Following a difficult and unpredictable year full of uncertainty, 2022 ends with a heightened sensitivity to risk. To discuss what lies ahead for miners in 2023, The Northern Miner spoke in mid-December with Matthew Bey, Senior Global analyst for the risk intelligence company RANE.
The Northern Miner: This year has seen multiple crises, both geopolitical and economic — some call it a ‘polycrisis.’ We’ve seen extreme disruption from Russia’s war in Ukraine, skyrocketing inflation, rapidly rising interest rates, continued impacts from Covid, etc.
What geopolitical risks from 2022 look like they will start to abate in 2023, and which are likely to intensify or linger?
Matthew Bey: Unfortunately, the risks that are going to abate are probably the shorter list of the two. A lot of things are going to be intensifying over the next year. One that I think is going to abate, at least from an economic standpoint is some of the Covid-19 restrictions that have been still slowing down economic growth in places like China. However, when you look at global economic growth next year, you’re also talking about concerns about a recession and the other two main engines of the economy. That’s, of course, the United States and Europe. So I think it’s a mixed bag.
Another risk that will be abating a bit next year will be the concern about the Taiwan crisis. We still think that China very much does not want to take a true offensive invasion of Taiwan for number of reasons, at least for the next few years.
On the flip side, when you look at a lot of the risks that are going to be intensifying or lingering, that’s a much longer list. You have the Ukraine war, of course, which is going nowhere right now. It is likely to remain in a kind of stalemate throughout all of 2023. We are not likely to see any true ceasefire or even really true dialogue beginning next year, for a couple of reasons. One, Russia has given no indication that it’s willing to negotiate about the areas of Ukraine that it’s recently annexed. Meanwhile, Ukraine is taking a hard line saying no, those are part of Ukraine. And quite frankly, neither of them has the military capacity to win the war in a physical sense.
Looking at some of the rising tension from a technology perspective between the U.S. and China, that’s been a major theme in certain industries, like the semiconductor industry. The U.S. has given no indication that it’s going to be slowing down its tech war against China. China has been giving no indication that it’s going to reduce the support for its national champions in these leading technology industries. So expect more restrictions, more regulations going forward. That US-China tension is likely going to remain for the next few years.
Matthew Bey
A couple others that I wanted to highlight, is there still a major dispute between the U.S. and Iran over the future of Iran’s nuclear program. Iran’s enrichment of uranium is now getting to the point where they can build a nuclear weapon — if they wanted to — within six months. So we’re talking about a potential nuclear crisis if we continue down this path, especially as talks on the 2015 Iran nuclear deal have gone nowhere over the last few months.
One last one is the global energy crisis. The natural gas crisis going on in Europe right now has been alleviated by China’s periodic lockdowns throughout the year. China’s demand for natural gas has not been that high this year, and that’s allowed Chinese LNG importers to resell to European companies. Next year, we might have a case where the global LNG supply is just not growing for a number of reasons. And then we still have massive demand coming out of China, which could mean that next winter, Europe may not be in as positive a spot as they are right now when it comes to natural gas availability.
TNM: I just want to pick up on one of the things that you mentioned — one of the big trends of this year has been the deglobalization or the reorganization of the world into different blocs. And the Western world has been pulling away from both Russia and China — to punish the former for its aggression in Ukraine and at least in part to challenge the latter’s dominance of critical supply chains. You just mentioned that this is likely to intensify going forward, can you give me some more detail about how you see that playing out?
MB: I think that we are at a critical juncture in the way that the global economic environment is operating. We are at a point where the Western, post-Cold War liberal order is kind of fraying. I don’t mean this just in an economic sense, but I’m also talking about the WTO, the IMF, and the power of these Western institutions that have been dominant for so long. But what that means from a trade perspective is that we are going to be seeing a lot more fragmentation and a lot more nationalism, when it comes from governments that have planned economies, and even the West, which is typically more free trade, we are seeing them implement more protectionist policies. Look at the inflation Reduction Act here in the United States, which included in its provision for EV tax credits a requirement that the final assembly be done in North America.
That actually means that it doesn’t include U.S. allies like Japan, or the European Union. The EU is, of course, pushing the U.S. on the issue, and the US has basically said, ‘Well, there’s something that we need to do for the energy transition, so you guys can do it too.’ So we are starting to see a fragmentation or deglobalization, and localized supply chains within a country are becoming much more significant or much more economical, as these barriers to trade are being put up. You might see less trade between the West and China, but more inter-regional trade, say, between the U.S. and Mexico and Canada. Or in the European Union, we see more trade with some of its periphery, whether it be North Africa, Eastern Europe, the Middle East, etc.
The areas where I think that you’re going to see more significant restrictions are going to be the high technology areas I mentioned, the U.S. is going to continue its tech war against China. That means we should anticipate more restrictions like those being done through export controls of key leading technologies — so in the semiconductor industry, and eventually, cloud computing, quantum computing, etc. Those are areas where we could see more concrete movements that actually do prevent some of the sales and transfer of goods to China and into Russia, of course.
