial stock changes since
    the enc of 3.950 (see para. 35).

                                                             00156

    5.   It is estimated that approximately 90 per cent of total world consumption of
    manganese ore is in various metallurgical uses. The remaining quantity is consumed in
    the manufacture of chemicals (hydroquinine, potassium permanganate, etc.) or dry-cell
    batteries. In the same way that metallurgical use dominates over-all consumption of
    manganese ore, iron and steel industry use dominates metallurgical consumption.
    Roughly 90 per cent of the combined total usage of the European Economic Community and
    Japan occurs in iron and steel production alone, and about 93 per cent of United States
    consumption stems from that industry. Counteracting the effects of sulphur by
    increasing the malleability of crude steel is the single most important application of
    manganese. This is an essential function in crude steel production and no other metal
    can compete with manganese on a cost basis in this application. As a consequence, all
    crude steel contains manganese as a result of standard steel production procedures.
    ioreover, in addition to its desulphurizing properties, manganese has useful cleansing
    and deoxidizing characteristics in raw steel. Most manganese consumed for this purpose
    is used in the form of one of the ferroalloys - ferromanganese, silicomanganese and
    spiegeleisen. Of these, ferromanganese is by far the most important, comprising
    about 90 per cent of the total in the United States in 1970 and similar proportions in
    other major steel producing countries. In addition to its use as a desulphurizing
    additive in crude steel, manganese is also utilized as an alloying element in a number
    of special purpose steels.

    6.   Econometric investigation of aggregate annual consumption of manganese ore is
    subject to the availability of national statistics on consumption. Such statistics
    are available for the 11 leading steel producers in the developed market economies,
    which are estimated to account for between 85 and 90 per cent of annual manganese ore
    consumption outside the socialist countries in recent years.

    7.   Consumption patterns in each of the major consumers were examined separately.
    On the basis of these investigations, certain general conclusions can be drawn:

         (a) The price of manganese ore has no perceptible effect on the consumption
         of manganese. For a few countries, however, price rises in ore may induce
         some small substitution of ferroalloy imports for ore imports; 2/

         (b) In spite of the fact that virtually all ferroalloy production is used
         in making steel, both ferroalloy production and steel production are
         independently significant in explaining manganese ore consumption. This
         is explained by the fact that in most countries significant quantities of
         ore are introduced directly into the production of pig iron, without passing
         through the ferroalloy stage;  /

         2/   The price elasticities were insignificant in most cases, Germany and the
    United Kingdom being exceptions.  Although, even in these cases, consumption is
    inelastic with respect to price, the magnitude of the elasticities were surprisingly
    high. Both countries are importers of ferruginous manganese ore and ferroalloys9 and
    it is possible that there has been substition of these for manganese ore when the price
    of ore has been particularly high.

         Z/   Elasticities of consumption with respect to -ferroalloy production were
    uniformly significant, with a range roughly between 0.' and 1.5. Elasticities with
    respect to steel productlon showed �greater variability with the statistically
    significant values ranging betwetel about 0.2 and about 1.0.
                                                     . 00157

         (c)  It cannot '-, m.intained on the basis of the available data that the
         newer steel-makling processes (electric-furnace and oxygen processes) differ
         from the bpen-hearth process in terms of manganese ore consumption per unit
         of steel produced.  This does not mean, of course, that the newer processes
         do not diminish in some degree the demand for ore;  it means rather that the
         effect attributable to the particular steel-making process used is so small
         as to be obliterated (in the data) by the effects of the total volume of steel
         and ferroalloy  produced.

    G,   Subsequent to the individual country studies, an aggregate consumption function for
    the 11 nmajor consumers 4/  was generated.  The best specification, with estimated
    coefficients, is the following:

         C/MAJ = -.375.66 + 1.5052 OFMA'J + 0.00576 OS/IIAJ + U(1)                  (1)
                           6.24             2.53
                                                            R2 = 0.99

    w;le-.0e C/MAJ is consumption of msnganese ore by major consumars, and OF/MAJ and OS/(qAJ
    are output of ferroalloys and output of crude steel, respectively, by the same
    counlries.  The 1ariablo U(1l) represents a random element in the equationa.

    9.  Determiration of the level of consumption of' manganese ore by the leading
    consucers then. us quite a zimple process, owing ;!; the fact that the overwhelming share
    of such ore is used in a sirgle application without signlficant alternative uses over a
    wide rais.e of prices.  Further, since t;he cost of the manganese ore cornumed is such a
    small fraction of the total cost of prc.ucin_   given quantity of steel, and since there
    .re  ro gccd substitutes for such ore at compa-r-able pri,eso, the price-glasticity of
    deaendei  or -.-nga'-se ore is virtually ze o. r/

    10.  Residual consumption outsicde tee m:ajor consumi:,� areas is specified as a time
    trend;

         C 'TH = (3IA,.oW(l lOo025tU(2)                                             (2)
                          22.59
                                                            R  = 0.98

    :     Ci-e0e /'TH is' consumption of marng-inese o0r6 in other o euntries, t is the time trend
    '-,ri�bie, and U(2) is a random elempent.  Actual data on ferroalloy production outside
    the il m;ajor coisming netioni wer3 not available, and this rrecluded the use of the
     n' cification employed in equation (i).  The exoonential trend adopted implies a

              '   Rlgium, Canrada, Federa' Republic of Crrmany, Italy, Lu-,-mbourg, Netherlandu
     -.-len, United States of America.
          / Tllis fact has policy� implications since i.t suggests the possibility of
    c.ntll-oling price by a policy o,: supply restraint.

                                                            00158

    constant percentage change over time. This type of trend fits the data for C/OTH
    better than alternative trend formulations which were tested. Considering the brevity
    of the projection period (1974-1980), the extrapolation of this trend over the period
    does not seem unrealistic. Furthermore, the estimated rate of change over time of the
    consumption of manganese ore is virtually equal to the forecast rate of growth of steel
    production outside the 11 major consumers. The fact that there is very little variation
    in the ratio of manganese ore consumed to steel produced provides an argument for the
    extrapolation of the estimated trend in consumption over the projection period.

    11. Aggregate consumption in all the developed market economies and the developing
    countries is as follows:

         C/AGG. =C/MAJ + C/OTH                                                     (3)
             wher C/AO  istheaggrgateconumpton o th.  .                      .
    where C/AqG is the Agregate consumption of the whole area.

                                        II. PRODUCTION

    12.  Forthepurpose of offering an explanation of the determination of the level of
    annual production of manganese ore, annual production can conveniently be subdivided
    into two components. These are a basic level of production, which is taken as the
    productive capacity of the industry, K/LTD, 6/ and a variation of actual production
    about that basic level, O/LND-K/Ln.   The following identity holds:

                               O/Li'D - K/LCD + (O/LND - /     -

    13. Examination of data on annual product-ion of manganese ore and on annual price of
    such ore suggests a systematic relationship between annual output and annual price
    lagged several periods.   Such a relationship can be rationalized in terms of the
    effect of past prices on current productive capacity and the presence of the latter
    as an element in current outrut.   The idea that current productive capacity in en
    industry depends on past prices for the goods of that industry is a familiar one and
    seems to need no particular justification.   The following relation is therefore
    assumed:

                                   K/LmND = H/        1P/AVR.

