Semiconductor Showdown: China's Rare Earth Element Export Controls and Geopolitical Tensions

Introduction

The Chinese government is intensifying its efforts to dominate the rare earth element (REE) supply chain. China currently produces 60% of the world's REEs but processes roughly 90%. In addition to developing strong REE production, processing, and recycling capabilities, Beijing is increasingly engaging in supply chain warfare, placing export controls on REE extraction and separation technologies, as well as certain metals. In its most recent and stringent round of trade restrictions, which were announced in early December, China’s Ministry of Commerce banned the sale of antimony, germanium, gallium, and superhard materials to the United States. China also recently announced that it will be acquiring ownership of the last two foreign-owned REE refineries within its borders. Together, these developments reflect a deliberate strategy to solidify China’s dominance in the REE supply chain and reinforce its near-monopoly on these critical materials. 

Chinese Rare Earth Global Supply Share

Source: Carbon Credits

The implications of these recent actions – and China’s broader consolidation of REE supply chains – are manifold. Rare earth elements, such as gallium, dysprosium, and germanium, are integral to the production of many advanced technologies, including semiconductors. As such, China’s heightened influence over these critical natural resources could escalate geopolitical tensions between itself and the United States (U.S.), further disrupt and reorient trade of critical minerals, and impact REE prices and the cost of downstream technologies for industry and consumers alike.

REE Uses and Impact on Semiconductor Industry

REEs covered by Chinese restrictions are critical in producing semiconductors for various uses. Antimony is used to make infrared detectors and diode components, as well as batteries and sheathing layers of cables. Gallium is generally combined with other materials to produce wide-bandgap semiconductors, which are smaller, more efficient, and widely used in weapon systems, such as g advanced radar systems for missile defence and target acquisition. Their civilian use is also on the rise, covering cutting-edge developments including 5G signal towers, fast charging stations, and improved solar cells. Germanium is currently utilised for sensors, infrared optics, solar cells, and fibre-optic cables. While its role as the main material of transistors has been replaced by silicon, germanium is making a comeback as researchers investigate the potential of next-generation chips that are solely based on the rare earth element.

Rare Earth Use and Application

Source: China Water Risk

Given their importance, Western users have stockpiled these metals given the impending implementation of the export controls. When similar policies were previously enacted by the Chinese government, prices of gallium and germanium significantly increased. A similar pattern price hike is expected to happen for antimony following the latest announcement on new export controls. The persistent high prices of these metals are poised to push up semiconductor prices, while the limited supply may potentially cause a chip supply crunch.

Reactions by Western Governments

Most commercially viable mines of antimony, gallium, and germanium are located in China, which controlled 48%, 98% and 93.5% of production of these materials worldwide, respectively. In response to this potential bottleneck, Western governments have worked to increase domestic production, raise refining capacity, and develop alternative replacements.

In the United States, the Department of Defense (DoD) is working to increase the production of the country’s only antimony smelting plant, while a private mining firm is expected to obtain government approval by the end of 2024 to open an antimony and gold mine in the state of Idaho. For gallium and germanium, after the initial reaction by the Pentagon to “proactively act to increase domestic mining and processing” of these resources, the U.S. has seemingly adopted a more laissez-faire approach to raising gallium production and refining capacity. Government funding was provided to execute technical studies to develop alternative extraction methods and create new semiconductor chips without gallium. The U.S. DoD has also worked to alleviate a potential germanium glut by awarding contracts to expand the production capacity of germanium substrates, and to develop infrared imaging modules with no germanium use. However, these initiatives are not aimed at addressing immediate needs, such as opening new mines and smelters.  

In Europe, primary gallium production facilities existed as late as the 2010s before shuttering due to low-priced Chinese exports that flooded the market. Aware of potential future supply issues, the European Union (EU) has since attempted to resuscitate the production of gallium and germanium. This strategy is exemplified by the EU’s Critical Raw Materials Act, which aims to extract 10%, recycle 25% and process 40% of gallium, antimony, germanium, and other crucial materials within the EU by 2030.

Australia is the biggest producer of bauxite ore. Since gallium is produced during the production of smelting that ore, government agency researchers are now looking into the possibility of also extracting gallium during the production process. The Australian government also added an additional AUD2 billion for critical minerals financing in 2023, which covered the three rare earth elements in question.

Canada promulgated its Critical Minerals Strategy in 2022 and has provided CAD192.1 million and tax credits to support the development of new processing strategies and exploration of new reserves as of September 2024.

Finally, the Minerals Security Partnership (MSP), a multinational collaboration between 14 Western countries, was founded in 2022 to facilitate financial support across the whole value chain for various essential raw critical minerals, including the REEs discussed in this article. The MSP’s activities increased after Beijing raised its export restrictions in 2023, including various conferences and dialogues with Global South countries.

Implications

The Chinese government’s continued efforts to dominate the rare earth element industry mark a significant escalation in tensions between the U.S. and China, with geopolitical considerations shaping public policy in both nations. The White House has warned that China’s actions leave the U.S. and its Western allies “vulnerable to supply chain shocks” and undermine their “economic and national security.” The two countries are locked in a power struggle to gain the competitive edge in advanced technologies, with a focus on semiconductor chips that are key to artificial intelligence and military applications. In 2022, the U.S. imposed export controls to restrict China’s access to U.S. semiconductor technologies in an effort to maintain technological superiority in the sector. In response, China levied export restrictions on two REEs – gallium and germanium – that are critical to the production of advanced semiconductors. The latest measures by China may be considered additional retaliatory maneuvers signaling the country’s continued displeasure with the U.S. Government’s export policies and underscore China’s willingness to weaponize its mineral resources to address its own economic and security priorities.

China Dominates Rare Earth Element Supply Chain

Source: Global X

China’s new export restrictions may intensify calls for nearshoring initiatives and alter global trade in rare earth elements. In recent years, the U.S. and its Western allies have reached a general consensus regarding the importance of augmenting domestic REE production and securing alternative supplies from countries with which they have stable and positive relations. Meanwhile, a similar state-directed strategy is being executed by China. The broader decoupling of U.S.-China trade relations and the emergence of parallel supply chain networks for critical minerals could lead to a bifurcated global trading system, with each nation spearheading separate blocs. 

However, some Western industry analysts are concerned by this trend, particularly as it relates to resource access and market complexities in REE supply chains. Outside of China, new REE production projects encounter significant challenges including high upfront costs, stringent regulatory requirements, permitting delays, limited technical expertise, environmental concerns, and lengthy project timelines, all of which discourage private investment. As a result, Chinese companies are likely to retain their competitive advantage due to their advanced technology, established infrastructure, and substantial government support.

Amid a lack of plausible alternative REE sources, industry is now sounding the alarm about future shortages. A more restrictive global ecosystem for rare earth minerals is expected to adversely affect key players in the semiconductor industry, such as TSMC and Nvidia. Reduced REE supplies will likely lead to supply chain bottlenecks and drive up resource prices, which exacerbates supply chain volatility and puts upward inflationary pressures on downstream products, including semiconductors. In fact, China’s 2023 export controls on germanium and gallium caused prices of the resources to more than double. Inflated prices may stifle research and development efforts, increase production costs, and cause manufacturing slowdowns, resulting in less innovation and smaller profit margins across the industry.

China's monopolization of rare earth elements has granted it unparalleled control over critical global supply chains, underscoring the global semiconductor industry’s vulnerability to supply disruptions. While Western nations are pursuing alternative supply chains and domestic production, significant barriers hinder rapid progress, allowing China to maintain its dominant position. This escalating resource competition is likely to deepen the fragmentation of global trade networks and increase geopolitical tensions between China and the United States.

Power and Protection - Smart Electricity Grids at the Crossroads of Technology and Geopolitics

In an age of evolving energy demands, climate concerns, and geopolitical tensions, the modernisation of power grids offers transformative potential. This report, authored collaboratively by the Global Commodities Desk and the Emergent Technologies Desk, provides actionable insights into the opportunities and challenges of smart grids, highlighting their pivotal role in building a sustainable, secure, and interconnected energy future. The geopolitical and economic dimensions of energy policy underscore the dual role of electrical and cyber systems, calling for robust protective measures against emerging threats. Discover how cutting-edge technologies and strategic policies are driving the energy revolution—read the full report to learn how smart grids are reshaping power systems and redefining energy security worldwide.

Serbia’s Jadar mine: the energy transition and environmental concerns

Introduction

Following government plans to reboot the Jadar lithium mine proposed by mining giant Rio Tinto, thousands of protesters rallied in Belgrade over the past month. The mine is set to become the largest lithium mine in Europe, significantly boosting Serbia’s economy, and supplying 90% of Europe’s lithium needs. However, the project has also sparked nationwide protests with concerns over the potential impact of the mine on the local environment. With increasing global demand for critical minerals, the Jadar lithium mine highlights broader tensions around resource extraction and the energy transition. This article analyses the implications of the mine and explores the different stakeholder perspectives that pose risks to its commencement.

Background

With the European Union's (EU) increasing demand for lithium, driven by the transition to electric vehicles (EVs) and energy storage, developing a secure lithium supply chain is growing in importance. Portugal is the only EU state that mines and processes lithium, making the region and its green transition heavily dependent on external sources. In response to this vulnerability, the EU has introduced the Critical Raw Materials Act (CRMA), which aims to reduce reliance on imports by promoting domestic production and refining capabilities. The proposed Jadar lithium mine in Serbia, with estimated reserves amounting to 158 million tons, could play a pivotal role in this strategy, with plans to produce 58,000 tons of lithium annually – enough to support 17% of the continent's EV production, approximately 1.1 million cars. 

If all goes to plan, mining operations could begin in 2028. According to Serbia’s mining and energy minister, the government “aims to incorporate refining processes and downstream production, such as manufacturing lithium carbonate, cathodes, and lithium-ion batteries, potentially extending to electric vehicle production”. Moreover, in June 2021, amid public opposition in the Loznica region, the government emphasised that the project would involve a full-cycle approach to maximise local economic benefits. In March, Prime Minister Ana Brnabić suggested that the country could restrict or prohibit the export of raw lithium to support domestic value chain development. However, so far the specifics of the refining processes remain unclear.

Stakeholder perspectives

EU view

Since Europe currently has virtually no domestic lithium production, the EU views the Jadar lithium mine as a crucial project to bolster its economic security and support its green energy transition. The mine is expected to produce enough lithium to meet 13% of the continent’s projected demand by 2030, reducing its reliance on imports. Germany has already expressed strong support for the project, with Chancellor Scholz emphasising the mine’s importance for Europe's economic resilience.

Serbian view

The Serbian government views the project as a significant opportunity for the country's economy and its industrial development. Its mining and energy minister has emphasized that the project would comply with EU environmental standards while delivering economic benefits, including the creation of around 20,000 jobs across the entire value chain. Furthermore, Serbia’s finance minister projects that the mine could add between €10 billion and €12 billion to Serbia's annual GDP, which was €64 billion in 2022. To maximize these benefits, Serbia plans to follow the example of countries like Zimbabwe and Namibia by imposing restrictions on lithium exports, aiming to establish a complete domestic value chain for EVs. Additionally, Serbia's bid for EU membership adds a strategic dimension to the project, potentially aligning the country more closely with the bloc's energy and economic goals.

Local population view

Massive protests against the Jadar project have erupted across Serbia since June, following a court decision that cleared the way for the government to approve the mine. Many Serbians are troubled by the lack of transparency that evolved in the granting of mining rights to a foreign company. Moreover, opponents are sceptical of Rio Tinto's involvement, citing the company’s controversial history in developing countries, such as its operations in Papua New Guinea, where environmental damage contributed to a nine-year civil war. In this light, locals fear that the mine could jeopardise vital food and water sources in the Jadar Valley. For example, environmental problems caused by tailings, mine wastewater, noise, air pollution, and light pollution could endanger the lives of numerous communities and harm their agricultural land, livestock, and assets. Concerns have also been heightened by reports that exploratory wells drilled by Rio Tinto brought water to the surface that killed surrounding crops and polluted the river.

Rio Tinto view

Rio Tinto asserts that the Jadar mine is “the most studied lithium project in Europe,” having invested over $600 million in research and development to ensure its safety. As part of its efforts to gain public support, the company has conducted 150 information sessions for the local community, while Serbia's mining ministry has established a call centre to address concerns about the project. To further reassure the public, Rio Tinto has also expressed a willingness to allow independent experts to conduct an environmental review, aiming to alleviate doubts about the mine's potential impact on the ecosystem.

Conclusion

Despite the public opposition, the Jadar lithium mine appears likely to proceed, backed by strong support from the Serbian government and the EU, both eager to meet the onshoring requirements outlined in the CRMA. However, as this article has highlighted, the project faces considerable risks, including environmental challenges and persistent social and political opposition. The recent closure of the Cobre copper mine in Panama, following widespread protests over environmental damage and disputes over a new tax deal, serves as a stark reminder of the potential pitfalls. The Jadar project will need to navigate these complexities carefully to avoid similar outcomes and ensure a balanced approach to economic development and environmental preservation.

