United Nations source documents on seabed mining

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United Nations Source Documents on

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SEABED MINING

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Ocean Science News

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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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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

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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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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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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.
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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
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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

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.

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.

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

(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.

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(

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

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

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 =

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

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