    That is, current annual productive capacity in the manganese ore industry is taken as
    depending on a weighted average of several lagged annual prices: P/AVR. _/

    14. The variation of actual production from capacity production depends both on cost
    factors and on demand factors.   For the purposes of this analysis, however, the cost
    aspect is ignored since published cost data do not exist.   Moreover, in a period as
    short as one year, changes in the prices of individual inputs or in productivity do
    not seem very important as determinants of changes in production, at least, not in
    comparison with changes in the relatively volatile aspect of demand, which is so
    sensitive to the business cycle.

       6The term "productive capacity" is not used in the sense of the maximum output
    which it is physically possible to produce.   For a particular firm (given the
    production function and prices of inputs), a given capital stock implies an output
    level which minimizes short-rim average cost.   This output is defined as the
    productive capacity of the individual firm and the sum of the firms' capacities as the
    productive capacity of the industry.

      /The choice of notation, O/IM  an-d K/LIU,, is to draw attention to the distinction
    between land-based industry (LND suffix) and ocean mining operations.   This
    distinction is important in the application of the model to the sea-bed question
    (see addendum, TD//483//Add.l).

      / It seems that current profitability is a significant factor in shaping a firmts
    expectations as to future profitability, and hence in determining its investment policy
    and future levels of productive capacity.   But, if future capacity depends on current
    profitability, then it dependsr onr cost variables as well as revenue variables (such
    as product price).   Although this in clear in theory, the inclusion of cost variables
    in the equation determining -,roductive capacity in the manganese ore industry is
    impossible because of a lack of data on the pric-e, of inputs and absence ()f information
    about the production function for this commodity.

                                                            00160

     15. In conventional theories of how to determine the 2evel of production of an
     economic good (or alternatively, the variation of current production from a given
     capacity), considerable emphasis is accorded to contemporaneous prices as a determining
     factor.   This is-true of standard oligopoly theories, as well as of the classical
     competitive theory of the firm.   The data on annual production of manganese ore and
     on the contemporaneous annual price of such ore, however, fail to reveal any
     systematic relationship between these two variables. 2/ On reflection, the absence of
     such a relationship does not seem particularly surprising.   The intuitive notion that
     current output depends on current price is based upon the premise that firms maximize
    profits over a given period.   Yet, the idea that firms in this industry plan their
    year's production primarily having regard to considerations of profit maximization
     during that particular year seems dubious. The planning horizons of large firms
    probably extend over several years, and a given year's production is made to conform
    to that longer run plan.   The output in a given year, which, in conjunction with the
    planned outputs for the other years of the planning period, maximizes profits over
    that longer run, may or may not maximize profits in any given year.   Consequently,
    the problem is to find an explanation of the annual variation of production around
    capacity which does not rely on contemporaneous annual price.

    16. The approach adopted here is that annual variations of actual production from
    capacity production can be related directly to annual consumption.   The relationship
    between consumption and production as usually envisaged is depicted in diagram l,a
    below, which indicates that current demand, i.e. current consumption, influences
    current production only through the intermediary of price (solid lines below). lo/
    The view adopted here is that the situation in the industry is as illustrated in
    diagram l,b, namely that consumption influences production directly, without price
    intervening.   This is not to dispute the idea that in the long run production depends
    on consumption through price.   It is simply a recognition of the fact that, in a
    period as short as a year, price has but little influence on production.

                                           Diagram 1

                                      eit          .C.lt

                                      P                 I

                                      olt<
                                           It/-  i I t
                                      OJ,.-

                                      1, a             l,b
    17.  It is possible to conceive of at least two mechanisms whereby, in this particular
    industry, production varies directly with consumption over the short run: an extra-
    market mechanism and an intra-market mechanism.

        2/ A number of specific hypotheses, with and without other possible explanatory
    variables, were examined.   Formulations included averages of prices, finite sums
    (polynomial lags and Almon lags), distributed lags, changes in output related to
    contemporaneous changes in price, etc.   Both linear and non-linear forms were tried
    but none produced a workable relationship between annual production and contemporaneous
    annual price.

        l_/ As noted in Section I, the link between P1 and C1 is virtually non-existent.
                                                              AA N t

    18. The extra-market mechanism reflects the institutional context of the manganese
    ore industry.   Much of the annual output of manganese ore is produced under long-term
    contracts or under subsidiary-parent company relationships.   Under these circumstances,
    changes in consumption do not necessarily result in changes in market demand and
    market price, at least at some ranges of consumption levels.   Deliveries under
    existing contracts are simply expanded or contracted under a contractual price which
    is not necessarily precisely equal to the current market price; or alternatively
    transfers from subsidiary to parent are entered at a bookkeeping price which also does
    not necessarily coincide with the current market price.   This being so, the effect
    of annual consumption on contemporaneous annual market price is weak, and output varies
    directly in tune with consumption, rather than through the intervention Qf market
    prices.

    19. The intra-market mechanism reflects the oligopolistic character of the manganese
    ore industry.   Given the price interdependency which exists among major firms in
    this industry, it seems likely that a typical firm envisages the demand curve which
    it faces as being more elastic above the currently existing price than below that
    price.   In other words, it probably believes that, if it raised its price
    substantially above the existing level, its competitors would not follow suit and
    it would lose some of its share of the market.,or conversely, that if it lowered its
    price below the existing level, its competitors would match the reduction and it
    would not improve its share of the market.   It probably believes that the demand
    curve which it faces is kinked at the current price, and is more elastic above the
    current price than below it.   This view of the individual firm's demand curve is
    illustrated in diagram 2 below.   The demand curve facing the firm (as perceived
    by the oligopolist) is the kinked curve D and the corresponding marginal revenue curve
    is MR.   The short-run average cost curve is SAC and the marginal cost curve is MC.

                                          Diagram 2

                       ($/Mt)
                                                          MO

                               SAC
                                                           D

                                                              Output (mt/YR.)

                                                              00162

     20. If consumption changes, and with it market demand, then, after a period of
     demand shifts, price will not change but current production will expand or contract
    as a direct response to the demand shift.   As long as the consumption shift produces
     intersections of the IR and 11C curves within the broken section of the former (as
    perceived by the firm), price will not change but production will.   Both of these
    mechanisms show a direct link between consumption and production, and neither involves
    an intermediate link with price.

    21. There are various ways in which it is possible to show empirically that
    variations around capacity depend directly on consumption.   Here, it is assumed
    that the amount by which actual production exceeds or falls short of capacity
    production depends on the amount by which consumption exceeds or falls short of
    capacity.   More specifically:

                        [O/LND - K/1,] = ?  [C/AG - K/LDT] + U(4)

    That is, the variation of actual production from capacity is proportional to the
    amount by which consumption exceeds (falls short of) capacity (plus a random factor,
    U(4)).

    22. The hypotheses on productive capacity and on the variation of actual
    production from capacity can now be amalgamated into a single hypothesis on the
    determination of actual production of manganese ore. The equations,

                                    IK/LN = /~o + 6   P/AVR

                         [o/Ln-  - K/m] =    cAGG -            LND] + u(4)

    when combined, and after estimation of coefficients, yield:

         O/LND = 982.79 + 54.111 P/AVR + 0.73075 c/AGG + U(4)                           (4)
                           2.30         11.75
                                                        2
                                                       R = 0.96
    where P/AVR is to be interpreted as a simple three-year average of prices beginning
    at price lagged eight years. ll/ Equation (4) represents the production sector
    of 'he model.

        l/All three-year weighted averages of lagged prices from a (centred) lag of two
    years to a (centred) lag of ten years were investigated.   The lag chosen was picked
    on a basis of sign appropriateness, R2, t value, etc .