Drilling Dreams, Sinking Realities

Introduction

Climate change is increasingly recognised as the most significant long-term downside risk to almost all investment sectors. This urgency is underscored by the approaching 2024 U.S. Presidential election, where energy policy is a key issue, particularly in the context of the Republican Party’s push to revive the fossil fuel industry. With global temperatures in 2023 reaching unprecedented highs and surpassing even the most dire projections, the severity of climate-related disasters has escalated. These developments make it clear that mitigating climate change is not just an environmental imperative but also a critical economic and geopolitical challenge. The outcome of the U.S. election could have profound implications for global energy policies, especially as the Republican nominee, Donald Trump, advocates for an aggressive expansion of fossil fuel production.

Increasing Severity of Climate Disasters

2023 has been a stark reminder of the accelerating impacts of climate change. Record-breaking global temperatures, partly driven by an El Niño intensified by climate change, have led to widespread heatwaves, wildfires, and other extreme weather events. These developments have surpassed the projections of most climate models, highlighting the increasing unpredictability and severity of climate-related disasters, and the real-world implications of inaction on climate policy. The nonlinear trajectory of ecosystem collapse is one that has far-reaching implications, affecting everything from agriculture and infrastructure to public health and economic stability.

Graph 1.0 (Global Temperature Trends)

As the graph above shows, 2023 surpassed every previous temperature record by-far; almost showing an off-the-charts uptick in increasing temperatures. This must be seen in the context of the political economy of the green energy transition, involving stakeholders like big-oil to employ significant effort to subdue, delay, and slow down momentum of green energy through extensive lobbying in an effort to stay relevant in a world where renewable energy has become cheaper than conventional oil and gas as shown in the graph below.

Graph 2.0 (Energy cost by source)

COP and Delayed Multilateral Action

The international community has attempted to make some progress toward addressing climate change, with the United Nations’ Conference of the Parties (COP) serving as a central platform for multilateral action. COP 28 in Dubai marked a significant moment, signalling what many hoped would be the beginning of the end for fossil fuels. However, the subsequent COP 29, hosted in Baku, Azerbaijan—also a petro-state—seems to have reduced the pace and effectiveness of global climate action, and put the world off-track to limit global warming to 1.5C. The influence of fossil fuel interests and lobbying has continued to slow progress, delaying the implementation of much-needed measures to reduce emissions on a global scale, which by the number of lobbyists in COP 26 for instance, outnumbered national delegations to the convention.

Graph 3.0 (number of lobbyists in COP 26)

The 2024 U.S. Presidential Elections

The 2024 U.S. Presidential election represents a pivotal moment for the country’s energy policy, particularly in the context of climate change. Donald Trump’s acceptance speech at the Republican National Convention on July 19th highlighted his intent to revive America’s fossil fuel industry. Declaring, “We will drill, baby, drill!” Trump pledged to ramp up domestic fossil fuel production to unprecedented levels, with the aim of making the United States "energy dominant" on the global stage. His commitment to this vision was evident in his efforts to court oil industry leaders, promising to roll back President Joe Biden’s environmental regulations in exchange for financial support for his re-election campaign.

Trump’s team argues that unleashing vast untapped oil reserves in regions like Alaska and the Gulf of Mexico could significantly boost production if environmental regulations were eased. However, experts contend that such plans might not significantly alter the U.S. energy landscape, whether fossil or renewable. Despite the oil industry’s grievances under Biden, the sector has seen substantial growth, with oil and gas production reaching record levels. Biden’s administration has issued more drilling permits in its first three years than Trump did during his entire term, and the profits of major oil companies have soared due to the 2020s global commodities boom.

Federal Policy and Oil Production

The impact of federal policy on oil production is often tempered by broader market dynamics and investor behaviour. The oil industry, particularly after the financial strains of the shale boom, now prioritises capital discipline, driven more by market conditions and Wall Street’s influence than by the White House’s policies. Even if Trump were to win the presidency, the overall trajectory of oil production is likely to continue being shaped by global supply-demand balances and the strategic decisions of organisations like OPEC.

Interestingly, Trump’s promise to repeal Biden’s Inflation Reduction Act (IRA)—which includes substantial subsidies for green energy—may face significant obstacles. The IRA’s benefits are largely concentrated in Republican districts, and industries traditionally aligned with fossil fuels are beginning to recognise the advantages of low-carbon technologies. For example, companies benefiting from the IRA’s subsidies for hydrogen and carbon capture are prepared to defend these incentives against any potential repeal.

Conclusion

The urgency of addressing climate change is often underestimated due to a common misunderstanding of the non-linear feedback loops involved in ecosystem collapse. Many tend to view emissions as a simple, transactional force with nature, failing to grasp the exponential and potentially catastrophic consequences of inaction. This underestimation leads to a dangerous complacency, undervaluing the need for urgent and robust policy action. 

The U.S. holds significant sway over global climate outcomes mainly because of two reasons: (1) It is the second largest emitter; and (2) it is one of the only countries in the world for climate policy to be a partisan issue, making it particularly susceptible to hampering global emissions targets.

With much of the Global South still dependent on coal, oil, and gas, a unilateral decision by the U.S. to aggressively increase fossil fuel consumption could single-handedly push the planet toward an irreversible climate disaster. The stakes are incredibly high, especially as the political economy of the green transition faces opposition from entrenched fossil fuel interests. These forces work to delay and obstruct the shift to renewable energy, despite the clear and present need to accelerate this transition to prevent ecological collapse.

Having already surpassed 1.5C warming; the world is headed towards 4.1-4.8C warming without climate action policies; 2.5-2.9C warming with current policies; and 2.1C warming with current pledges and targets. In this context, if the U.S. were to aggressively change course and begin burning more, instead of less as Trump suggests—it may severely hamper the ability of the global ecosystem to recover and restore, potentially breaching already critical tipping points.

Graph 4.0 (projected warming in different scenarios)

Therefore, it becomes more important than ever for climate-conscious energy policy, to recognise that ecological collapse is a non-linear and irreversible outcome of breaching environmental tipping points, and to underscore the need to prevent misinformation on climate change spreading as a result of forces acting against renewable energy in the political economy of the green transition.

The good news, however, may be that while Republicans may advocate for a new oil boom, the realities of global markets and investor behaviour suggest a different outcome. Wall Street, driven by a cost-benefit analysis that increasingly favours renewable energy, may not align with the interests of a pro-fossil fuel administration. Although the White House can influence energy policy, it is ultimately market forces that will dictate the future of America's energy landscape. This shift towards green energy, driven by economic viability and technological advancements, underscores the need for accelerated action to mitigate climate risks and ensure a sustainable future.

Nickel and Dime: The Philippines' Approach to Attracting Western Capital

Introduction

Aware of the integral role of critical minerals in clean energy systems and other modern technologies, the Philippines has begun courting Western investment to develop its domestic critical mineral industry. The country has vast reserves of untapped natural resources, including nickel, a critical component of electric vehicle (EV) batteries. According to the International Energy Agency, global demand for nickel is expected to increase by approximately 65% by the end of the decade. The Philippines stands to financially benefit from the expected surge of demand for nickel in the coming years, but must first build the requisite infrastructure (e.g., mines, refining plants, processing facilities, transport hubs, etc.) to realise the economic potential of this mineral resource.

To attract increased foreign investment, the Philippines is positioning itself as an alternative to China in the global nickel supply chain. This stance draws from the rationale that the United States (U.S.) and other Western countries will want to diversify their critical mineral supply chains away from China given contemporary security concerns with China and its dominance over nickel supplies and processing capabilities. Such a strategy has both geopolitical and economic implications, especially as it relates to strategic trading and investment blocs that reflect the U.S.-China power competition. By aligning with Western interests, the Philippines aims to bolster its economic growth while contributing to a more balanced global supply chain for critical minerals.

Nickel Industry in the Philippines

The Philippines is currently the world’s second-largest supplier of nickel, accounting for 11% of global production. The country’s nickel exports are expected to increase over the next couple of years to meet growing global demand, particularly in the EV sector. However, this outlook depends on how the country navigates other political and economic factors, including (1) volatility in market prices; (2) trade relations and international partnerships; (3) ability to attract foreign investment; (4) the implementation of government policies that promote industry development; and (5) environmental, social, and governance considerations. The Philippines Government has seemingly decided that, at its current stage, the best way to develop the country’s nickel production capacity is by focusing on boosting foreign investment in the domestic nickel industry.

Investment Strategy

Indonesia is the largest global supplier of nickel, producing over 40% of the world’s nickel in 2023. Approximately 90% of Indonesia’s nickel industry is controlled by Chinese companies, giving China a dominant market position over nickel. The market concentration of this critical mineral has caused unease and consternation amongst Western nations that fear China may leverage this control over the global nickel supply chain to their disadvantage. The Philippines, which itself has experienced escalating tensions with China over territorial claims in the South China Sea, has leveraged this fear, attempting to use it to spur greater foreign investment in their own nickel industry. Through this investment, the Philippine government hopes to develop the domestic nickel sector, especially as it relates to downstream processing, where most of the value-added occurs. The investment strategy comes amid a broader effort to augment economic ties and foster greater alignment with the U.S. and its allies, although the country is still open to Chinese investment. Government officials in Manila have shared that the U.S., Australia, Britain, Canada, and European Union have all expressed interest in directing investment to the Philippines’ nickel sector.

To date, there have been a few initiatives to advance the Philippines’ nickel industry. In late 2023, government officials from the Philippines and the U.S. signed a Memorandum of Understanding that provided $5 million to set up a technical assistance programme to develop the Philippines’ critical mineral sector. The leaders of the U.S., Japan, and the Philippines also held an economic security summit in April 2024 that featured discussions on strengthening critical mineral supply chains. Similarly, there have been preliminary talks about a trilateral arrangement in which the Philippines would supply raw nickel, the U.S. would provide financing, and a third country (e.g., Australia) would offer the technology necessary to process and refine the nickel. However, thus far, these discussions have yielded little in the way of concrete financing or investment initiatives that would provide notable benefit to the industry.

Geopolitical and Geoeconomic Implications

While the U.S. and its allies support a diversification of the global nickel supply chain, their ability to shift the paradigm will likely prove to be a difficult undertaking. Strengthening the Philippines’ nickel mining, processing, and refining capacity up to a level in which it will be able to recapture significant market share from Indonesia and China will require a huge amount of economic and political resources. This is something most countries will shy away from incurring in an important election year. For example, the U.S. has communicated its reluctance to sign a critical minerals agreement amidst the 2024 U.S. presidential race. Further, countries will not want to antagonise China and risk retaliation, given that many economies currently rely on China for the production and processing of critical minerals and their downstream technologies.

As a result of major Chinese investment and technological innovation, Indonesia’s production of nickel has notably increased in recent years. This flood of new nickel supplies has put downward pressure on global nickel prices and crowded out competition from entering the market. With slumping prices, it may be a challenge to attract sufficient foreign financing without a policy framework or safeguards that could inspire greater investor confidence. A potential remedy could be regulatory policies and tax incentives that favour non-Chinese companies. Nevertheless, the economic development associated with increased nickel production is integral to the Philippines economy, so the country does not want to alienate Chinese investors if they prove to be the best path forward.

Concluding Remarks

The Philippines’ strategic efforts to develop its nickel industry through Western investment illustrate the dynamics of economic ambition and geopolitical considerations. By positioning itself as a viable alternative to the China-dominated Indonesian nickel industry, the Philippines aims to leverage global security concerns to increase investment in its domestic nickel sector. However, the realisation of this ambition will hinge on overcoming significant political and economic challenges, such as fluctuating prices and dynamic geopolitical tensions. As the country navigates these hurdles, the outcome of its initiatives will significantly impact its role in the global critical minerals supply chain, shaping future economic and strategic alignments.

Small Modular Reactors Nuclear Renaissance?

In the era of climate urgency, increasing energy demands, and geopolitical uncertainties, Small Modular Reactors (SMRs) could redefine the energy landscape and provide viable alternatives to current energy sources. SMRs present a scalable, safer alternative to traditional nuclear power. This report from London Politica explores the potential of SMRs to revolutionise energy production, mitigate climate change, and enhance energy security. With uranium prices soaring and global interest in nuclear energy surging, SMRs are poised to play a critical role in the nuclear renaissance.

Our comprehensive analysis covers key regions, including the US, Europe, and China, examining their nuclear strategies, regulatory landscapes, and market dynamics. We also delve into the controversies surrounding uranium supply chains and the broader political and economic implications of nuclear power. Dive into our in-depth analysis of the future of SMRs and their global impact.

Mexico’s Election Impact on Energy Policy

Background

On 2nd June 2024, Claudia Sheinbaum made history by being elected as Mexico’s first female president. With a strong academic background, Sheinbaum is a physicist holding a doctorate in energy engineering and was part of the Nobel Peace Prize winning UN panel on climate change. Sheinbaum’s economic agenda aims to capitalise on the opportunities presented by American nearshoring efforts, contingent on a stable and expanding energy supply. 