TNM: I want to talk a little bit more about China, because China’s demand for commodities drove the last supercycle and China obviously remains extremely important in terms of driving demand. However, some analysts, including analysts from BlackRock and in a recent note, from early December, suggest that the country appears to be refocusing on self-sufficiency in food, energy and technology and de-emphasizing growth. Would you agree with that assessment? And what are the near and medium-term implications for the commodities markets?
MB: I do think that China is trying as much as it possibly can to boost its self-sufficiency in a lot of different areas, whether it be raw materials, technology, etc., and it is definitely de-emphasizing economic growth. But the one caveat is that China’s self-sufficiency goals are often very high-level political goals, where they shoot for the stars and try to achieve half of it. So when we see China wanting to do 70% of its semiconductor manufacturing at home or trying to source all of its raw materials from inside Chinese borders, there’s very limited ability to actually do that. They might functionally get halfway there. That still means that China is still buying a lot of goods from overseas. I think the important part from a supercycle commodity perspective is that China, when it gets to an economic slowdown, isn’t necessarily going to focus so much on building through construction and other projects that are driving up and boosting demand for things like iron or steel. That is no longer going to be as in vogue as it was post the 2007-2008 financial crisis.
When we talk about some of these new areas where the U.S. and China are competing, like the battery supply chain, the minerals are going into the batteries, a lot of those are not mined in China. The rare earths are, but with lithium mining or the procurement of nickel, we are seeing China being very aggressive when it comes to the Chinese companies that are dominant in the battery supply chain or the processing of nickel, going into countries like Indonesia to secure supply. It’s not total self-sufficiency, but it is self-sufficiency in the sense of China controlling that supply chain from mine to consumer.
TNM: After the recent protests in China against the government’s Zero Covid policy, and a notable softening of the policy in response, do you think that we will see the end of Zero Covid in 2023?
MB: I think from the Chinese Communist Party’s perspective, they built up so much credibility around the Zero Covid strategy that they can’t abandon it in name, they can only really abandon it in practice, if that makes any sense. But I do think over the course of the next year, we are likely to see the slowing down and removal of restrictions. The big challenge, though, is that China hasn’t deployed a lot of vaccines to, for example, the elderly population, China hasn’t used a lot of mRNA vaccines so there’s a question as to whether or not we’ll see a massive increase in the number of Covid-19 cases. There could be a snapback of some of the restrictions. So it’s likely to be chaotic.
TNM: Refocusing away from China now, miners venture into some pretty risky areas of the world. Are there any regions you would highlight as places where miners are seeing increasing risk?
MB: I think there’s increasing risk right now in parts of Africa, which is already a high-risk environment. But when we look at political stability on the continent, it’s going to be one of the things that’s facing stress next year, particularly, as we see rising food prices, or high food prices. The population of a lot of these countries are very dependent on subsistence or very small, localized farming operations. And next year, it will be a year after the first harvest with very little amounts of fertilizer, which can then lead to more social unrest, government turnover, and government and political crises — similar to what we’ve seen this year in Sri Lanka and Pakistan. Another thing that we’ve also seen in West Africa in particular, is the spread of jihadist activity, particularly in Burkina Faso and Mali, that has led to multiple coups causing political risk in places like Niger, Mali, Burkina Faso, etc. So I just think Africa is probably the highest risk.
TNM: There is a lot of mining investment in West Africa, which has experienced what some have called a ‘coup epidemic.’ Many of the big miners in these countries say their operations haven’t been affected by these upheavals. But how bad is the situation in each of these countries, from your perspective? And is it something that investors should be worried about?
MB: I think in Burkina Faso and Mali and Guinea, the political situation is in a precarious position. We’ve seen multiple coups in Mali and Burkina Faso. But I think the concern there shouldn’t just be on political stability from a government-to-government position. Yes, there’s a high risk of more coups in the future. But when we look at the insurgency that’s going on there, right now, with al-Qaeda and the Islamic State groups, we are starting to see some of them spread their activities beyond just Burkina Faso, Niger and Mali. We’ve seen several attacks in places like Togo, and we’re talking about further encroachment of some of these jihadist activities which then increases the risks for miners in Ghana, Togo of course, Benin, Ivory Coast just because the jihadists are getting closer to those borders.
And these political crises in Burkina Faso and Mali, which have led to a reduction in counterterrorism cooperation with France, are going to only further enable growth of the jihadist groups. At the same time, we’ve had a rise of Russian influence — it is more prominent in Mali and the Central African Republic than we are seeing in Burkina Faso. It’s also possible that from a company perspective that their operations aren’t hurt, but if they are working in a country with a government that is getting increasingly close to Russia, that is a reputational risk for miners who are funding that government through their operations and things like royalties, etc. So that reputational risk is on top of the risks associated with business continuity.
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