                                                      00163

                                        III. PRICE

    23.  The general structure of the market for manganese ore is one of bilateral
    oligopoly, with about eight large producers trading with a handful of large steel
    companies and minerals trading firms.  There are second tiers of considerably
    smaller firms on both the supply and the demand sides, but the market is dominated
    by, and prices determined by, the interaction of the large firms. The
    United States Government has been a participant in the manganese ore market as it
    has accumulated, and more recently partially liquidated, a strategic reserve of
    manganese ore. In addition, the socialist countries, and particularly the USSR,
    play a role in the market. There is a flow of net exports, mainly from the USSR
    to Western Europe and the influence of this flow on prices was investigated.

    24. Since, for the most part, manganese ore is mined outside the main consuming
    countries, a large portion of trade in such ore is international in character.
    In 1970, nearly 50 per cent of all ore produced entered international trade.
    The broad pattern of trade is composed of a main flow from developing countries
    to developed market economies, and of lesser flows from surplus developed market-
    economy countries (South Africa and Australia) and the USSR to deficit developed
    market-economy countries.

    25. As noted above, the structure of the market for manganese ore is one of
    bilateral oligopoly. Nevertheless, the standard oligopoly models are of little use
    as explanations of the annual price of manganese ore. A basic obstacle to the
    utilization of these theories in the present context is that they all posit market
    Clearing over the period of analysis.   /  It would be necessary to assume that
    annual quantity data represented observations on equilibrium quantities, that is,
    that the market was in equilibrium, year after year. However, it would be
    unrealistic to assume that the market for manganese ore clears within the same
    year that a change in some exogenous variable occurs. Given an initial equilibrium
    and a perturbation of some variable in the system, a number of years would be
    required to bring price, quantity demanded and quantity supplied to new equilibrium
    values, even in the absence of further disturbances. In the interim, the quantity
    exchanged data would be observations on disequilibrium quantities in contradiction
    to the requirements of the models. As in the case Of the production sector, the
    difficulty lies in the brevity of the analytical period - one year - relative to
    the natural inertia of the industry. L/ For these reasons, the usual oligopoly
    models of price determination cannot be used in the present analysis.

        L2/ An additional difficulty is that these models explain output in terms
    of contemporaneous price. As noted in para. 15 above, however, annual production
    of manganese ore does not seem to be related to contemporaneous annual price.
        l/ Such considerations are reinforced by the fact that price, as
    statistically calculated, reflects the existence of tied sales and long-term
    contracts and could be expected to be relatively slow-moving.

                                                         00164

    26. Instead, the determination of manganese ore price in a period as short as
    one year is taken as essentially an inventory phenomenon, relating price to the
    level of commercial inventories and to United States Government stock level
    changes.  (A dummy variable is also included to account for disruption of the
    market in 1957 f llowing the initial closure of the Suez Canal.) The estimated
    result is:

    P = 27.747 + 0.00184 A  I/USG - 0.00023 I/COM (t-l) + 10.735 DDI + U (5).   (5)
                0.92               -2.04                    6.34

                                                                2
                                                              R2 = 0.88

    where P is the price of manganese ore, t  I/USG is United States Government
    stock change, I/COM(t-l) is commercial inventories at the end of preceding year,
    DDI is the dummy variable, and U(5) is a random variable. No significant role
    in price determination was found for (net) imports from the socialist countries.

                                                        00165

                                  IV.  THE COMPLETE MODEL

    27. The model is closed with two identities relating to inventories, viz:

        6I/COM - O/LND - C/AGG + M/SOC - 6. I/USG                                   (6)

           I/CoM - I/COlq(t-l) + 6 I/COM                                            (7)

    where 6nI/COM is change in commercial stocks, and M/SOC is net imports from the
    socialist countries.

    28.   The causation embodied in the model can be summarized in the following
    terms (see diagram 3 below). Aggregate consumption is determined, through its
    components, by steel production and ferroalloy production in the major industrial
    countries and by a trend element. Aggregate production is determined by aggregate
    consumption and (through productive capacity) by an average of lagged prices. The
    change in commercial stocks is determincd by aggregate production, aggregate
    consumption, net imports from the socialist countries, and United States Government
    stock change. Price is determined by lagged commercial inventory levels and by
    United States Government stock change.

                                        Diagram 3

    OF/tAJ   [r  OS/M/AJ

           c/1.1J      Fc/oTH

             ..... C/AGG

                                     9~" ~1                         4.     M/soc

            ,-4 O/LND
              �1   -  > P                -   I/COM  ------ AI/USG

                                                         OO1__i

                          V.  VERIFICATION OF THE ESTIMATED STRUCTURE

    29. The estimated structure consisting of equations (1) to (7), was used as a
    unit to calculate values for the seven jointly dependent variables, year-by-year
    over the period 1953-70.   Since actual data for each variable for each year are
    available, the errors of the calculated figures can be determined, as well as the
    estimated capacity of the structure to reproduce the values of the variables over
    the past.   This will provide a basis for forming a tentative judgment of the model's
    power to predict future values of the variables. The mean absolute per cent errors
    (MNAPE) over the period for the calculated values of the variables are as follows:

                         Variable                            MNPE

                                                             1.98

                          C/OTH                               7.57

                          C/AGG                               1.73

                          O/TU.D                               2.19

                          P                                    7.04

                         L\ I/COM                             8.99

                          I/COm                               0.67

         These values are very low and provide some assurance of the model's predictive
    capacity, barring drastic structural changes in the manganese ore industry.

    30. Further confirmation of the estimated structure can be obtained by considering
    its testable implications.   The following equation is implied by the structure of
    the production hypothesis:

                          I/LND = 3650.1 + 201.15 P/AV

    Although no statistics on productive capacity outside the socialist countries exist
    for this industry, some indirect corroboration of the above equation can be found.
    If the figures produced by the equation are realistic, they should mirror the major
    events known to have affected capacity in the industry.   It is known, for example,
    that the productive capacity of the manganese ore industry rose sharply with the
    opening up of the mines in Gabon and the efficient new mines in Australia; and it is
    also known that capacity has been diminished by the closure of mines in several of
    the traditional manganese ore producers in recent years.   The figures implied by the
    equation should reflect these developments.   Table 1 below gives the capacity
    figures implied by this equation.   The expansion of capacity owing to the opening of
    the Cabonese mines in the early 1960s can be seen in the sharp rise in the capacity
    figures for 1961 and 1962.   The opening of new mines in Australia shows up in the
    higher capacity figures for 1965 and 1966.   The absence of developments of the order
    of magnitude of the Gabonese and Australian ventures, coupled with some shutdogns of
    miines in traditional producers, are reflected in the levelling off and slight reduction
    of productive capacity in the last few years shown.  lfhile this does not constitute a
    direct verification of the capacity figures, it does reveal that the figures seem to
    reflect the major developments affecting capacity.   The relationship of capacity to
    actual output implied in table 1 is consistent, too, with the course of prices during
    the 1960s.                                          .   [t1 67

    31. Another equation is implied by this production hypothesis, namely,

                            [O/LN - K/I'D =- 0.73075 [CC/AGG - K/LNID]

    First, it can be noted that the estimate of the constant of proportionality is
    positive as the hypothesis demands.   Further, in every year of the sample period
    in which capacity exceeds consumption, capacity also exceeds actual output.   This
    too is in line with the hypothesis.