Mexico is one of the largest oil suppliers in the world, having produced 1.6 million barrels daily in 2022. The country is also ranked 13th in the global crude oil output. Whilst Sheinbaum has promised to accelerate Mexico’s clean energy transition and aims to generate 50% of its energy from renewables by 2030, most spectators are divided. Some hope her scientific background will lead to a greater emphasis on clean energy, while others fear she might follow the policies of her predecessor, Andrés Manuel López Obrador, who invested heavily in bolstering fossil fuel-reliant state energy companies, PEMEX (Petróleos Mexicanos) and CFE (Comisión Federal de Electricidad). 

Regardless of her position on energy transition, Sheinbaum faces the challenge of restoring investor confidence, which was shaken during López Obrador’s administration. Without this achievement, the new leader cannot guarantee Mexico’s energy stability and it could jeopardise the country’s commitment under the US - Mexico - Canada Agreement (USMCA) and the Paris Agreement.

Mexico’s gas supply, traditionally dominated by PEMEX, faced disruptions due to declining production and pipeline congestions. An energy reform in 2013 allowed private firms to enter the gas market to boost market competition and supply reliability. However, under López Obrador, the private sector participation was viewed as a threat, and efforts were allocated to prioritise PEMEX’s production. Currently, the company is the most indebted oil corporation in the world, with its stocks having a -5.74% 3-year return, compared to +11.48% from other companies in the same period and sector. 

Considerations for Sheinbaum’s Energy Strategy

Sheinbaum has a decision to make regarding the energy future of Mexico. There is a confluence of energy-related factors that Sheinbaum will need to consider early in her administration, such as increasing domestic energy demands, pressure from environmental groups and international climate regimes, a deepened reliance on energy imports from abroad, and foreign companies’ dissatisfaction with the state’s current control of the energy sector.

Sheinbaum has long supported the state-centric energy policies of the previous administration, including legislative amendments that rolled back the 2013 constitutional reforms that helped liberalise the Mexican energy sector. Nevertheless, while Sheinbaum continues to defend the energy policies of the previous López Obrador administration, she is more pragmatic than her predecessor, which may provide a path for potential policy change to deal with the various energy issues facing her administration.

One area where Sheinbaum differs from López Obrador is the role of renewable energy sources in Mexico’s energy mix. Sheinbaum has a robust environmental pedigree and has published extensively on the clean energy transition. During her time as mayor of Mexico City, she implemented clean energy infrastructure and electrified transportation modalities. Furthermore, according to her campaign platform, she is committed to progressing Mexico’s clean energy transition and decarbonising the economy. However, climate progress under the Sheinbaum administration is likely to be tempered by fossil fuel supporters. Mexico still strongly depends on the oil and gas industry for its energy needs, accounting for over 80% of its energy mix in 2022. Understanding the necessity of oil and gas for the domestic economy, Sheinbaum has championed domestic oil production and supports the central role of PEMEX in the energy sector.

Source: IEA (2024)

As Mexican energy sovereignty will likely continue to be a focus for Sheinbaum’s administration, issues related to weak foreign direct investment in the Mexican energy industry are likely to persist. Under the current policy framework, private industry does not have an incentive to invest in exploration and production activities in Mexico. Lax private investment coupled with recent financial struggles at PEMEX may result in insufficient investment in Mexico’s energy infrastructure and increased reliance on energy imports. Therefore, to address the increased domestic energy demands, Sheinbaum may alter the government's prevailing energy strategy to ensure sustainable and robust energy supplies by providing private companies more control/access to the energy sector.

There are also broader trade implications regarding Sheinbaum’s potential approach to Mexico’s energy strategy, particularly how it impacts the country’s relationship with the US. The US Trade Representative communicated to its Mexican counterpart that the legislative amendments passed under the López Obrador administration violated investment provisions stipulated by the USMCA, leading the US to open dispute settlement consultations to address the issue. If a negotiated agreement is not reached, the US could invoke trade sanctions targeting Mexico in response. Failure to reaffirm Mexico’s commitment to the trade agreement could also lead to neglect of economic opportunities stemming from American nearshoring efforts.

The outcome of the 2024 U.S. presidential election will undoubtedly further impact Mexico’s energy sector, especially as it relates to trade and investment. Sheinbaum’s industrial policy plans and interest in promoting a green economy align with Biden’s focus on the clean energy transition and nearshoring efforts. Conversely, a Trump White House may provide a more hostile and coercive environment for Sheinbaum to operate within.

Outlook

Given the current instability affecting the early stage of Claudia Sheinbaum’s administration, companies and investors need to adapt their current strategy to seize the right set of circumstances for their business. 

Despite the undefined agenda for energy public policies and the ongoing debate between energy transition and oil investment, Sheinbaum will need to prioritise a stable domestic energy supply. Therefore, companies that want to be aligned with the government's agenda should invest in projects focused on new technologies that bolster domestic production or increase resilience.

Foreign companies may have concerns about the continuation of policies aligned with López Obrador’s approach, especially given the limited or even absent participation of private investment in Mexican oil companies in recent years. To mitigate this risk, companies can engage and promote public-private partnerships, which can foster joint ventures. However, joint ventures can present risk in the case of the nationalisation of foreign companies, but this is unlikely to occur under Sheinbaum’s presidency. Investors should focus on sectors that are likely to receive government support, such as technologies that enhance energy independence or generate a constant supply.

It is important to mention that there will be clearer indications if Sheinbaum will prioritise climate commitments or follow the steps of her predecessor in due course. Additionally, the outcome of the US elections is likely to significantly impact the country’s energy policy framework.

Eastern Entente: Houthi Campaign

Following developments in the Houthi campaign, the growing cooperation between China, Russia, and Iran is becoming a major concern for the Red Sea region. This emerging ‘Axis’ increases uncertainty for stakeholders in commodity trade, as the stability of the Suez Canal, Strait of Hormuz, and Gulf of Oman are threatened. Iran’s power projection in the region, characterised by the use of proxy groups in an ‘Axis’ of resistance, has paralysed global trade flows. Although China and Russia's involvement is presented as a means to stabilise the region and foster trade, rising scepticism clouds maritime traffic and worsen future prospects (as quantitatively analysed in a recent article by the Global Commodities Watch). The geopolitical and economic implications are profound and pose risks to all parties involved, raising questions about the motives behind this new ‘Axis’ formation and what it means for the disruptive ‘Axis of Resistance’.

Axis of Resistance - In Retrospect

Since the Iranian Revolution of 1979, the Tehran regime’s foreign policy has been characterised by its desire to propagate its brand of Shi’a Islam across the Middle East. To this end, it has long developed and fostered relationships with sympathetic proxy groups throughout the region. This has allowed it to project power in locations that might otherwise be beyond its reach while exercising some degree of “plausible deniability." In January 2022, this prompted the former Israeli Prime Minister, Naftali Bennett, to brand Iran “an octopus” of terror whose tentacles spread across the Middle East. 

The country’s so-called “Axis of Resistance'' has expanded since 1979, its first major franchise being Hezbollah, which was founded in 1982 to counter Israel’s invasion of Lebanon that year. Its most recent recruit has been the Houthis. This group was established in northern Yemen in the 1980s to defend the rights of the country’s Shi’a Zaidi minority. What was initially a politico-religious organisation then evolved into an armed group that fought the government for greater freedoms. It was able to exploit the chaos of the Arab Spring to capture the national capital, Sana’a, in the autumn of 2014, and the group now controls around 80% of Yemen’s population.

Exactly when the Houthis became a part of the “Axis of Resistance” is something of a moot point, but the general consensus among the group’s observers is that it started receiving Iranian military assistance around 2009, with this almost certainly contributing to its capture of the Yemeni capital, Sana’a, in 2014. Since the HAMAS attack against Israel on October 7, 2023, it has rapidly emerged as a key Iranian franchise whose focus has been attacking shipping in the southern Red Sea. At the time of writing, an excess of 40 vessels had been targeted, while repeated US-led strikes against Houthi military infrastructure on the Yemeni coast appeared to have had limited success in degrading the group’s intent or capability. 

March 2024 saw a proliferation in the number and efficacy of attacks, with the first three fatalities reported on the sixth of the month as the Barbados-flagged bulk carrier True Confidence was struck near the coast of Yemen. Around three weeks later, on March 26th, four ships were attacked with six drones or missiles in a single 72-hour period. Separately, on March 17th, what is believed to have been a Houthi cruise missile breached southern Israel’s air defences, coming down somewhere north of Eilat, albeit harmlessly.

Since starting their campaign against mainly international commercial shipping in the waters of the Red Sea and Gulf of Aden in November 2023, the Houthis have become one of the mostaggressive Iranian proxy groups in the Middle East. This and their apparently strengthened resolve in the face of US and UK strikes have substantially raised their profile internationally and won them plentifulplauditsfrom their supporters across the region. The perception that they are standing up to the US, Israel, and their Western cohorts has been instrumental in developing their motto“God is great, death to the U.S., death to Israel, curse the Jews, and victory for Islam” into a mission statement.

Map of Houthi Attacks

Source: BBC

Iran-Houthi Mutualism

In terms of regional geopolitics, the mutual benefits to Iran and the Houthis of their cooperation are far-reaching. For their part, the Iranians can use the Houthis to project power west into the Red Sea and Gulf of Aden, pushing back against the influence of Saudi Arabia and other Sunni states. Although not part of the Abrahamic Accords of 2020, Riyadh has been showing signs of a willingness to harmonise diplomatic relations with Israel, even since the events following October 7, 2023. This is a complete anathema to Tehran, for which the Palestinian cause is central to its historic antagonism with Tel Aviv. The fact that Saudi Arabia was instrumental in setting up the coalition of nine countries that intervened against the Houthis in Yemen from 2015 onwards only strengthens Tehran’s desire to confront the country’s influence regionally.

A secondary benefit of the Houthis’ Red Sea campaign is that it helps to maintain Tehran’s maritime supply lines to some of its franchise groups further north in Lebanon, Gaza, and Syria. Their importance to Iran’s proxy operations was illustrated in March 2014 when the Israel Defence Forces (IDF) conducted “Operation Discovery,"  intercepting a cargo ship bound for Port Sudan on the Red Sea’s western shores carrying a large number of M-302 long-range rockets. Originating in Syria, they were reckoned to have been destined for HAMAS in Gaza following a circuitous route that included Iran and Iraq and which would have culminated in a land journey from Port Sudan north through Egypt to the Levant. 

Iran began to increase its military presence in the Red Sea in February 2011 and has since established a near-permanent presence there and in the Gulf of Aden, to the south, with both surface vessels and submarines. However, this footprint is relatively weak compared to that of its presence in the Persian Gulf, to the east, and it would be no match for the Western vessels that have been operating against the Houthis in the Red Sea since late 2023. The latter’s campaign in these waters can, therefore, only reinforce Iran’s presence thereabouts.

A lesser-known reason for Iran’s desire to maintain influence around the Red Sea is a small archipelago of four islands strategically located on the eastern approaches to the Gulf of Aden from the Indian Ocean and Arabian Sea. The largest of the four islands is called Socotra and is considered by some to have been the location of the Garden of Eden. With a surface area of a little over 1,400 square miles, it has, in recent years, found itself more and more embroiled in the struggle for hegemony between Iran and its Sunni opponents in the region. In this sense, it and its neighbours could be seen to have an equivalence to some of the small islands and atolls of the South China Sea that are now finding themselves increasingly on the frontlines of Beijing’s regional expansionism.

While officially Yemeni, Socotra has long enjoyed close ties with the United Arab Emirates (UAE), with approximately 30% of the island’s population residing in the latter. Following a series of very damaging extreme weather events in 2015 and 2018, the UAE strengthened its hold on Socotra by providing much-needed aid, with military units arriving entirely unannounced in April 2018. Vocal opposition from the Saudi-allied Yemeni government led to Riyadh deploying its own forces to the island in the same year, but these were forced to withdraw in 2020 when the UAE-allied Southern Transition Council (STC) took full control of the island. Since then, Socotra has been considered to be a de facto UAE protectorate, extending the latter’s own influence south into the Gulf of Aden.

Shortly after came the signing of the Abrahamic Accords, which normalised relations between Israel and several other regional countries, including the UAE. Enhanced cooperation with the UAE gave Tel Aviv a unique opportunity to expand its own influence in the region through military cooperation with its new ally. In the summer of 2022, it was reported that some inhabitants of the small island of Abd al-Kuri, 130 km west of Socotra, had been forced from their homes to make way for what has been described as a joint UAE-Israeli “spy base." For Iran, this means that Israel now has a presence at a strategic point on the strategically vital approaches to the Red Sea from the Indian Ocean.

Perhaps a greater irritant for both the Houthis and Iran is the presence of UAE forces on the small island of Perim. This sits just 3 km from the Yemeni coast in the eastern portion of the Bab al-Mandab Strait, giving it obvious strategic importance. The UAE took the island from Houthi forces in 2015 and started to construct an airbase there almost immediately. Although there is no known Israeli presence there, Perim is now a major thorn in the side of Iran’s own regional ambitions. In the regional tussle for supremacy, this is yet another very pragmatic reason for the Houthi-Iran relationship.

