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Green energy transitions are ramping up demand for critical minerals like lithium, cobalt, graphite, and rare earth elements. Seeking better development outcomes, mineral-rich developing and middle-income economies are keen to move beyond mining into higher value-added activities like processing. "Downstreaming"—advancing from mining ore to processing and refining it, as demonstrated by Indonesia—can produce significant economic gains. However, countries considering downstreaming should look to Jamaica's bauxite and alumina industry to understand a key challenge: the massive energy demands of downstreaming.
Despite having strong political economy fundamentals, Jamaica has only partially transitioned to exporting higher-value refined products. While downstreaming is a worthy goal, without large domestic renewable energy resources and capacity, downstreamed industries can incur prohibitive economic costs and massively increase these countries' carbon footprints. They can also render their industries noncompetitive during times of high energy prices.
Indonesia's success with downstreaming has bred imitation
Indonesia has banned unrefined nickel ore exports since December 2020, forcing investment in domestic smelters to process materials locally for export. Indonesia's seeming success with downstreaming—in just its first two years, the value of its nickel exports increased threefold, with only 29 percent of the increase due to higher nickel prices—has bred mimicry. African governments have been particularly swayed, with countries including Ghana, Namibia, Nigeria, Tanzania, and Zimbabwe either mulling over or imposing bans on unrefined ore exports of various materials.
But it isn't just an African phenomenon. Malaysia has banned the export of unprocessed rare earth elements. Smaller Indian steelmakers are pushing Modi's government to suspend iron ore exports to shore up competition from China. And of course, China has imposed its own export restrictions, first on gallium and germanium and more recently on graphite, as part of its semiconductor and green tech trade war with the United States.
Small, ore-rich economies should look to Jamaica to better understand how reliance on imported energy has shaped its ability to move into processing and up global value chains. Mineral refining and processing are incredibly energy intensive. Despite some significant efficiency gains in recent years, alumina smelting—which transforms bauxite into the aluminum oxide used in aluminum production—consumes an average of 2,835 kilowatt hours (kwh) per metric ton,1 or enough electricity to power the average US household for almost four months. In a perfect world, energy-intensive refining facilities would be sited near abundant hydropower, as they are in Brazil and Canada. Less desirably from a climate change mitigation perspective, mineral processing facilities are also located in countries with abundant liquefied natural gas (Bahrain, United Arab Emirates) or coal resources (Australia, China, and Indonesia). But ours is not a perfect world, and as advanced economies are increasingly turning to economic nationalist policies, many developing and middle-income countries are eager to get a larger slice of the pie. Downstreaming is seemingly one way of achieving it.
Not all mineral exporters are equally well positioned to do so. To state the obvious, miners site mines where the ore is, even when local political economies are very challenging. Bulk shipping enables refining to occur far from mines, in regions with higher environmental tolerance or mitigation capacity and greater political and policy stability. When siting processing facilities, political economy and energy availability considerations weigh heavily.
Jamaica as a seemingly ideal downstreaming candidate
From a political economy perspective, Jamaica is an outstanding candidate for downstreaming. It has been a stable democracy since independence in 1962. Unlike many primary commodity exporters, it has been largely free of armed conflict and political violence, though gang-related violence has pushed it near the top of the UN Office on Drugs and Crime's compilation of global murder rates.2
Assessments of rule of law and regulatory quality put it in the middle of the pack but close to successful downstreamers like Indonesia. And the effectiveness of Jamaica's government—which captures quality of public services, bureaucratic independence from political pressure, and policy credibility and stability—ranks higher than that of Chile or Saudi Arabia, according to the World Bank. On top of all that, its location in the Caribbean Basin—which was called "an American lake" as early as the late 1930s by the press—puts it squarely in the US zone of influence and maritime dominance, shielding it from the geopolitical tensions affecting countries in the Middle East or Asia and making it an ideal nearshoring candidate (from a US perspective).
Energy is Jamaica's Achilles heel
Energy has been Jamaica's Achilles heel. The island is bauxite rich but energy poor, leaving it highly dependent on fossil fuel imports for electricity generation. This dependence has resulted in electricity costs double the global average, and these prices tend to spike along with global oil and gas prices. High energy costs are one reason (among several) why Jamaica's bauxite and alumina industry went into relative decline in the 1970s, the decade of seismic global oil shocks. Data from the 2020s demonstrate that Jamaican alumina refining continues to be sensitive to energy prices, with alumina output nearly halved in 2022 relative to 2021 as oil prices spiked after Russia's invasion of Ukraine. Citing high energy costs and environmental concerns, some prominent voices in Jamaica—which has robust tourism and services industries—have called for Jamaica to quit the sector entirely.
Indonesia's success with nickel downstreaming has prompted several countries to follow suit, hoping to move up global value chains and build domestic industry. But Jamaica's experience with downstreaming demonstrates the challenge of meeting energy demands, especially as countries are trying to lower their carbon footprints and compete on price with China, Australia, and Brazil (and Indonesia, which has extended its nickel ore export ban to include bauxite as well), which have massive advantages in terms of scale and energy endowments. Indonesia's experience may thus be hard to replicate: Its large market share, linkages with existing Chinese supply chains, fossil energy endowments, and large home market and diversified export profile may have combined to make Indonesia a downstreaming unicorn.
Regional partnerships between resource-rich and energy-rich countries may provide a path forward
In light of this, some countries have a more obvious path to powering downstreaming than others, like Ghana, which has significant hydroelectric and fossil energy. Namibia, on the other hand, may face energy sourcing challenges that will require additional investment in solar and offshore wind—both of which are promising given Namibia's sunny, arid environment and long coastline. Instead of attempting to go it alone, developing and middle-income countries should pursue regional approaches that leverage their own diverse mineral endowments and the renewable energy resources of regional partners. This could be achieved either by concentrating processing power in countries with significant renewable capacity or by importing renewable energy from near neighbors. Especially in Africa, doing so would help increase intra-regional trade (including trade in renewable energy via grid integration) and make these supply chains more resilient to global fossil energy price shocks.
Notes
1. Converted from megajoules to kilowatt hours from values reported by the International Aluminum Institute for 2022.
2. Counting murders, especially in middle-income and developing countries, is not entirely straightforward. Countries at these levels of economic development frequently experience domestic armed conflicts and civil wars that, in addition to resulting in many conflict-related combatant and noncombatant deaths, also provide opportunities for score settling and revenge killings that are difficult to separate analytically from true battle deaths. This results in artificially low assessed murder rates for countries during conflict. Post-conflict countries often see inflated murder rates, as some scores are not settled until after the official fighting stops (see Collier and Hoeffler 2004).
Data Disclosure
This publication does not include a replication package.