                                            Table 1

                   Consumption, output, and implied productive caDacity in the
                                    manganese ore industry
                           (Thousands of metric tons, gross weight)

                                                         Implied Productive
                             Consumption     Output      Implied productive
                                                              capacity

                    1960        5140           6070              8020

                    1961        5220           6200              8740

                    1962        5480           6590              9070

                    1963        5390           6200              9000

                    1964        6410           6960              8950

                    1965        7320           7820              9660

                    1966        6980           8320             10700

                    1967        7360           8000             10900

                    1968        7900           8410             10100

                    1969        8290           8880              9410

                    1970        9430           9290              9210                                  C

                                                              00168

                                           Annex I,

                                   A NOTE ON DATA EMPLOYED

         Most of the numerical data employed in estimating the coefficients of equations
    and in verifying the estimated structure were extracted from published sources.  For
    four variables, however, it was necessary to synthesize data since published data
    were not available at all or a sufficiently long homogenous suries was not available.
    These variables are: P, C/OTH, I/COM andLI/USG. This note outlines the process
    employed to generate figures for each of these.

         There is only one time series of data on market prices of manganese ore which
    is of considerable duration and ready availability. This is the series for
    48-50 per cent manganese content ore published in the Metal Bulletin. Unfortunately,
    the series is for ore c.i.f. New York. Since, however, shipping costs represent
    perhaps as much as one-third of this price on the average, it is very difficult to
    differentiate between fluctuations in the series attributable to changes in freight
    rates and those that are attributable to changes in market prices f.o.b. Further,
    attempts to adjust the series for changes in freight rates were not successful.
    Clearly, however, since the ultimate interest is in the export earnings of developing
    country producers of manganese ore, the price concept required is that of an f o.b,
    price. As an alternative to the published price, a unit export value may be used.
    Since total export values reflect the inclusion of values of exports of ore sold under
    long-term contracts or under parent company-subsidiary arrangements, the derived unit
    export value for a period will not exactly equal the average open market spot price
    for the same ore during the same period. However, this is an advantage rather than
    a disadvantage.  Since long-term contracts and parent company-subsidiary relationships
    will continue to exist in the future, an average unit export value - which reflects
    these factors - should provide a better indicator of the unit value of ore accruing
    to developing country producers than an open market spot price. There is, however,
    a conceptual difficulty in using an average unit export value as an operational
    definition of price. The problem is that exports of metallurgical-grade,
    chemical-grade, battery-grade and ferruginous ore are included in the statistics
    of manganese"6re exports, while the focus of interest in the present report is on the
    unit export value of metallurgical-grade ore. As a practical matter, however,
    this is not a serious problem, because the quantities of metallurgical-grade ore
    produced and exported are overwhelmingly grea?.ter than the combined quantities of
    chemical, battery and ferruginous ore produced and exported, 1/ indeed, most of
    the latter is improved to metallurgical-grade quality before export. Any small
    distortion which is produced by this amalgamation of disparate ores can be
    corrected by omitting from the aggregate value and aggregate quantity of exports
    the values and quantities of exports of those few countries which produce relatively
    large quantities of chemical, battery, and ferruginous ores, before calculating the
    export unit value for a particular year. The corrected unit value so computed is
    taken as the "price" of (metallurgical grade) manganese ore.

         14/ Although prices of chemical-grade and battery-grade ores exceed that of
    metallurgical-grade ore, the differences are not nearly of such magnitude as to
    offset the quantity advantage of metallurgical ore.

                                                      00169

    A
         Data on C/OTH were formed as follows. There exists a rigid technological
    relationship between crude steel produced and manganese ore consumed. Given crude
     steel production in that portion of the developed market economies and developing
     countries that falls outside the eleven major ore consumers (from published data),
     it is a straightforward task to estimate manganese ore consumption in that area.
     Conceptually, the figures so generated could be distorted if the area outside the
    eleven rajor consumers was an importer of significant quantities of ferroalloys from
     the eleven to use in its steel production. In practice, however, this is not the case.

         The commercial inventory variable, I/COM, is defined as follows. The following
    identity holds:

              I/COM(t) =I/CON(O) + L(t),

    where

                  L(t) --- c--   ,I/tOM(t-~r, )

    That is, inventories at the end of year t are equal to what they were at the end of
    a preceding year (0), plus the algebraic sum of stock changes since that time.
    Now L(t), computed since the end of 1950, is known, though unfortunately, 1950
    year-end stocks are unknown. Operationally I/COM(t)' is defined as follows:

                  I/COM(t)  .L(t).

    The estimation of the coefficient of commercial inventory in the price equation is
    unaffected by the omission of the element I/COM(1950) in the data since the
    I/COM(1950) is amalgamated into the intercept of that equation.

         Data on United States Government stockpile releases (jI/USG) were.also
    synthesized. Figures relating to stockpile operations of the United States
    General Services Administration are published in Stockpile Report to the Congress.
    Data are published in a comparable form, however, only as far back as 1966. Since
    this source did not provide a time series sufficiently long for present purposes,
    the data were synthesized utilizing the following identity:

             I/USG :=- 0/us - c/us - T/Us -  ' i/usoI,,

    where O/US, C/US, T/US, and 4 I/USCOM are United States output, consumption  net
    trade, and commercial stock change of manganese ore, respectively.  All variables
    on the right side of the identity are statistical measurements from the United States
    Bureau of Mines Minerals Yearbook; the variable /' I/USG follows.  The figures thus
    generated differ as to level, but not as to sign, from those published in the official
    stockpile report.

         A listing of the basic data employed, with sources, is given below.

                                                                00170

                                            Table 2

                                A listinx of data employeda/

            C/MAJ     OFAIAJ    OS HAJ    C/OT      )O/:ND       P       I/US G T/COM   M/SOC

    1953   3632.9     1121.4    173180       285.''   5872.9   27 .  1429         8403      162
    1954   3200.1     1661.3    156400       403.9    4379.9    26.7      670     9203      194
    1955   3949.0     2090.0    196000       433.2    5179.1    25.0      423     9917      340
    1956   4520.7      2417.4    220260      500.0    5855.0    27.4      364    10704      317
    1957   4546.3      2482.6    205480      561.8    6464.3    37.5      754    11684      378
    1958   3488.4     1946.2    175360       480.4    5716.6    38.8      711    13090      369
    1959   3651.8     2014.7    194680       585.0    5993.8    30.4      337    14963      453
    1960   4420.0     2421.6    219540       720.8    6067.2    27o0      698    15499      308
    1961   4352.7     2410.8    220350      868.2    6201.9    28.5       713    16079      312
    1962   4482.7      2410.8    218630      995.6    6591,0    26.7      517    17007      332
    1963   4419.3     2335.0    235510       971.9    6204.0    22.7      284    17862      326
    1964   5324.8     2800.0    274420    1084.0    6959.8    21.7        -45    18643      185
    1965   6050.2     3036.3    284500    1271.7    7815.3    22.7    -202    19566         228
    1966   5725.6     2859.2    289660    1254.1    8319.6    24.2   -148    21473          419
    1967   5996.4     3011.2    301910    1362.9    7998.9    23.7    -345    22938         480
    1968   6414.7      3241.3    322780    1485.0    8412,6    21.0   -227    24021         343
    1969   6726.9     3458.6    354530    1561.3    8877.3    18.4    -199    25129         320
    1970   7592.5     3905.4    361700    1837.5    9291.7    18.0    -533    25930         406

    a/   All physical quantities are given in thousands of metric tons of ore (gross
         weight).  The variable "P" is in United States dollars per metric ton.  The
         dummy variable DDl assumes the value one in 1957 and 1958, zero otherwise.
         The trend variable "t" was taken as unity in the first year (1953).