Perim Airbase

Source: The Guardian

Since February 2022, much has been made of the extent to which Ukraine has become a weapons incubator for both sides in the conflict there, not least with regard to innovative drone and AI technology. Given the range of weaponry now apparently at the disposal of the Houthis in the Red Sea and Gulf of Aden, it may be that that campaign is serving a similar purpose for a Tehran keen to test recent additions to its armoury. Indeed, the Houthis’ use of a range of modern weapons, including drones, Unmanned Underwater Vehicles, and cruise missiles, since November 2023 continues to be reported on a regular basis. 

In return for prosecuting its campaign in the Red Sea, the latter received substantial material military support from Tehran, allowing them to raise their standing even more. The aforementioned attack, which killed three seafarers aboard the True Confidence, was the first effective strike against a ship using an Anti-Ship ballistic Missile (ASBM) in the history of naval warfare. First and foremost, this will have been regarded as a major coup for the Iranian military assets mentoring the Houthis in Yemen. Additionally, it has given the latter’s global standing a further boost since an attack of this magnitude would be more normally associated with the much more sophisticated standing military of a larger country. 

A simplistic analysis of the Houthi-Iranian relationship could stop at this point. However, recent events in the Middle East and further afield show that it is a relatively small coupling in a much larger, global marriage of convenience. A clue to this appeared in media reporting in late January 2024, when The Voice of America reported that Korean Hangul characters had been found on the remains of at least one missile fired by the Houthis. This led to the conclusion that the Yemeni group has received North Korean equipment via Iran.

North Korean missile supposedly used by the Houthis

Source: VOA

Russian Involvement

In late March 2024, Russia and China signed a historic pact with the Houthi in which the nations obtained assurance of safe passage through the Red Sea and Gulf of Aden in return for ‘political support’ to the Shia militant group. Despite the assurance, safety for Russian and Chinese vessels is not guaranteed. In late January, explosions from missiles were recorded just one nautical mile from a Russian vessel shipping oil, while on the 23rd of April, four missiles were launched in the proximity of the Chinese-owned oil tanker Huang Lu. Evidently, increased regional tensions incur an extra security risk for Russian tankers, regardless of the will of the Houthis to keep said tankers safe. 

The Kremlin is trying to walk a thin line between provoking and destabilising the West while simultaneously trying to avoid, literally and figuratively, capsizing regional Russian maritime activity. Its seemingly contradictory two-pronged approach aims to secure vital shipping routes while fostering an anti-Western bond with regional actors. Russia is seen upholding its anti-West rhetoric, which serves as a cornerstone for bonding with regional actors and pushing forth Russian economic interests, while silently attempting to facilitate regional de-escalation led by Washington. Despite being a heavy user of their veto power in the UNSC, Russia abstained from voting on Resolution 2722, which demands the Houthis immediately stop attacks on merchant and commercial vessels in the Red Sea. 

On January 11th, Washington put forth UN Resolution 2722 to the UNSC, which sought to justify attacks on Houthi infrastructure as a push-back for the group’s recent activities in the Red Sea. During the voting procedure of the resolution, Russia chose to abstain, even though Moscow often frequents vetoes as a tactic to show support for Kremlin-friendly states in Africa and the Middle East. The resolution subsequently passed, and the US and UK commenced their first strikes on Yemen the following day. These reveal Russia’s interests in securing enough stability to continue shipping its estimated 3 million barrels of oil a day to India, while aligning with overarching geopolitical alignments. 

Russia’s interest in stabilising regional conflicts may lie in the threats to its weapon supply chains. As the war in Ukraine drags on, Tehran’s importance as a weapon supplier increases the Kremlin’s collaboration efforts. Putin continues to foster and protect regional connections by actively protesting Western regional presence, attempting to balance the current crisis with crucial ties to middle-eastern nations.

Trade Route Diversion

Since the onset of the crisis in the strait, Russia has utilised the opportunity to bolster anti-Western and pro-Russian sentiments. For one, Russia has flagged various Russian transport initiatives. On January 29th, Russia’s Deputy Prime Minister, Alexey Overchuk, noted that Russia’s “main focus is on the development of the North-South international transportation corridor,"  which is a 7200-km multi-modal transport network offering an alternative and shorter trade route between Northern Europe and South Asia.

International North-South Trade Corridor

Source: ResearchGate Article by Eram Ashraf

A key part of the trade route involves an imagined rail network spanning from Russia to Iran. Though positioned as a universally beneficial transport option for both Europe and Asia, it seems Moscow and Tehran would benefit the most. The two highly sanctioned states, whose connection has recently deepened due to their shared economic isolation from the global economy, could position themselves as lynchpins of an effective transport network. 

Unlike Tehran, which still has control over the vital Strait of Hormuz choke point, Russia’s political might in terms of energy transport networks is quickly dwindling after the Baltic states’ complete exit from the BRELL energy system and the West’s resolve to decrease energy dependence. The North-South corridor thereby holds value as a catalyst of global energy transport and trade. 

However, this vision is thwarted by financial crises, with workon the railroad from Rasht to Astara in Iran suffering setbacks. Iran does not have the means to pour into the project and has already obtained a 500 million euro loan (about half of the total cost of construction) from Azerbaijan in FDI. In May 2023, it became known that the Kremlin would fund the project themselves by issuing a 1.3 billion euro loan to Tehran, despite Iran’s ballooning debt to Russia. The same month, Marat Khusnullin, Deputy Prime Minister, announced that Russia is expecting to invest approximately $3.5 billion in the North-South corridor by 2030. This is likely a major underestimation of the costs needed to complete the project. 

With Iran’s growing debt and Russia’s war-born financial strain, further trade route developments are sure to be delayed. Seeing as the railroad project between Russia, Azerbaijan, and Iran has been in existence since 2005 with no concrete end in sight, the North-South Corridor, despite Russia’s active marketing campaign in light of the troubles in the Red Sea, is unlikely to become a viable transport option in the near future. 

The Northern Sea Route (NSR), which Putin has similarly promoted since the start of the Houthi attacks, is likely to suffer a similar fate. The NSR’s realisation as a major global route is hindered by the fact that the Arctic Circle’s harsh climate causes the route to be icebound for about half of the year. Furthermore, in light of the recent war in Ukraine, the NSR is off-limits to even being considered a viable transportation route for large swaths of the West due to sanctions against Putin’s regime. 

Russia: Long-Term Strategy

With Russia’s closest regional naval presence being Tartus in Syria, Russia is also interested in establishing naval bases closer to the Red Sea. Russia’s primary interest is to establish a port in Sudan. High-level bilateral negotiations have been actively taking place between Khartoum and Moscow, with an official deal being announced in late 2020. The construction of a naval base would increase Russia’s influence over Africa, facilitating power projection in the Indian Ocean. Nonetheless, the ongoing Sudanese civil war seems to have stalled negotiations. 

The region is of such strategic interest to Russia that Moscow has recently pushed forth another alternative for bolstering its presence in the Red Sea: a naval base in Eritrea. During a state visit to Eritrea in 2023, Russian Foreign Minister Sergey Lavrov underscored the potential that the Massawa port holds. The same year, a Memorandum of Understanding was signed between the city of Massawa and the Russian Black Sea naval base Sevastopol, in which the two countries pledged to foster closer ties in the future. 

A New Axis
China and Russia have recently struck a deal with the Houthis to ensure ship safety, as reported by a Bloomberg article. Under the agreement, ships from China and Russia are permitted to sail through the Red Sea and the Suez Canal without fear of attack. In return, both countries have agreed to offer some form of “political support” to the Houthis. Although the exact nature of this support remains unclear, one potential manifestation could involve backing the Yemeni militant group in international institutions such as the United Nations Security Council. In January 2024, a resolution condemning attacks carried out by the Houthi rebels off the coast of Yemen was passed, with China and Russia among the four countries that abstained.

Despite instances of misfiring by Chinese ships after the deal, the alignment between these countries has been viewed as the emergence of an “axis of evil 2.0." Coined by former U.S. President George W. Bush at the start of the war on terror in 2002, the term “axis of evil” originally referred to Iran, Iraq, and North Korea, which were accused of sponsoring terrorism by U.S. politicians. Indeed, China and Iran have maintained a robust economic and diplomatic relationship. China is a significant buyer of Iranian oil, purchasing around 90 percent of Iran’s oil output, totalling 1.2 million barrels a day since the beginning of 2023, as the U.S. continues to enforce Iranian oil sanctions.

Chinese Dominance of Iranian Crude Oil Exports

Source: Seeking Alpha

However, it may be far-fetched to consider China, Russia, Iran, and North Korea as a united force akin to the Communist bloc against the West during the Cold War. After all, there are significant tensions within these relationships. For example, Beijing has not fully aligned with Moscow regarding the invasion of Ukraine. Additionally, there are power imbalances within these relationships, as Iran relies on China far more than China relies on Iran.

Despite the thinness of this idea of an "axis," it remains concerning that these powerful countries (three of which are nuclear-armed) are aligning against the democratic world. Considering the volume of trade passing through the Suez Canal and the impossibility for the U.S. and company’s Operation Prosperity Guardian to protect every ship in the region, the deal struck between China, Russia, and Iran may be a significant factor that could shift the current global economic balance towards the side of the "Eastern Axis.”

Similarly, China’s recent activities against the Philippines in the South China Sea could be viewed as an attempt to undermine the Philippines’ economy, which heavily relies on its seaports. This could force the Philippines to capitulate or incur significant costs for the U.S. should it decide to provide more assistance to further enhance the Philippines’ defence capabilities.

China: Long-Term Strategy

In recent years, China has increased its ties with countries outside the ‘Western sphere’. Apart from being present in the Gulf of Oman and destining a myriad of vessels to secure the region, it has made strides in developing long-term partnerships with Russia and Iran. Chinese collaboration with Russia is advertised as having “no limits,”,  and its 25-Year Comprehensive Cooperation Agreement with Iran further cements its political and economic involvement with both nations. 

The security and economic aspects of China’s long-term plans are the most relevant to commodity trade, as violent conflicts and geopolitical tensions are the prime hindrances to trade flows through the region. Nonetheless, the cooperation of these nations does not bode well with the West and could negatively impact trade regardless of improved security. 

China’s circumvention of the financial sanctions placed on Iran mocks the international community’s concerted effort to dissuade Tehran’s human rights violations, nuclear activities, and involvement in the Russia-Ukraine war. Its “teapot” strategy, which allowed China to purchase90% of total Iranian oil exports, relies on the use of dark fleet tankers and small refineries to avoid detection and evade the financial sanctions placed on Iranian exports.

Increased its bilateral trade flows with Russia also point to increased cooperation, with $88 billion worth of energy commodities being imported by China in 2022, with imports of natural gas increasing by 50% and crude oil by 10%, reaching 80 million metric tonnes. In 2023, bilateral trade reached $240 billion, proving both countries hold cooperation as a pillar of their economic strategy.

Chinese-Iranian Oil Trade

Source: Nikkei Asia

The West has increased efforts to dissuade cooperation with Russia, as seen with the creation of the secondary sanction authority. These sanctions cut off financial institutions that transact with Russia’s military complex from the U.S. financial system and have successfully led three of the largest Chinese banks to cease transactions with sanctioned companies. Despite the success of certain measures and sanctions, cooperation between both states remains, and their involvement in the Middle East will ensure collaborative efforts for the foreseeable future. 

Conclusion

The evident development of collaborative endeavours among the ‘Eastern Axis’ countries is enough to engender strife and uncertainty in trade in the Red Sea. It is becoming increasingly evident that uncertainty will still roam the seas regardless of whether the Houthi conflict is tamed, preventing maritime trade in the Red Sea’s key routes from reaching their potential. The reliance of regional security on both violent attacks and political alignments, such as the involvement of the Eastern Axis in the region, highlights how deeply supply-chain stability is intertwined with geopolitical relations, establishing Iran as a determinant of the Red Sea’s future commodity trade prosperity.

Australian Mining in Crisis: Nickel’s Price Plunge

On February 16th, Australia added nickel to its Critical Minerals List to protect its mining industry from strong competition from low-cost Indonesian nickel. Indonesia’s nickel industry is expected to continue growing, backed by pursuant investments from China. Australia’s inclusion of nickel makes the mineral eligible for a 3.9 billion-dollar fund to support the minerals industries linked to the energy transition through grants and loans with low-interest rates. This inclusion is a response to the persistent downward trend of nickel prices that began at the end of 2022, caused by an increase in the supply of cheaper nickel produced in Indonesia. Nickel is used to manufacture batteries for electrical vehicles (EVs) and stainless steel. However, the low-profit margin of nickel exploitation, in combination with increased competition from Indonesia, is jeopardising the Australian mining industry and pushing investors away from Australian mines.

Chinese Investment Into Indonesian Nickel And Its Impacts On Australia

One of the biggest reasons for the global decline in nickel prices, which decreased by 45% in the past year, is Chinese investment in Indonesia. In 2020, Indonesia–which holds 42% of the global nickel reserves–reinstated a ban on unprocessed nickel exports to encourage onshore investment in its processing industry. Large multinational companies, such as Ford and Hyundai, invested in ore processing and manufacturing in the archipelago to access its nickel reserves. Indonesian lateritic nickel ore is attractive as it is closer to the surface than the sulphide ore found in Australia or Canada, making the required infrastructure to exploit it significantly cheaper. The sector received massive Chinese investments in various forms, such as refineries, smelters, and metallurgic schools, to develop the industry that had not previously evolved due to the lack of business know-how and financial investments. In 2022, Chinese investments accounted for 94.1% of the total foreign direct investments in the Indonesian reserves, as seen in the “Nickel Rush” chart below. The investments increased quickly after the ban on unprocessed Indonesian nickel in 2014, which was later eased. These investments boosted the production efficiency of Indonesian refined and semi-refined nickel, representing 55% of the world's total nickel supply in 2023 and potentially increasing its market share to 75% by 2030. 

The chart can be found here.

The investment inflows towards Indonesian nickel also helped its laterite nickel ore to become more competitive compared to foreign ones. Primary nickel production is divided into two grades: (1) low-grade or Class II, which is used to manufacture stainless steel and found mainly in Indonesia, and (2) high-grade or Class I, which is used in batteries and can be found in Canada and Australia. While Indonesia has an abundant reserve of low-grade nickel, investments in the industry enabled its producers to apply sophisticated methods to upgrade its nickel to a higher grade. With the improved quality, this type of nickel can be used for batteries, after applying high temperature and pressure methods called high-pressure acid leaching (HPAL), allowing the Indonesian nickel to compete with other countries.

Global Challenges Impacting Nickel Demand

From the demand side, China, Europe, and the United States–Australia’s largest nickel importers—are simultaneously experiencing reduced demand for various reasons. The stainless steel market, which accounts for 75% of nickel use, was sluggish in 2023 due to a slow economic recovery in Europe and the US, which are still recovering from pre-COVID levels. Demand is set to increase by 8% in 2024, but the oversupply mutes its effects. As Sino-American tensions grow, China, the biggest EV market, faces deep and complex economic challenges, including a lack of trust from investors and buyers. Europe, the second biggest EV consumer, has seen the end of tax breaks and other government incentives to buy EVs. Moreover, the US’ high-interest rates prevent consumers from taking out loans, including for EV purchases. The combination of these factors is plummeting the aggregate demand for EVs, thus further pushing down nickel prices, an important mineral for EV batteries. 

Consequently, Australian nickel mines are becoming uncompetitive at the current price range, with many even shutting down as nickel prices are expected to continue decreasing throughout 2024. The unit cost per ton of Australian nickel is 28% higher than in Indonesia. Also, while nickel prices decreased globally, its Australian production cost has increased by 49% since 2019, driven by rising wages. The London Metal Exchange (LME) listed nickel closed at US$16.356 per metric ton on February 16, a downward trend since its peak of around US$33,000 per metric ton in December 2022, as seen in the chart below. Companies such as IGO, First Quantum, and Wyloo Metals, some of the most prominent actors in Australian nickel mining, have pulled back investments or suspended part of their businesses.

Chart made by the author with data from Investing.com

These recent developments threaten the jobs of many Australian workers. BHP, the largest Australian mining company, recently announced it may take an impairment charge of around US$3.5 billion. The company plans to shut down its Nickel West division, which employs nearly 3,000 people. In total, the Australian nickel industry supported 10,000 jobs in 2023.

The situation is not exclusive to Australia. Eramet, a French mining company, lost 85% in revenue in 2023 in its New Caledonia nickel plant without any prospect of having government aid to increase its competitiveness. Macquarie, an asset management firm, estimates that 7% of the total nickel production has been removed due to closures. Even so, Australia will likely be the most affected. The country has 18% of global nickel reserves, but it is no longer competitive and is left contemplating the potential of its uncompetitive reserves. 

The Debate Over 'Dirty' vs 'Clean' Nickel

There may be a solution to Australia’s nickel problem beyond access to the Australian Critical Mineral Facility Fund. Australian nickel producers are subjected to more strict sustainable standards than Indonesia, increasing costs. The refining of Australian nickel produces six times fewer emissions than other countries, including Indonesia. For these reasons, Madeleine King, the Australian Resources minister, urged the LME to split the listing of nickel into two categories: “dirty” coal-produced nickel and “clean” green nickel. Mining businessmen also demand this separation to motivate buyers to pay a premium for Australian and other nickel supplies with a smaller carbon footprint to level the competition against Indonesian nickel with this premium. This type of split in mineral contracts already exists, such as for aluminium and copper.

LME officials also declare that classifying minerals according to ESG criteria is a tough challenge given the lack of a universal ESG standard. Currently, carbon emissions per ton of the nickel listed in the LME vary greatly, from 6 to 100 tons of carbon dioxide per ton of nickel produced, and the lack of a standard makes it difficult to estimate the absolute emissions that would classify a nickel as “clean”. Currently, the LME classifies low-carbon nickel as producing less than 20 tons of carbon dioxide per ton, and it is working on a more precise definition with nickel specialists.

Reshaping the Australian nickel industry

It is unlikely that the LME will list green nickel separately from “dirty” nickel soon, given the liquidity threats this incurs. The broker wants to solidify buyers' confidence after the 2022 nickel episode before making changes that can jeopardise liquidity. LME officials stated in mid-March of this year that they have no plans to do so as the market size of a green nickel is not large enough to split it. On the other hand, Metalhub, a digital broker, recently started to split its nickel listing with the support of the LME. MetalHub allows the producers to have an ESG certificate tailored to their emissions per ton, which is more flexible than the LME ESG standards. The demand for the “clean” nickel in the digital broker would determine an index price used to derive the premium for this product type and delimit the liquidity of this trade contract. The digital broker plans to release the contract data when the volume traded increases.

It will be challenging to see nickel prices at levels that would make Australia's nickel mining industry competitive again. Indonesia is not hiding the fact that it wants to influence market prices with its nickel supply. According to Septian Hario Seto, an Indonesian deputy overseeing mining, the current price allows Indonesian nickel producers to sustain their activities. Also, low nickel prices will lower the costs of its emerging battery industry, completing the strategy to build an Indonesian upstream industry of batteries. 

The access to Australia’s Critical Minerals Facility fund, in combination with the Inflation Reduction Act (IRA) from the US, brings the expectation of an increase in investment towards the nickel industry. The Australian fund will be crucial to leverage projects to reduce costs by increasing productivity and infrastructure efficiency related to high costs such as energy, water, high-skilled labour, and transport. Also, the US’ IRA is set to increase the demand for Australian nickel, as it obliges US industries to purchase 40% of its critical minerals needs from either domestic producers or countries with which the US has a free trade agreement–wherein Australia is one of them. The two, combined with ever-evolving environmental regulations leading to a greater demand for EVs, can bring the required financial boost for Australia’s upstream nickel production. However, it will be more difficult for its nickel downstream industry given internal inflation and external competition not only from Indonesia but from all the countries building plans to rebuild their national processing industries. 

When it comes to nickel buyers, assuming standard market incentives, they will pay more if they see an advantage in buying a cleaner metal, such as government subsidies or a bigger profit margin on selling a greener EV. Summing up, Australia chose to include nickel in its Critical Minerals List, assuming a big part of the responsibility to protect the industry. The government is one of the stakeholders with the financial ability and the incentive to avoid adverse socioeconomic developments. Minister King is also working with counterparts to advocate for robust standards in production to be reflected in a price premium. These counterparts–namely the US, the EU, and Canada–have the same interest in building an alternative supply chain to the Chinese one. The combination of factors such as the Critical Mineral Facility Fund, the IRA, and a possible stable price premium will give much-needed relief to persisting uncompetitive problems faced by Australian nickel producers. This seems to be the beginning of a pathway towards enhanced competitiveness for Australian nickel miners and, possibly, more sustainable nickel standards.

Even so, more funds might be insufficient to make the Australian nickel miners more competitive. Indonesia has a competitive advantage with a low production price that incurs high costs to its citizens. Coal mines are being constructed to fuel energy-intensive activities to upgrade the Indonesian nickel, making the country reach record levels of coal consumption and carbon emissions. Rivers are contaminated with heavy metals from the mines and refineries, exposing inadequate waste disposals. Addressing these environmental and social costs will level up Indonesian nickel prices, indirectly benefiting Australia and promising relief for the communities burdened by these impacts. 

The LNG Freeze Limbo: How the US Export Pause is Reshaping Global Gas Dynamics

The Biden administration recently suspended granting permits for new liquified natural gas (LNG) imports, which will likely have major impacts on global energy security, especially for the European Union (EU). The move comes amidst growing protests against the Biden administration over its lacklustre plan to make a swift transition to green energy ecosystems. As per the White House, the decision aims to address domestic health concerns, such as increasing pollution near export facilities. However, the timing of the decision raises serious concerns, especially as the US’ European allies grapple with energy shortages since the Russian invasion of Ukraine 2 years ago. 

The EU has been greatly dependent on LNG exports from the US in dealing with energy shortages following its decision to stop Russian exports. For instance, in the first half of 2023, the US exported more liquefied natural gas than any other country – 11.6 billion cubic feet a day. That same year, 60 per cent of US LNG exports were delivered to Europe and 46 per cent of European imports came from the US. This abrupt decision by President Biden, prioritising domestic concerns over international energy security and stability, is a long term challenge for US allies in Europe, as well as in Asia. 

Despite the EU having fairly dealt with the energy shortages, a potentially long, harsh winter season later this year could further complicate the entire scenario, given the strong correlation between weather and gas prices. Winter conditions are, thus, likely to increase LNG demands, thereby increasing gas prices. Hence, shutting down gas exports to Europe is likely to accelerate geopolitical risks. This would imply diverting economic supply by the EU for Ukraine to deal with the impending energy crisis. 

Many of the developing economies in Asia have traditionally been heavy consumers of coal and fossil fuels, primarily due to a lack of infrastructural capabilities to harness renewable sources of energy. Early LNG developments, especially in South East Asia were spurred on by the 1973 oil shock, which brought the need to diversify away from Middle Eastern oil for power generation. Consisting of many developing economies, countries in Asia wanted to rely on a stable and efficient partner to develop their energy ecosystems running on a fair share of LNG exports. Being the largest exporter of LNG in the world, the US was seen as “the reliable partner.” Hence, the recent announcement by the White House has been taken seriously in Asia, given that it might hinder the progress of capacity expansion projects in the region. 

Moreover, one of the US’ strategic allies in the region, Japan, could be hit extremely hard by the recent development, given that it is the world’s second-largest purchaser of LNG, with a huge proportion of the imports coming from the United States. Several Japanese companies, especially JERA, have been foundation buyers of LNG export projects and this announcement is likely to hinder their business prospects in the present and the future. Moreover, the future implications of the pause are even more disastrous for the other allies of the US, especially smaller countries like the Philippines, which is currently undergoing energy shocks.  The Philippines relies heavily on the electricity and natural gas acquired from the Malampaya gas field. This reserve is expected to run dry in 2027, causing an energy crisis. The nation must now choose between transitioning to renewable energy or continue to rely heavily on the exploration of conventional energy sources which would make them drift further apart from their commitments towards cutting down carbon emissions. The leadership in Manila initially looked to the United States to provide initial relief over its impending energy crisis by importing LNG reserves from the US. However, the latest White House decision will very well make the Philippines’ political leadership exhibit signs of perplexity and look for other alternatives as the Southeast Asian nation continues to grapple with an ongoing energy crisis which is likely to turn worse in the upcoming years. 

While the decision might highlight the US’ decision to deal with environmental concerns and climate change issues, the abruptness of the decision is likely to raise serious doubts among the allies over Washington’s reliability to help them cope with the ongoing energy crisis, made worse by a sluggish global economy in the aftermath of the COVID-19 pandemic. The move is likely to lead its partners to export LNG from other countries, which have a higher profile of emitting carbon emissions than the US. 

This may also prompt countries to rely heavily on the use of coal and fossil fuels, thereby reversing the trend of actively exploring cleaner energy alternatives. With the global community facing an incoming climate emergency, substantial hope was placed on developed, industrialised countries of the north to create a strong base for the developing economies of the global south to make a transition towards cleaner energy ecosystems.

The US, with one of the largest reserves and the largest exporter of LNG, was seen as the “responsible leader” to effect this transition and, at the same time, stand shoulder to shoulder with struggling economies to deal with the contemporary energy shortage predicament. With ongoing geopolitical crises, the perception of the “pause” being indicative of breaking commitments to international partners and allies, cannot be undermined, in a year that is likely to decide the fate, political will, and the “ability to lead home and abroad amidst challenges” of the incumbent US president.

Featured image by Maciej Margas: PGNiG archive, CC BY-SA 4.0, https://commons.wikimedia.org/w/index.php?curid=90448259

M23: How a local armed rebel group in the DRC is altering the global mining sector

In recent weeks, North Kivu, a province in the eastern part of the Democratic Republic of Congo (DRC), has seen over 135,000 displacements in what has become the latest upsurge in a resurging conflict between the Congolese army and armed rebel groups. The indiscriminate bombing in the region puts an extra strain on the already-lacking humanitarian infrastructure in North Kivu, which thus far harbours approximately 2.5 million forcibly displaced people.