    Source:  Columns 1,2,3 : United States Bureau of Mines, Minerals Yearbook, various
                              issues;  Statistical Office of the European Communities,
                              Siderurie, various issues; for Canada, Japan, Sweden
                              and United Kingdom, national sources.

             Columns 4,J,7,8 : synthesized.

             Column 5 : United States Bureau of Mines, Minerals Yearbook, various issues.

             Column 9 : Various national sources;  OECD, Statistics of Foreign Trade -
                         Trade by Commodities, various issues.

           Since the consistency of OLS estimators rests on the assumption of diagonality
    of EU U, it is worth while considering a statistical test of this assumption. If
    EUtUt is diagonal, then the four disturbances in the behavioural equations are
    contemporaneously uncorrelated, and conversely. It is wished to test:

                H    ei: . = 0           (i, j   1  ..., 4, i /  j)

    against     H  :  ij / O.

                                                          00171

    Since the distribution of r. is very sensitive to (i and N, the sample size,
    it is more convenient to wori with:,

                             +1 r..
                ij   - in
                                  1J
    which is approximately normally distributed with

                                1 + C

                               yij- iij
                                l-  a..

                   -'   J  IN

    The hypotheses above immediately translate into:

                     H  :       = 0

    At the 0.05 significance level, in a two-tail test, the critical value of  .. is 0.88.
    Since the largest sample value of ii  is 0.45, it is possible to accept the Jnull
    hypothesis and assume that the disturbances are contemporaneously uncorrelated.  This
    test must be considered somewhat suspect because the approximation of the normal
    distribution to that of y   is very close only for, say, N X'  30.
                            'Vij                                 x
    Nevertheless, as a practical matter, there is no good alternative to the diagonality
    assumption and OLS estimation. It will be noted that only one equation (number 4)
    permits of estimation by a k-class estimator (e.g., two stage least squares), because
    it is the only one that contains a jointly dependent variable as an explanatory
    variable. Moreover, the requisite computer software for a full system estimation
    was not available.

                                                          00172

                                          Annex II

                               A NOTE ON STATISTICAL ASSUMPTIONS

         A word about the statistical model imposed upon the data may be in order. Let U
    be the vector of disturbances from the four behavioural equations of the model, and
    let X be the vector of eleven predetermined variables which appear in the model. It
    is assumed that for s, t = 1, ..., 18 (18 annual observations, 1953-70):

    (1) EUt = 0

    (2) Ut' is distributed independently of U for all s, t (s#t)
                                            S
    (3) EUtU  is a matrix of finite constants for any t, identical for all t,
           t t
        non-negative definite, and diagonal

    (4) EX U = 0
           t t
         It is well known that, in a simultaneous equations context, the disturbance in
    an equation is usually correlated with any contemporaneous endogenous variable which
    appears in that equation. Under these circumstances, assumption (4) is violated and
    OLS estimators are inconsistent (in the technical statistical sense). It will be
    noted, however, that the present model is only superficially simultaneous, and is,
    in fact, recursive. The latter characteristic, in combination with the diagonality
    specification of assumption (3), renders any contemporaneous endogenous explanatory
    variable in an equation predetermined.5/ Thus assumption (4) is satisfied and the
    OLS estimatores employed are consistent.

        l5/ See Henri Theil, Principles of Econometrics (New York,
    John Wiley and Sons, Inc., 1971), p 460.

                                                       00173

                                                                           DDistr.
                                                                           GE1IERAL
                                                                           TD/B/484
                                                                           28 May 1974
                                                                           ENGLISH
    United Nations Conference on Trade and Development                        Original:  FRENCH

    Trade and Development Board
    Fourteenth session (first part)
    Geneva, 20 August 1974
    Provisional agenda item 4

                       The effects of possible exploitation of the sea-bed
                   on the earnings of. develoing countries from ccpper exports

                                Re eport.by.. the UNCTAD secretariat

          This report is the third in a series of quantitative analyses whose purpose is to
     estimate, in relation to one of the metals under consideration, how any exploitation
     of the sea-bed would be likely to affect the export earnings of the developing
     countries.

          The report has been prepared pursuant to the instructions of the Conference which,
     in its resolution 51 (III), decided that "the question of the economic consequences and
     implications for the economies of the developing countries resulting from the
     exploitation of mineral resources shall be kept constantly under review by -the
     Conference and its subsidiary organs, in particular the Trade and Development Board",
     and invited the Secretary-General of UNCTAD "to continue to study the measures necessary
     to avoid the adverse economic effects which -the exploitation of the sea-bed ... may have
     on the prices of minerals exported primarily by developing countries ...".

          This study is based on a simulation model of the copper market prepared by
     Professor F.G. Adams of the University of Philadelphia.

     GL.74-45348

                                                             00174

                                      CONTENTS

                                                                     Paragraphs

          Summary and conclusions  -

     I    Characteristics and prospects of the copper market                  6  - 17

    II    Effects of exploitation of the sea--bed on the
          copper market                                                      18  - 23

    III    Effects of exploitation of the sea-bed on copper
          exports from developing countries                                  24  - 31

    Except as otherwise indicated, the term "dollars" or the sign o means US dollars.

                                                     00175

                                  Surmnary and conclusions

    1.   The consumption of copper has increased in -the last two decades at an average
    annual rate of 5 per cent, and in the non--socialist world reached an anmnual
    average of 8 million metric tons in the period 1969-1971.

    2.   Mine production over that period totalled about 5 million tons of' copper
    content, correspondinrg to a value of ;1,6,000 million, the difference between mine
    production and consumiption beinc accounted for largely by the use of secondary
    copper.  The share of the developing countries in that output was about 40 per cent.

    3.   The characteristics of the copper market, and in particular the existence of
    two relatively independent sub-markets, were taken into account in an econometric
    model which was used to simulate the behaviour of the market in the event of
    exploitation of the sea-bed.  As in the UNCTAD secretariat's previous reports,
    four assumptions wrere made concerning the intensity of exploitation of the sea-bed.
    On the low assumption 14,100 tons of copper would be extracted from the sea-bed in
    1980, on the mediuml-low assumption 42,500 tons, on the mediun--high assumption
    98,800 tons, and on the high assmnption 141,000 tons.

    4.   By that date, even in the last--mentioned case, the volume of copper
    extracted from the sea-bed would not account for more than 2 per cent of mine
    production, or for more than 1 per cent of consumption in the non--socialist world.
    Again by 1980, according to the results of the quantitative analysis, the effect of
    this production might be summarized as follows, by comparison withl the case of no
    exploitation of the sea--bed. contraction of mine production on land by 0.7 per cent,
    expansion of total mine production (on land and on the sea-bed) by 1.2 per cent,
    and expansion of conswnption by 0.4 per cent in the non-socialist world.  London
    Metal Exchange prices would drop by 2.2 per cent and United States producer prices
    by 1 per cent.  hile export earnings of the developing countries would shrink by
    about  ;200 million, or about 3 per cent of the total.

    5.   For reference purposes, this figure may be compared with the value of the
    copper that would be extracted from the sea-bed on the same assumption - about
    2300 million.  Assuming that the profits of firms engaging in that activity would
    hardly be likely to exceed half their gross receipts, it will be seen that a
    transfer of all or part of those profits to the developing countries would not
    offset the shrinkage of their potential export earnings.

                                                      00176

                  I.  Characteristics and prospects of the copper market

    6.   Any estimate of the effects that exploitation of the sea-bed might have on the
    copper market must obviously be based on an analysis of that market's characteristics
    and a projection of its trends. Part I of the report contains a brief description
    of those characteristics and trends.