The March 23 Movement, or M23, is an armed rebel group that is threatening to take the strategic town of Sake, which is located a mere 27 kilometres west of North Kivu’s capital, Goma, a city of around two million people. In 2023, M23 became the most active non-state large actor in the DRC. Further advances will exacerbate regional humanitarian needs and could push millions more into displacement. 

The role of minerals  

Eastern Congo is a region that has been plagued with armed violence and mass killings for decades. Over 120 armed groups scramble for access to land, resources, and power. Central to the region, as well as the M23 conflict, is the DRC’s mining industry, which holds untapped deposits of raw minerals–estimated to be worth upwards of US$24 trillion. The recent increase in armed conflict in the region is likely to worsen the production output of the DRC’s mining sector, which accounts for 30 per cent of the country’s GDP and about 98 per cent of the country’s total exports.

The area wherein the wider Kivu Conflicts have unfolded in the last decade overlaps almost entirely with some of the DRC’s most valuable mineral deposits, as armed groups actively exploit these resources for further gain. 

The artisanal and small-scale mining (ASM) sector produces about 90 per cent of the DRC’s mineral output. As the ASM sector typically lacks the size and security needed to efficiently deter influence from regional rebel groups, the mining sector as a whole falls victim to instability as a result of the M23 upsurge. Armed conflict and intervention by armed groups impacts 52 per cent of the mining sites in Eastern Congo, which manifests in the form of illegal taxation and extortion. As such, further acquisitions by M23 in Eastern Congo may put the DRC’s mineral sector under further strain.

The United Nations troop withdrawal

The escalation of the M23 conflict coincides with the United Nations’ plan to pull the entirety of their 13,500 peacekeeping troops out of the region by the end of the year upon the request of the recently re-elected government. With UN troops withdrawn, a military power vacuum is likely to form, thereby worsening insecurity and further damaging the DRC’s mining sector. However, regional armed groups are not the only actors that can clog this gap. 

Regional international involvement

A further problem for the DRC’s mining sector is that the country’s political centre, Kinshasa, is located more than 1,600 km away from North Kivu, while Uganda and Rwanda share a border with the province. 

Figure: Air travel distance between Goma and Kinshasa, Kigali and Kampala (image has been altered from the original)

The distance limits the government’s on-the-ground understanding of regional developments, including the extent of the involvement of armed groups in the ASM sector, thereby restricting the Congolese military’s effectiveness in countering regional rebellions. 

In 2022, UN experts found ‘solid evidence’ that indicates that Rwanda is backing M23 fighters by aiding them with funding, training, and equipment provisions. Despite denials from both Kigali and M23 in explicit collaboration, Rwanda admitted to having military installments in eastern Congo. Rwanda claims that the installments act as a means to defend themselves from the Democratic Forces for the Liberation of Rwanda (FDLR)–an armed rebel group that Kigali asserts includes members who were complicit in the Rwandan genocide. The FDLR serves as a major threat to Kigali’s security, as its main stated aim is to overthrow the Rwandan government. 

As such, M23, on the other hand, provides Rwanda with the opportunity to assert influence in the region and limit FDLR’s regional influence. Tensions between Rwanda and the DRC have, therefore, heightened, especially with the added fact that the Congolese army has provided FDLR with direct support to help the armed group fight against M23 rebels. As such, the DRC has been accused of utilising the FDLR as a proxy to counter Rwandan financial interests in the Congolese mining sector. 

Another major point of contention between the states involves the smuggling of minerals. The DRC’s finance minister, Nicolas Kazadi, claimed Rwanda exported approximately $1bn in gold, as well as tin, tungsten, and tantalum (3T). The US Treasury has previously estimated that over 90 per cent of DRC’s gold is smuggled to neighbouring countries such as Uganda and Rwanda to undergo refinery processes before being exported, mainly to the UAE. Rwanda has repeatedly denied the allegations. 

Furthermore, the tumultuous environment caused by the conflict might foster even weaker checks-and-balance systems, which will exacerbate corruption and mineral trafficking, which is already a serious issue regionally. 

In previous surges of Congolese armed rebel violence, global demand for Congolese minerals plummeted, as companies sought to avoid problematic ‘conflict minerals’. In 2011, sales of tin ore from North Kivu decreased by 90 per cent in one month. Similar trends can be anticipated if the M23 rebellion gains strength, which may create a global market vacuum for other state’s exports to fill. 

China 

In recent years, China gained an economic stronghold of the DRC’s mining sector, as a vast majority of previously US-owned mines were sold off to China during the Obama and Trump administrations. It is estimated that Chinese companies control between 40 to 50 per cent of the DRC’s cobalt production alone. In an interest to protect its economic stakes, China sold nine CH-4 attack drones to the DRC back in February 2023, which the Congolese army utilised to curb the M23 expansion. Furthermore, Uganda has purchased Chinese arms, which it uses to carry out military operations inside of the DRC to counter the attacks of the Allied Democratic Forces (ADF), a Ugandan rebel group, which is based in the DRC. In return for military support, the DRC has granted China compensation via further access to its mining sector, which is helping bolster China’s mass production of electronics and technology within the green sector.

The US

Meanwhile, the US has put forth restrictions on imports of ‘conflict minerals’, which are minerals mined in conflict-ridden regions in DRC for the profit of armed groups. Although the US attempts to maintain certain levels of mineral trade with the DRC, the US’s influence in the country will likely continue to phase out and be overtaken by Beijing. The growing influence of M23 paves the path for further future collaboration between China and the DRC, both militarily and economically within the mining sector. 

The UAE 

The UAE, which is a major destination for smuggled minerals through Rwanda and Uganda, has since sought to end the illicit movement of Congolese precious metals via a joint venture that aims to export ‘fair gold’ directly from Congo to the UAE. In December of 2022, the UAE and DRC signed a 25-year contract over export rights for artisanally mined ores. The policy benefits both the DRC and the UAE as the UAE positions itself as a reliable partner in Kinshasa’s eyes, which paves the path for further business collaboration. In 2023, the UAE sealed a $1.9bn deal with a state-owned Congolese mining company in Congo that seeks to develop at least four mines in eastern DRC. The move can be interpreted as part of the UAE’s greater goal to increase its influence within the African mining sector. 

Global Shifts

China and the UAE’s increasing involvement in the DRC can be seen as part of a greater diversification trend within the mining sector. Both states are particularly interested in securing a stronghold on the African mining sector, which can provide a steady and relatively cheap supply of precious metals needed to bolster the UAE’s and China’s renewables and vehicle production sectors. The scramble for control over minerals in Congo is part of the larger trend squeezing Western investment out of the African mining sector. 

Furthermore, the UAE’s increasing influence in the DRC is representative of a larger trend of the Middle East gaining more traction as a rival to Chinese investment in Africa. Certain African leaders have even expressed interest in the Gulf states becoming the “New China” regionally, as Africa seeks alternatives to Western aid and Chinese loans. 

Although Middle Eastern investment is far from overtaking China’s dominance of the global mining sector, an interest from Africa in diversifying their mining investor pools can go a long way in changing the investor share continentally. Furthermore, if the Middle East is to bolster its stance as a mining investor, Africa serves as a strategic starting point as China’s influence in the African mining sector is at times overstated. In 2018, China is estimated to have controlled less than 7 per cent of the value of total African mine production. Regardless, China’s strong grip on the global mining sector might be increasingly challenged through investor diversification in the African mining sector. The DRC is an informant of such a potential trend. 

The further spread of the M23 rebellion, though likely to damage the Congolese mining business, might also foster stronger relations with countries such as the UAE which seek to minimise ‘conflict mineral’ imports. As such, the spread of the M23 rebellion–which acts as a breeding ground for smuggling, might catalyse new and stronger trade relations with the Middle East. This could be indicative of a trend of “de-Chinafication” in the region, or at least greater inter-regional competition for investment into the African mining sector.

A Strait Betwixt Two

As the Yemeni Houthi group's assault on maritime vessels continues to escalate, the risk to key commodity supply chains raises global concern. As analysed in this series' previous article (available here), conflict escalation impacts the region's security, impacting key trade routes and global trade patterns. The Suez Canal is a key trade route whose stability and security could impact and shift trade dynamics. As the search for alternative trade routes ensues, the Strait of Hormuz makes use of a power vacuum to expand its influence. 

Suez Canal

The Suez Canal is a 193-kilometre waterway that connects the Red Sea to the Mediterranean Sea. Approximately 12% of global trade passes through the Canal, granting it vast economic, strategic, and geopolitical influence on a global scale. This canal shortens maritime trade routes between Asia and Europe by approximately 6,000 km by removing the need to export around the Cape of Good Hope and serves as a vital passage for oil shipments from the Persian Gulf to the West. Approximately 5.5 million barrels of oil a day pass through the Canal, making it a ‘competitor’ of the Strait of Hormuz.

Global trade via the Suez Canal is likely to decrease as a result of the rising tensions near the Bab el-Mandeb Strait. Due to their geographic predispositions, the Bab el-Mandeb Strait and the Suez Canal are interdependent; bottlenecks in either trade choke point will have a knock-on effect on the other. Bottlenecks caused by Houthi aggression against ships in the strait are likely to redirect maritime traffic from the Suez Canal to alternative passageways. From November to December 2023, the volume of shipping containers that passed through the Canal decreased from 500,000 to 200,000 per day, respectively, representing a reduction of 60%.

Suez Canal Trade Volume Differences (metric tonnes)

Source: IMF Portwatch. Disruption Monitor

The overall trade volume in the Suez Canal has decreased drastically. Between October 7th, 2023, and February 25th, 2024, the channel’s trade volume decreased from 5,265,473 metric tonnes to 2,018,974 metric tonnes. As the weaponization of supply chains becomes part of regional economic power plays, there is a global interest in decreasing the vulnerability of vital choke points via trade route diversification. The lack of transport routes connecting Europe and Asia has hampered these interests, making choke points increasingly susceptible to exploitation. 

Oil Trade Volumes in Millions of Barrels per Day in Vital Global Chokepoints

Source: Reuters 

Quantitative Analysis

Many cargoes have been rerouted through the Cape of Good Hope to avoid the Red Sea region since the beginning of the Houthi conflict. Several European automakers announced reductions in operations due to delays in auto parts produced in Asia, demonstrating the high exposure of sectors dependent on imports from China. 

In the first two weeks of 2024, cargo traffic decreased by 30% and tanker oil carriers by 19%. In contrast, transit around the Cape of Good Hope increased by 66% with cargoes and 65% by tankers in the same period. According to the analysis of JP Morgan economists, rerouting will increase transit times by 30% and reduce shipping capacities by 9%.

Depiction of Trade Route Diversion

Source: Al Jazeera

More fuel is used in the rerouted freight, an additional cost that increases the risk of cargo seizure and results in elevated shipping rates. The most affected routes were from Asia towards Europe, with 40% of their bilateral trade traversing the Red Sea. The freight rates of the north of Europe until the Far East, utilising the large ports of China and Singapore, have increased by 235% since mid-December; freights to the Mediterranean countries increased by 243%. Freights of products from China to the US spiked 140% two months into the conflict, from November 2023 to January 25, 2024. The OECD estimates that if the doubling of freight persists for a year, global inflation might rise to 0.4%.

The upward trend in freight rates can be seen in the graphic pictured below, depicting the “Shanghai Containerised Freight Index” (SCFI). The index represents the cost increase in times of crisis, such as at the beginning of the pandemic, when there were shipping and productive constraints, and more recently, with the Houthi rebel attacks. Most shipments through the Red Sea are container goods, accounting for 30% of the total global trade. Companies such as IKEA, Amazon, and Walmart use this route to deliver their Asian-made goods. As large corporations fear logistic and supply chain risk, more crucial trade volumes could be rerouted.

Shanghai Containerized Freight Index

Source: United Nations Conference on Trade and Development

Energy Commodity Impact

Of the commodities that traverse the Red Sea, oil and gas appear to be the most vulnerable. Before the attacks, 12% of the oil trade transited through the Red Sea, with a daily average of 8.2 million barrels. Most of this crude oil comes from the Middle East, destined for European markets, or from Russia, which sends 80% of its total oil exports to Chinese and Indian markets. The amount of oil from the Middle East remained robust in January. Saudi oil is being shipped from Muajjiz (already in the Red Sea) in order to avoid attack-hotspots in the strait of Bab al-Mandeb.

Iraq has been more cautious, contouring the Cape of Good Hope and increasing delays on its cargo. Iraq's oil imports to the region reached 500 thousand barrels per day (kbd) in February, 55% less than the previous year's daily average. Conversely, Iraq's oil imports increased in Asia, signalling a potential reshuffling of transport destinations. Trade with India reached a new high since April 2022 of 1.15 million barrels per day (mbd) in January 2024, a 26% increase from the daily average imports from Iraq's crude. 

Brent Crude and WTI Crude Fluctuations

Source: Technopedia

Refined products were also impacted. Usually, 3.5 MBd were shipped via the Suez Canal in 2023, or around 14% of the total global flow. Nearly 15% of the global trade in Naphta passes through the Red Sea, amounting to 450 kbd. One of these cargoes was attacked, the Martin Luanda, laden with Russian naphtha, causing a 130 kbd reduction in January compared with the same month in 2023. Traffic to and from Europe is being diverted in light of the conflict. Jet fuel cargoes sent from India and the Middle East to Europe, amounting to 480 kbd, are avoiding the affected region, circling the Cape of Good Hope. 

Due to these extra miles and higher speeds to counteract the delays, bunker fuel sales saw record highs in Singapore and the Middle East. The vessel must use more fuel, and bunker fuel demand increased by 12.1% in a year-over-year comparison in Singapore.

In 2023, eight percent, or 31.7 billion cubic metres (bcm), of the LNG trade traversed the Red Sea. The US and Qatar exports are the most prominent in the Red Sea. After sanctioning Russia's oil because of the Ukrainian War, Europe started to rely more on LNG shipments from the Middle East, mainly from Qatar. The country shipped 15 metric tonnes of LNG via the Red Sea to Europe, representing a share of 19% of the Qatari LNG exports. Vessels travelling to and from Qatar will have to circle the Cape of Good Hope, adding 10–11 days to travel times and negatively impacting cargo transit. 

US LNG export capacity has increased in the past few years, sending shipments to Asia via the Red Sea. The Panama Canal receives many LNG cargoes from the US via the Pacific, yet its traffic limitations cause US cargo to be routed through the Atlantic and the Red Sea. The figure “Trade Shipping Routes” below displays the dimensions of the shifts that US LNG cargoes must take in the absence of passage via the Panama Canal.

Trade Shipping Routes

Source: McKinsey & Company

Until January 15, at least 30 LNG tankers were rerouted to pass through the Cape of Good Hope instead. Russia's LNG shipments to Asia are currently avoiding the Red Sea, and Qatar did not send any new shipments in the last fortnight of January after the Western strikes at Houthi targets.

Risk Assessment

A share of 12% of oil tankers, ships designed to carry oil, and 8% of liquified gas pass through this route towards the Mediterranean. Inventories in Europe are still high, but if the crisis persists for several months, energy prices could be aggravated. As evidenced by the sanctions against Russia, cargo reshuffling is possible. Qatar can send its cargoes to Asia, and those from the US can go to European markets, allowing suppliers to effectively avoid the Red Sea.

Around 12% of the seaborn grains traversed the Red Sea, representing monthly grain shipments of 7 megatonnes. The most considerable bulk are wheat and grain exports from the US, Europe, and the Black Sea. Around 4.5 million metric tonnes of grain shipments from December to February avoided the area, with a notable decrease of 40% in wheat exports. The attacks affected Robusta coffee cargoes as well. Cargoes from Vietnam, Indonesia, and India towards Europe were intercepted, impacting shipping prices and incentivizing trade with alternative nations. 

Daily arrivals of bulk dry vessels, including iron ore and grain from Asia, were down by 45% on January 28, 2024, and container goods were down by 91%. However, further significant disruptions to agricultural exports are not expected. Most of the exports from the US, a large bulk, were passing through the Suez Canal to avoid the congestion of the Panama Canal due to the droughts that limited the capacity of circulation. These cargoes are now traversing the Cape route.

Around 320 million metric tonnes of bulk sail through Suez, or 7% of the world bulk trade. No significant impacts are predicted for iron ore or coal, which represented 42 and 99 megatonnes of volume, respectively, shipped through the Red Sea in 2023. Most of the dry bulks that traverse the impacted region can be purchased from other suppliers, precluding significant supply disruptions. 

As of March 1st, reports show that only grain shipments and Iranian vessels were passing through the Red Sea. There were no oil or LNG shipments with non-Iranian links in the Red Sea. These developments illustrate the significant trade shifts caused by the Red Sea crisis. As of today, a looming threat lies in the Houthis’ promises of large-scale attacks during Ramadan. The lack of intelligence on the Houthi’s military capacity and power makes it difficult to ascertain the extent of future conflicts, generating further uncertainty in commercial trade.

The Strait of Hormuz

The Strait of Hormuz is a channel that connects the Persian Gulf to the Gulf of Oman, providing Iran, Oman, and the UAE with access to maritime traffic and trade. The strait is estimated to carry about one-fifth of the global oil at a daily trade volume of 20.5 million barrels, proving to be of vital strategic importance for Middle Eastern oil supply the world’s largest oil transit chokepoint. The strait is a prominent trade corridor for a myriad of oil-exporting nations, namely the OPEC members Saudi Arabia, Iran, the UAE, Kuwait, and Iraq. These nations export most of their crude oil via the passage, with total volumes reaching 21 mb of crude oil daily, or 21% of total petroleum liquid products. Additionally, Qatar, the largest global exporter of LNG, exports most of its LNG via the Strait.

Geographic Location of Strait of Hormuz

Source: Marketwatch

Although the strait is technically regulated by the 1982 United Nations Convention on the Law of the Sea, Iran has not ratified the agreement. Through its geostrategic placement, Iran can trigger oil price responses through its influence on trade transit, establishing the country’s regional and global influence.

Strait of Hormuz Oil Volumes

Source: Reuters

Experts are particularly worried that the turbulence is likely to spread to the Strait of Hormuz now that Iran backs the Houthis in Yemen and might want to support their cause by doubling down regionally. However, this is something that would cause a lot of backlash in the form of a further tightening of economic sanctions against Tehran, which might deter further provocations. 

Despite Iran’s previous threats to block the Strait entirely, these have never gone into effect. Diversifying trade routes to avoid supply shocks and bottlenecks is of interest to regional oil-exporters dependent on the route for maritime trade access. Such diversification attempts have already been undertaken, as seen by the UAE and Saudi Arabia's attempts to bypass the Strait of Hormuz through the construction of alternative oil pipelines. The loss of trade volume from these two producers, holding the world's second and fifth largest oil reserves, respectively, severely hindered the corridor’s prominence.

The attacks on the Red Sea might cause damage to the oil and LNG cargo from countries in the Persian Gulf, increasing costs for oil and gas exporters. However, cargoes could find alternative destinations. The vast Asian markets, which face a shortage of energy products due to a loss of trade through the Red Sea, could be a potential suitor. Finding new LPG (liquefied petroleum gas) contracts could be beneficial for Iran, and its recently enhanced production capacity could supply various markets.  

Geopolitics and Prospects for a Route Shift

Although the Strait of Hormuz stands to capture diverted trade flows from the Suez Canal, its global influence is still limited by Iran’s geopolitical ties. As exemplified by the Iran-US conflict, Iran’s conflicts can severely impact traffic through the Strait, significantly impacting the stability of the route and prospects for future growth. 

Although security and stability are of paramount importance to trade, efforts to provide these traits could be counterproductive. On March 12th, China and Russia conducted maritime drills and exercises in the Gulf of Oman with naval and aviation vessels. According to Russia's Ministry of Defence, this five-day exercise sought to enhance the security of maritime economic activities using maritime vessels with anti-ship missiles and advanced defence systems. Over 20 vessels were displayed in this joint naval drill, attempting to lure trade through the promise of stability and security.

Whether meant as a display of power or a promise of security, the pronounced presence of Russian and Chinese forces could aggravate geopolitical tensions and increase the potential for conflict in the region, driving global trade prospects down. With precedents of trade conflict, such as the IRGC’s seizure of an American oil cargo in the Persian Gulf on January 22nd, various countries might be sceptical of rerouting commodity trade through the Strait.

Tensions are also aggravated by Iran’s alleged assistance in the Houthi attacks. The US has supposedly communicated indirectly with Iran to urge them to intervene in the region. China and Russia’s interest in improving the Strait’s trade prospects would benefit from a de-escalation of the Houthi conflict, as shown by China’s insistence on Iran’s cooperation in the Houthi conflict. As the conflict stands, the Strait’s prospect as an alternative trade route is dependent not only on Iran’s reputation and presence in global conflicts but also on the route’s patrons and proponents.

Conclusion

The extent to which the Strait of Hormuz could benefit from trade diversion depends not only on its ability to pose itself as a viable trade route but also on the duration of the Houthi conflict. In order to capture trade volumes and increase international trade through the route, Iran would have to ameliorate its geopolitical ties and provide stability to compete with rising prospective trade route alternatives. Although the conflict in the Suez has yet to show promising signs of de-escalation, securing the Suez would likely cause previous trade volumes to resume and restore its hegemony in commodity trade. It remains to be seen whether the conflict will endure long enough to allow other trade routes to be established as alternatives and permanently shift power balances in global trade.

The U.S. LNG Pause: Implications for the Global Fertiliser and Food Markets

Peter Fawley

The U.S. LNG Pause

On January 26, the Biden administration announced a temporary pause on approvals of new liquified natural gas (LNG) export projects. The pause applies to proposed or future projects that have not yet received authorisation from the United States (U.S.) Department of Energy (DOE) to export LNG to countries that do not have a free trade agreement (FTA) with the United States. This is significant as many of the largest importers of U.S. LNG–including members of the European Union, the United Kingdom, Japan, and China–do not have FTAs with the United States. Without the DOE authorisation, an LNG project will not be allowed to export to these countries. The policy will not affect existing export projects or those currently under construction. The Department of Energy has not offered any indication for how long the pause will be in effect.

This pause will have political and economic implications across the globe, and is expected to apply further pressure to the LNG market, fertiliser prices, and agricultural production. The following analysis will first delve into the rationale for the pause, the expected impact it will have on global LNG supplies, and the associated risks this poses for the fertiliser and food markets. It will then examine the impact of this policy change on India’s agricultural sector, given that the country is heavily reliant on LNG imports to manufacture fertilisers for agricultural production. The article will conclude with brief remarks about the pause.

Reasons for the Pause

According to the Biden administration, the current review framework is outdated and does not properly account for the contemporary LNG market. The White House’s announcement cited issues related to the consideration of energy costs and environmental impacts. The pause will allow DOE to update the underlying analysis and review process for LNG export authorisations to ensure that they more adequately account for current considerations and are aligned with the public interest. 

There are also likely political motivations at play, given the upcoming election in the United States. Both climate considerations and domestic energy prices are expected to garner significant attention during the lead up to the 2024 U.S. presidential election. The Biden administration has been under increasing pressure from environmental activists, the political left, and domestic industry regarding the U.S. LNG industry’s impact on climate goals and domestic energy prices. In fact, over 60 U.S policymakers recently sent a letter to DOE urging its leadership to reexamine how it factors in public interests when authorising new licences for LNG export projects. 

These groups have argued that the stark increase in recent U.S. LNG exports is incompatible with U.S. climate commitments and policy objectives, as the LNG value chain has a sizeable emissions footprint. Moreover, there is a concern about the standard it sets for future policy. An implicit and uncontested acceptance of LNG could signal that the U.S is wholly committed to continued use of fossil fuels as an energy source, leading to more industry investments in fossil fuels at the expense of renewable energy technologies. In an unusual political alliance, large U.S. industrial manufacturers are lobbying alongside environmentalists to curb LNG exports. These consumers, who are dependent on natural gas for their manufacturing processes, worry that additional LNG export projects will raise domestic natural gas prices. Therefore, the pause may then be interpreted as an acknowledgement of these concerns and an attempt to reassure supporters that the Biden administration is committed to furthering its climate goals and securing lower domestic energy prices.

Impact on LNG Supplies

Since the pause only pertains to prospective projects, there will be no impact on current U.S. LNG export capacity. However, the pause may constrain supply and reduce forecasted global output as the new policy indefinitely halts progress on proposed LNG projects that are currently awaiting DOE authorisation. In the long-term, this announcement has the potential to tighten the LNG market, potentially resulting in increased natural gas prices and other commercial ramifications. Because the U.S. is currently the world’s largest LNG exporter, a drop in expected future U.S. supplies may force LNG importers to seek to diversify their supply. Some LNG buyers will likely redirect their attention to other, more certain sources of LNG, such as Qatar or Australia. Additionally, industry may be more keen to invest in projects in countries that have less regulatory ambiguity related to LNG projects.

Risk for the Global Fertiliser and Food Markets

Natural gas is key to the production of nitrogen-based fertilisers, which are the most common fertilisers on the market. With regard to the use of natural gas in fertiliser production, most of it (approximately 80 per cent) is employed as a raw material feedstock, while the remaining amount is used to power the synthesis process. Farmers and industry prefer natural gas as a feedstock as it enables the efficient production of effective fertilisers at the least cost.

The U.S. pause on new LNG projects is an unsettling signal to already fragile natural gas markets given the existence of relatively tight current supplies and a forecasted shortfall in future supply levels. This announcement will exacerbate vulnerabilities and put increased pressure on global supplies, potentially leading to greater volatility and price escalation. Additionally, increased global demand for natural gas will further strain the LNG market. Therefore, global fertiliser prices may increase given that natural gas is an integral input in fertiliser production. Natural gas supply uncertainty stemming from the U.S. announcement may not only impact market prices for fertiliser, but could also increase government subsidies needed to support the agricultural industry to protect farmers from price volatility. Due to the increased subsidy outlay, government expenditure on other publicly-funded programs could plausibly be reduced.