    7.   The average annual mine production of copper in the non-socialist world over
    the period 1969-1971 came to about 5 million metric tons of copper content,
    representing in value about $6,000 million. The share of the developing countries
    in that outpuit was about 2 million tons, or some 40 per cent of the total.

    8.   Over the same period the non-socialist world consumed an average of some
    8 million tons of copper annually, the difference between mine output and
    consumption being largely accounted for by the use of secondary copper. The
    development qf the copper market over the last two decades has been characterized
    by an average annual growth in demand of about 5 per cent.

    9.   An important peculiarity of the world copper market is the existence of two
    relatively independent sub-markets: the copper market in the United States and the
    copper market outside the United States. The United States copper market is very
    much a "managed" market in style, and the producer prices, fixed on the basis of
    medium-term targets and for a time controlled by the Government, have in the past
    proved more stable than the prices ruling on the London Metal Exchange. These two
    sub-markets, although relatively independent, are nevertheless interconnected in
    various ways. In the first place, copper price fluctuations on the London Exchange
    have some - though a mitigated - effect on producer prices in the United States.
    Secondly, the volume of United States imports depends in part on the disparity
    between United States producer prices and London Metal Exchange prices. Liastly, the
    price of secondary copper and hence the volume of such copper entering the market
    in the United States can be seen to be closely linked to the London market prices.

    10. While copper has distinctive physical properties of its own, such as high
    electrical and thermal conductivity, it nevertheless competes for certain uses with
    aluminium, which is of lower conductivity but much less expensive. Consequently
    the price of aluminiulm ranks as one of the variables determining the level of
    copper consumption, alongside industrial activity, the volume of investment and,
    of course, the price of copper, which also plays a dominant role in determining
    output.

    11. Fisher and Cootner, in collaboration with Baily, developed a model of the
    copper market which takes into account the various characteristics described above.1/
    Professor F. G. Adams revised this model and brought it up to date for the benefit
    of the participants in a project for building a world economic model: the LINK
    project. At the request of the UNCTAD secretariat, which is one of the
    participants, Professor Adams used his model, which will be published in the
    proceedings of the LIiNK project, to estimate the effects of a possible exploitation
    of the sea-bed on the copper market.  The present document is based on the results
    communicated to the secretariat by Professor Adams.

        /   Fl. m. Fisher and P. H. Cootner, in collaboration with M. N. i3aily:  An
    Econometric Model of the World Copper Industry, Bell Journal of Economic and
    Management Science, Vol.3, No.2, autumn 1972.

                                                          00177

    12.  At whatever rate the sea-bed may be exploited in -the future no projection of
    the copper market can be made without first formulating some assumptions concerning
    the development of the exogenous variables in the model.   These assiurptions are
    set out below.

    13.  The level of economic activity up to 1975 Twas projected through the LIIMC model
    on the basis of the results of an OECD study I/ covering the period 1975-1980.   On
    that basis, the -rowth of economic activity in the industrialized countries may be
    expected to slackien in 1974 and 1975 b-ut should speed up aoain in the second half of
    the decade.

    14.  It is assumed that, in average -nnmual rates over l;lhe entire period 1973-1980,
    the price of aluminium (current value) will rise at the rate of 3.2 per cent and that
    the wholesale price index will incrca-.se at the ra-e of 5 per cent in the Unlted
    States and 3.9 per cent in the United IKingdom.

    15.  On these assumptions and in the ?absence of any exploitation of the sea-bed, -the
    mine production of copper would grow during the period 1973-1980 at an average
    annual rate of 1.8 per cent in the United States, 5.7 per cent in Canada and
    5 per cent in the rest of the non-socialist world, or at an average rate of 4.3
    per cent per annum for the entire non-socialist world.

    16. Throughout that period, the consumption of copper would increase by an average
    of 2.3 per cent per annum in the United States and 4 per cent per annum in the
    non-socialist world as a whole, while United States imports would double (average
    annual growth rate 10.4 per cent); stocks in the United States would diminish by
    4.5 per cent and those of the rest of the non-socialist world by 37.3 per cent.

    17.  Still for the period 1973-19S0, -the average annual rise in the price of copper
    would be 7.5 per cent in current money terms and 3.5 per cent in constant pounds on
    the London Metal Exchange, while United States producer prices would rise at an
    annual average rate of 7.0 per cent in c-trrent dollars and of 2.6 per cent 'in
    constant dollars.

             II.  Effects of exploitation of the sea-bed on the copper market

    18. The effects of possible exploitation of the sea-bed on the copper market and on
    the export earninlgs of the developin5 cc.ntries will depen. on the intensity of
    such exploitation.   That intensity, in its turn, will depend _firs-tly on the
    measures taken by national or international authorities to regulate such
    exploitation, and secondly on the relationship betwreen the costs of exploitation and
    the market prices for the metals concerned:  copper, nickel, coll1.t and possibly man-
    ganese. _/  Although great progress has been made recently in estimating these costs,

         I/ OECD, The growth of olttpu-t, 1560-1980:  retrospect, prospect and problems
    of policy, Paris, 1970.
         2j   The extraction of mnmgmanese would p)robably entail additional expense over
    and above that incurred, first in extracting and transporting the nodules
    themselves, and secondly in processing the nodules to extract nickel, copper and
    cobalt.   Under these condition:, send in view of tine prices of manganese, the
    extraction of that metal mig::ht seem to be barely or not at all profitable.

                                                     00178

    they are still far from exactly knownm and it wras not considered feasible to include
    them as a variable in the model.   Therefore, as in the two previous studies by the
    UNCTAD secretariat on the consequences of exploiting the sea-bed, 1/ one concerning
    the cobalt 4arket and the other concerning the manganese market, a number of
    assumptions were made regarding the intensity and yields of exploitation of the
    sea-bed, in4luding the implicit assumption that such exploitation wouLld be economic
    at the degrees of intensity envisaged.   In other words it was assumed that:

         (i)  Total receipts from the sale of the metals extracted from the nodiules
              would cover the costs involved and would leave a sufficient profit
              margin to encourage industry to engage in such exploitation;

        (ii)  The receipts from the sale of copper at the prices indicated by the
              model would cover the additional costs involved in its production
              (in the case of copper there is hardly any doubt that, if the first
              adsumption is correct, the second is likewise correct).

    As in the previous studies on cobalt and manganese, the assumptions made about the
    intensity aid yields of exploitation of the sea-bed are based on data presented in
    a report by the Secretary-General of the United Nations to the Committee on the
    Peaceful Uses of the Sea-Bed and the Ocean Floor Beyond the Limits of National.
    Jurisdiction. 2    It was assumed that every mining operation on the sea-bed would
    lead to the annual extraction of 1 million tons of dry nodules from which, in
    addition to nickel, cobalt and possibly manganese, 14,100 tons of copper could be
    extracted.

    19.  The various hypothetical programmes for exploitation of 'the sea-bed considered
    in this analysis are the same as those considered in the two studies mentioned
    above concerning cobalt and manganese, and are summarized in the following table.

    20.  These various assumptions look extremely implausible at the present time.
    It is hardly conceivable that commercial exploitation of the sea-bed could attain
    any appreciable level of activity by 1976 or perhaps even by 1978.   Furthelnore
    it would appear that some future mliningr operations on the sea-bed might involve a
    larger quantity of nodules than that postulated  here, perhaps 3 million tons.

         1/   Exploitation of the mineral resources of the sea-bed beyond national
    jurisdiction: issues of international commodity policy; Case study of cobalt
    (TD/B/449/Add.l);

              The effects of production of manganese from the sea-bed, with particular
    reference to effects on developing country producers of manganese ore (TD/B/403);

              An econometric model oi' the :;anganese ore industry (TD/B/4G3/Add.l).

         2/ Possible impact of sea-bed mineral production in the area beyond national
    jurisdiction on world markets, with special reference to the problems of developing
    countries: a preliminary assessment, report by the Secretary-General (A/AC.13C/36).

                                                         00179

                                                              Table I

                     Tn- various assun31;ions made concernin,- the Drogramme for exploitnltjiof of the s,:a-bcd

                 -Ue~. assumption            he1diur--low assumption       I-Aeciumn-iTigh assum-ption        Hig;h assumption

             Number of                     Yurib--r Of     �d1fl           umber of       Prdcin         Number of        Pouto
               op~i~~ns ~   of copper                     of copper  0/ miin                           I   rcn
                  opcrations            ~operations           2/operations  2/cope        operations I/ ofcpe2/

     197A                         00                                                         14.1               1           14.1

     197~5  7.1                                 -2,1    .1                      2            28.2               2            28.2
        i916 ~    11~ 1                       14.                               33                           42-3
                                    14.1        ft~~1       21.1               4-6-4                           5            7.

            978   1            ~~~14.1          262.2                          5       7      0.5              7            c8.7
        1- 9   7     9          141     25.2                                    6            8  6              9.126.9

    198Cvein0   ii        K      14.        3 .              42.3               7            98.7              10           141.0

     ~:/Thousands of metric tons.

    11surcel  United lNations.

     However, snee tho1 futuro  l'evzmins very uIlcertain, it was thougllt desirable to
     continue tb use in the present study the hypotheses adopted for the two previous
     secretariat studies, so that comparisons may be made regarding the imlllications of
     sea-bed exploitation for thle markets of thle various metals concerned.

     '1.  In the case of copper, the effects of such exploitation will depend not only on
     the volume of copper extracted but also on the proportion of' that copper reaching
     each of th$l two pertly independent sub-mar':ets (United States and non-United States)
     whlich ,.rere mentioned at the begriimin, of tniis note.   At the present stacge it is
     v;ery difficult to formulate any asslunptions concerning' that  apportionment.   It is
     lalown only that some American, Japanese and European firms  a.ve already evinced
     interest in  'ossible commercial exploitation of the sea-bed and have undertaklen
     research on the subject.   That beinf s:;o it seemed desirable to assumne thllat all
    ,the copper extracted would be channelled into the non-United States marklet, for
     that is the situation in which exploitation-of the sea-bed would have the most
    pronounced effects on the copper market as described in the model. 1/   An attempt
    was thus made to determine the tipper limit of impact of the hypothetical programmes
    of sea-bed exploitation considered in this report.

    22.  Hence, in the various situations assumed, the mine production, consumption,
    level of stochs and prices of copper wouldl reach the levels indicated in the table
    below:

                                           TYable II

                   Effects of possible e::ploitation of the sea-bed on the
                                    coplper market in 19200

                         Base           Low           lediu-lo       Medium-hi gl     i
                       situation I/assumlption  /. assumption  p/ asumnotion    assullntion J
       - -. ~ - - ~- - --~  -4~-I-- -------------II-_ -   I
                        i'.nne production (in thousands of metric tons of copper content)
    Canada               1 022         1 021          1 020           1 o            1 013
    ,United States       1 673         1 672          1 656             1664         1660
    Rest of the
     world         /     4 627         4 625          / 6 20      i    t4 600        4 597
    Sea-bed                  0            1        ,     42              99      I I
    Total                7 322         7 33o          7 051           7  37  7 411

                          Consuunption (in tlousands of metric tons)

    United States         9 3            99 3                         4002           4 004
    Non-Uni ted
     States              " 99          0 90             3 09  j 1   C939
    Total               1             1 9 01. '         9 0          12 924         12   43

         j/ 'Yihe morlel re`lcct tlhe ,:'asct, :rlfclh la  rl, mentioned a.t the b)eimnnlin .i' tli]s
    note, that the prroducer rcrices in thle United States are  "ruanaged" prices; andi lrnrce
    less sensitive tc fluctuations in supply and demand than the prices on the London
    Metal Eyxcanje.
                                                           00181

    Tablc II (contd)

                            Stock's (in thousands of metric -tons)

     U nited States        1 075          1 072          1 071           1 065         1 064
     'ton-Uni ted
      States  /            2 060          2 091          2 153           2 241         2 514
     Total                  3 135         ! 163          3 204           3 306         3 373

                                            Prices

    Lcndon  Exc;hange

     CI ulront pounds
      per long ton         1 208         1 207           1 201           1 192         1 1gl
     19773 iol-nds per
      lonf; ton J/           925            924 A          920             913           904

    United States
    producer prices
     Current dollars
      per lb                 0. 93          0.98           0.93            0.90          0.97
     1973 dollars
      per lb         O       0.70           0.70    i      0.70            0.70          0.69

    Notes:
    iL/  In tihe absence of exploitation oi' -he sea-bed.

    2_/  See table I.
    yJ   Excluding socialist coutntries.
          Co rrected by the United Kingdom wholesale price index.
         Corrected b, the Unitei States whol.sale price inde:.

    The fore oing figures make it clear that a possible exploitation of the sea-bed
    would h.ve only a very mild impact on the copper market:  the copper from the
    sea-bed would at most account for 2 per cent of total mine production cnld
    1 per cent of total consumption in -tle non-socialist world.   It should be stressed
    thatI the voliue of copper from the sea-bed is well below the annuacl fluctuations
    of rmining output caroud the mean.

    23.  In thiese circunam;tances it is not surprisin: -that the impact of sea-bed
    e:oC)loit' tion on rine production, co!lsu.l!!ltion, stocks and prices should be very
    sli-ht.   If tlie highl assur;lpt;ion is; compared ritll the base situation, it will be
    seen that such exploitation rwould cause mine production on land to diminish by
    C.7 rer eent (lenost lalf the reduction beinl borne by Canada and the United States)
    rid ,,otal m:ine oroduction (includirl;c !tl.-lt on t;e sea-bed) to increase by 1.2 per cent.

                                                      001  2

    Total copper consumption in the non-socialist world would increase by 0.4 per cent
    in response to the decline in prices caused by the increase in supply, and that
    decline would attain 2.2 per cent on the London Netal Exchange and 1 per cent in
    the case of United States-producer prices.   Since the increase in consumption would
    net completely offset the increase in production, the level of stocks in the
    non-socialist world would rise by 7.0 per cent.

    III. Effects of exploitation of the sea-bed on copper exports from developing
         countries

    24.  Copper is a very important source of e_-ort earnings for the developing
    countries which, as we have seen above, accounts for about 40 per cent of the world's
    mine production of copper (pocialist countries excluided.)  These earnings averaged
    3$2,S00 million a year in 1969-1970, t;le last two years for which detailed figuires
    are lnoim.   This being so, any work;ing of the sea-bed, although likely to ehave only
    a very limnited impact, in relative value terms: on the copper market, could lead to
    a reduction in earnlines that would be far from negligible in absolute terms,   In
    part III of this report wae shall try to estimate the likely order of magnitude of
    that reduction.

    25.  The preparation of this estimate entailed maling a number of further assumptions
    which are presented below.

    26.  In the first place, it was assumed that in 1980 the developing countries' share
    in mine production on land outside C'anada, the United States and the socialist
    countries would be at the average level recorded in 1969-1970, or 70 per cent.
    Since the model shows different  Trowtlh rates of production for the United States,
    Canada end the rest of the non-socialist world (see paragraph 15 and table II), the
    mine production of the developing coUntries woutld under these conditions account in
    1980 fcr about 50 per cent of tha.i; of' the non-socialist world, as against 40 per
    cent in 1969-1970.

    27.  Total exports of copper from the developing countries (including those
    coun-tries' trade with one anothller) accounted for 95 per cent of their copper
    production in 1969-1970, and it was assumed that this would also be so in 1930.
    This is tanltamornat to assuming thaat the consumption of copper in the developing
    countries which produce it would increase aet the same rate as -their production,
    naclely by an averaw'e of 5 per cent a year.

    23.  In order to estimate the earnings i'rom t1he developing countries' copper exports
    on the various assumptions made in thlis note wit.hl regard to sea-bed exploitation,
    it rerar.ins to set a unit value on such exCnorts.   In response to several factors -
    which sometimes work in opposite directions - these unit values differ from the
    prices prevailing on the London !ietal ExchanCge.   The first point to note is that
    these prices relate to refined metal, whereas the developing countries export
    blisters and ores as well as metal, as slhom in the table below.   Again, the
    London F;:change prices quoted c.i.f. include insurance sand frei~ght, wlhereas unit
    values expressed f.o.b. do not.   La-stly, the value of exported ores depends on
    their content not only of copper but also of other metals such as silver.

                                                             00183

                                          T,1ble III

                          Copper exloortus fro., develonin�: countries
                                  Annual avera;,?e, 1969-1970

                IQuan'titl' ('housands o-'"                              Unit. value
                        met ric tonillions                        (US,, per mIetric ton o'
                    of copf e content          o      ) copper content             I .o.!.!

    O res                 2S .0                  290.2         i            1 029
    Blisters              640.3                   14.6          j           1 272
    Refined
      copper            1 264.1           i   1 676.0                        1 326

       Total            2 1o6.4                2 7'30.z                     1 272

    Sources:  National  s5ta.tistics.

    29.  The average price of copper on the London Exchange in 1969-1970 was t1,440 per
    metric ton, sc tihe ratio ofi the avera-fe unit value of the developing countries'
    cop-pcer erports to this average price was 0.20.   In the absence of more precise
    information it was assumed that thi,-, ratio would prevail in 1900, although it may
    be thought that thle developing count,.ies will seek to refine an increasing
    proportion of the copper they export.   On the basis of these assumptions cand the
    results given by the ;rodel, the followinf table can be established.

    30.  The above figures confirm that the impact of any sea-bed exploitationol't -tlhe
    copner export earnings of developing- countries would be relatively slight.:  As
    already noted, the difference in the anmo-Lni  of these ea.rnings between the hi-h
    -.sumption and the situation of no soea-bed exploitation is less thal tle anmual
    fluctuation in those earnings, for it; repr,,esenlts only 3 per cent of the total.
    In absolute value, however, thle redluction is appreciable since, again on the high
    assumptir,n, it amrnounts to 79) million 1973  pounds or, at thle average 1973 rate of
    exchange, 31l94 million.   On thle !basis of the figures given in the study on
    mengmalese clready mentioned 1_/, thi;s sun represents abolut five times the reduction
    in mangsaese export eaznirng; whichl, oil the high'n assumption, sea-bed exploitation
    would inflict on the developin,' countries.   It should be stressed, however, that
    in the case of mrr.cmlanee t;h( reduc-tion in c:-,ort, ea.lnings would represent about
    40 per cen-t of the total wlchi tihose earnings would attain in the absence of
    sea-bed exploitation.   Tilis over-simlpliL4ed comparison illustrates the difficulty
    of maling cany comprehensive a.nalysis of th-e effects which -the mining of imetals on
    t'he s;ea-bed woulld have on the foreign exchange earnin.gs of developing countrie;;
    fuirthermore such an analysi, would also have to take into account lthe characteris-
    tiics .ecullair to sinmultneous prodzuction of' -the four metals unlder consideratioll.

    31.  It will also be noted that the redl(ction in the copper export eainir: f c;' tlie
    devel0pming, countries re-cresents mlore thlan 60 per cent of the value of the coler
    extre;cted from the sea-bed.   Although, as already stated, it is still far frorm
    cleer Iw-r hat such production would cost, i.t seems ihardly likely that the prof'its i'ron;
    t;e sql.e of such copper would offsi'et the loss incurred by the developing countries
    whichi e xport thl-le metal.

         J/   The effiecis of lprorduction of' i.manlne::e frjch ~h C;tea-berd (Tl)/B//l' ~).

                                                    Table IV
                         Earnings of developing countries from copper exports in 1980
                                on various assumptions about sea-bed exploitation

                                                     Base         Low     M1'Lium-low  IMedium-high      High
                                                   situation  assumption  assumption  assumption   assumption

    Price on London Exchange (current �s per
      metric ton)                                      1 189       1 188        1 182        1 173         1 162
    Price on London Exchange (1973 Es per
      mctric ton)                                        910         909          905          899           890
    Unit value of developing countries' exports
      (current cs per metric ton of copper
      content)                                         1 046       1 045        1 040        1 032        1 022
    unit value of developing countries' exports
      (1973 �s per metric ton of copper content)         801         800          796         791           783

    HIine production of developing countries
      (thiousands of metric tons of copper
      content)                                         3 609       3 506        3 604        3 59/!       3 586
    Exports from Developing countries (thousands
      of metric tons of copper content)                3 429       3 426        3 424       3 414         3 407
    For reference: sea-bed production (thousands
      of metric tons of copper content)                    0          14           42           99          141

    Copper export earnings of developing
      counzriees I/ (millions of current is)          3 587       3 580        3 561       3 523         3 482
    Copper export earnings of developing
      countries  / (millions of 1973 Us)               2 747       2 741       2 726        2 700         2 668
    Reduction in copper export earnings of
      dev'cpirng countries resulting from sea-
      bed exTChiitation (millions of 1973 as)       i        6                     21           47            79
    For reference:  value of sea-bed production
      (m�illicns of 1973 as)                               0          13           38          8  125

    g   -&ross export earnings:  export content before deduction of profits accruing to parent companies.
    Sources:  fable II (see notes thereon).

                                                                              31 July 1973
                                                                              ErTGLISIt ONLY

                          THE I1ACT OF COBALT PRODUCTION FROM THE
                                            SEA-BED

                           A review of present empirical Imowledge
                                   and preliminary appraisal

                                              by

                                        F. Gerard Adens
                          Professor at the University of Pennsylvania

    Note:  This report was prepared at the request of the UNCTAD secretariat to prov;ide an
    initial assessment of t}ar economic impact of the production of cobalt from the sea-.bed
    on the world market for cobalt and on the export earnings of the developing countries.
    This request was made in pursuance of Conference resolution 51(III), inviting the
    Secretary-General of UNCTAD "to continue to study the measures necessary to avoid the
    adverse economic effects which the exploitation of the sea-bed ... may have on the
    prices of minerals exported primarily by developing countries ..."    The views
    expressed in this study do not necessarily reflect those of the UNCTAI secretariat.

         The terminology used in this study is that of the author.

         The designations employed and the presentation of the material in this document
    do not imply the expression of any opinion whatsoever on the part of the secretariat
    concerning the legal status of any country or territory or of its authorities, or
    concerning the delimitation of its frontiers.

    TD/B(XIII)/Iisc. 3
    GE. 75-50049