The last time there was a significant shock to the natural gas market, fertiliser shortages and greater food insecurity ensued. Following the 2022 Russian invasion of Ukraine, there was a stark increase in natural gas prices, which led to a rise in the cost of fertiliser production. This prompted many firms to curtail output, causing fertiliser prices to soar to multi-year highs. Higher fertiliser costs will theoretically induce farmers to switch from nitrogen-dependent crops (e.g., corn and wheat) to less fertiliser-intensive crops or decrease their overall usage of fertilisers, both of which may jeopardise overall agricultural yield. Given that fertiliser usage and agricultural output are positively correlated, surging fertiliser costs in 2022 translated into higher food prices across the world. While inflationary pressures have subsided in recent time, global food markets remain vulnerable to fertiliser prices and associated supply shocks. This is especially true for countries that are largely dependent on their agricultural industry for both economic output and domestic consumption. Food insecurity and global food supplies may also be further constrained by unrelated impacts on crop yields, such as extreme weather and droughts.

Case Study: India

The future LNG supply shortfall and its impact on fertiliser and food markets may be felt most acutely by India. The country is considered an agrarian economy, as many of its citizens – particularly the rural populations – depend on domestic agricultural production for income and food supplies. Fertiliser use is rampant in India and the country’s agricultural industry relies heavily on nitrogen-based fertilisers for agricultural production. With a steadily rising population and a finite amount of arable land, expanded fertiliser usage will be necessary to increase crop production per acre. As a majority of India’s fertiliser is synthesised from imported LNG, the expected increased demand for fertiliser will necessitate more LNG imports.

LNG imports to India are projected to significantly rise in 2024, with analysts forecasting a year-on-year growth of approximately 10 per cent. Over the long-term, the U.S. Energy Information Administration predicts that overall natural gas imports to India will grow from 3.6 billion cubic feet per day (Bcf/d) in 2022 to 13.7 Bcf/d in 2050, a 4.9 per cent average annual increase. The agricultural industry is a substantial contributor to this growth. This trend is only expected to continue, as India has announced that it plans to phase out urea (a nitrogenous fertiliser) imports by 2025 in order to further develop its domestic fertiliser industry. To ensure adequate supplies for domestic urea production, India is expected to increase its natural gas demand and associated reliance on LNG imports. A recent agreement between Deepak Fertilisers, a large Indian fertiliser firm, and multinational energy company Equinor exemplifies this. The agreement secures supplies of LNG (0.65 million tons annually) for 15 years, starting in 2026. 

Concluding Remarks

The U.S. pause on new LNG export facilities will have ramifications for the global natural gas market and supply chain. While current export capacity will not be jeopardised, the policy change will delay future projects and may put investment plans into question. The pause will also have implications for downstream markets in which natural gas is an important input, such as the fertiliser market. There are a couple of questions that now loom over the LNG industry: (1) what will be the duration of the pause; and (2) to what extent will the pause affect LNG markets? 

While the U.S. Department of Energy has given no firm timeline for the pause, analysts estimate – based on previous updates – that the DOE review will likely last through at least the end of 2024. The expectation is that the longer the pause remains in effect, the more uncertainty it will create, especially as it relates to private industry investment decisions and confidence in U.S. LNG in the long-term. In addition to the fertiliser and food markets, transportation, electricity generation, chemical, ceramic, textile, and metallurgical industries may all be affected by the pause. One potentially positive consequence is that because LNG is often thought of as a transitional fuel (between coal and renewable energies), a large enough impact on LNG supplies could accelerate the energy transition directly from coal to renewable sources of energy, providing a boost to the clean energy technologies market. However, the pause may also create tensions with trading partners as it could be interpreted as an export control or a discriminatory trade practice, both of which stand in violation of the principles of the multilateral rules-based trading system. This may expose the U.S. to potential challenges and disputes at the World Trade Organization. Although it may be some time before we are provided concrete answers to these questions, the results of the 2024 U.S. presidential election will provide some insight into what LNG policies in the U.S. will look like going forward.

The Impact of a Potential Conflict Between Venezuela and Guyana on the Global Oil Market

Introduction 

In the global oil market, Venezuela has played an important role as one of the world's biggest oil producers because of its strategic endeavors within OPEC. However, sanctions and an economic downturn have caused a decrease in Venezuela's oil production, hindering the country's oil producing status in recent years. In contrast, due to recent oil discoveries and production, neighboring Guyana has become a new player in the global oil market. With newly discovered oil deposits, Guyana is positioned to increase its energy influence, while Venezuela struggles with decreasing production and geopolitical turbulence, creating new tensions between the two countries. 

Furthermore, in December 2023, tensions began between Venezuela and Guyana over a long-standing territorial dispute. The border territory around the Essequibo River, which spans 160,000 square kilometers (62,000 square miles), is the center of a dispute between Venezuela and Guyana and is claimed by both countries. The border around this thinly populated area was first drawn in 1899, when Guyana was ruled by the British. Following major oil discoveries off the coast of Guyana in 2015, Venezuela reaffirmed its claim to the territory. With President Nicolas Maduro promising exploration efforts in the disputed region, Caracas recently secured backing for reclaiming the Essequibo through a referendum vote. For this reason, a potential conflict between Venezuela and Guyana over the Essequibo territorial dispute could cause disruptions to regional oil transportation routes and supply chains, which could lead to price volatility in the oil market.

Venezuela's Significance in The Global Oil Market

Venezuela has been a significant player in the global oil market since Shell geologists discovered oil in the country in 1922, leading to a sharp increase in output by the late 1920s and making Venezuela the world's second-largest oil producer behind the United States. Venezuela has the world's highest proven oil reserves at 304 billion barrels, slightly more than Saudi Arabia's 298 billion barrels, according to the 2022 BP Statistical Review of World Energy. The country holds historical influence in the global oil market as a founding member of OPEC, joining the group in 1960 with Saudi Arabia, Iran, Iraq, Kuwait, and other countries in an effort to control oil prices and strengthen state authority over the sector. That same year, Venezuela increased the income tax on oil businesses to 65% and established the Venezuelan Petroleum Corporation (PDVSA), a state-owned oil company. However, in recent years, the oil industry in Venezuela has appeared completely different than that of the twentieth century.

Oil production in Venezuela from 2008 to 2022 (In million barrels per day)

Source: https://www.statista.com/statistics/265185/oil-production-in-venezuela-in-barrels-per-day/ 

Venezuela's status as a key contributor to the world's oil supply has declined in recent years due to sanctions enforced by several nations against Venezuelan-produced oil, notably by the United States in 2019. Furthermore, the heavy composition of Venezuela's crude oil creates difficulties for the refining and production operations. In defiance of US sanctions, Venezuela was able to maintain and continue oil trade alliances with China, Cuba, Iran, Russia, and Turkey. Nonetheless, as described in the graph below, Venezuela’s crude oil production fell significantly from 2,804,000 barrels per day in 2012 to 716,000 barrels per day in 2022, decreasing its rank in global production among the rest of OPEC countries. 

Crude oil production of the OPEC in 2012 and 2022, by member state (in 1,000 barrels per day)

Source: https://www.statista.com/statistics/271821/daily-oil-production-output-of-opec-countries/ 

In November 2022, the US lifted sanctions on Venezuela's oil and gas industry and allowed Chevron to resume limited operations in an effort to mitigate rising global energy costs as a result of the Russo-Ukrainian war. Chevron increased production through joint ventures with PDVSA, shipping crude oil to the US, which has increased the likelihood of a production rebound for Venezuela after years of decline. Because of this, Venezuela could once again become a major force in the energy sector given its abundance of oil resources; however, throughout Venezuela’s oil production decline, its neighboring country, Guyana, has remarkably shifted its position as a global oil producer. 

Guyana's Emergence in The Global Oil Market

With a population of 791,000, Guyana has been one the poorest countries in South America, with approximately 41% of its population living below the poverty line in 2017, and more than 40% of its people surviving on less than $5.50 a day. Little did this country realise that its economic course would change after May 2015 when ExxonMobil first discovered significant oil deposits off the country’s coast in an area called the Liza field in the Stabroek Block. This discovery changed the dynamics of the global energy landscape by adding the largest amount of new oil to the reserves since the 1970s.

Source: https://www.gisreportsonline.com/r/guyana-oil/#toc-pos-factsfigures 

The discovery of an estimated 11 billion barrels of oil reserves saw the start of commercial drilling in 2019, significantly increasing the economic landscape for Guyana. Even during the global economic downturn caused by the Covid-19 pandemic, Guyana's GDP grew by an astounding 49% in 2020, making it one of the fastest-growing economies in the world. Guyana became the seventh-largest crude oil producer in Latin America in 2022, producing 276,000 barrels per day, a significant rise from the average of 74,000 barrels per day in 2021. Because of its rising oil output, Guyana’s GDP grew by an astonishing 62.3% in 2022. Having already received $1.6 billion in oil revenues by May 2023, Guyana’s government utilised the funds for infrastructure projects and stable economic development projects. If present economic patterns continue, Guyana may rank among the world's top producers of oil per person by 2030.
Current oil producers in Guyana, Exxon, Hess Corp., and China's CNOOC, produced 400,000 barrels per day from two vessels by August 2023, generating $2.8 billion in revenues for Guyana, and employing 4,400 Guyanese. Exxon plans to expand up to ten offshore projects with partners Hess Corp and CNOOC. ExxonMobil projects that by 2026, its oil production in Guyana will increase to 750,000 barrels per day. By 2027, their projects are expected to make Guyana the third-largest producer in Latin America after only Brazil and Mexico. According to the International Energy Agency, by 2028, Guyana will produce 1.2 million barrels per day, with four additional oil fields expected to be operational that same year.

Production of crude oil in Guyana from 2019 to 2022 (in 1,000 barrels per day)

Source: https://www.statista.com/statistics/1260886/crude-oil-production-guyana/ 

Due to Guyana’s increasing oil production, spot markets have emerged and interest in Guyanese crude oil is expanding throughout Europe. Guyana was able to secure a larger share of the European oil market in 2023, after finding a window of opportunity as a result of sanctions on Russian oil following its invasion of Ukraine. Refinitiv Eikon data indicates that during the first half of 2023, Guyana's oil exports to Europe amounted to over 215,000 barrels per day, or 63% of the nation's total exports of 338,254 bpd. This is an increase over 2022, when roughly 50% of Guyana's shipments were sent to Europe. However, increasing tensions between Venezuela and Guyana, both important oil-producing nations with significant shipping infrastructure, could disrupt oil shipping routes in the event of conflict between the two countries.

Potential Disruption to Oil Shipping Lanes

Ports are essential for the distribution of oil throughout the world and have increased in the vicinity of oil rich countries. Approximately 2.9 billion tons of oil and natural gas products, or around 62% of the world's petroleum production, were transported by sea in 2015. Such is the case for both Venezuela and Guyana. The Jose Terminal, situated in northeastern Venezuela, is the most significant oil export terminal for the country, producing 920,000 barrels of crude oil a day on average in 2019. The map below shows the major ports in Venezuela and Guyana, as well as other ports in the region. For Venezuela, these ports include, from west to east: Maracaibo, Bajo Grande, Puerto Miranda, Amuay, Punta Cardon, El Palito, Puerto Cabello, La Guaira, Jose Terminal, Puerto La Cruz, El Guamache, and Palua–which is located more inland. For Guyana (from west to east) these ports include: Georgetown, Linden, which is located inland, and New Amsterdam. It is important to note Trinidad and Tobago’s location along the maritime trade route that passes through Venezuela and Guyana, which holds seven important sea ports. Because of the location of various important ports in the region, and the oil routes that pass through them, a potential conflict between Venezuela and Guyana could disrupt these shipping routes in the Caribbean, as well as nearby maritime ports. 

Location of Major Ports in Venezuela and Guyana and Others in the Region

Source: https://portwatch.imf.org/ 

For context, similar situations came as a result of attacks by Houthi rebel groups on Israeli-owned or -bound shipments, as well as Russia’s invasion of Ukraine. According to freight analytics company Vortexa, nine million barrels of oil were moved via the Suez Canal every day in the first half of 2023. The recent attacks on container ships in the Red Sea by Iran-backed Houthi groups from Yemen led freight companies to reroute their cargo around the Cape of Good Hope to avoid accessing the Suez Canal. This caused a significant disruption to global supply chains. It is estimated that the additional fuel expenses to reroute ships around the southern tip of Africa was $1 million for each round voyage between Asia and Northern Europe. Likewise, during Russia’s invasion of Ukraine, several issues, including the suspension of port operations in Ukraine, damage to critical infrastructure, trade restrictions, and rising fuel prices caused substantial disruptions to regional logistics in the Black Sea region. Ships and containers were forced to find alternate routes as ports closed and carriers stopped offering shipping services to Russia and Ukraine. 

Maritime Shipping Routes in the Region

Source: https://portwatch.imf.org/ 

Similarly, shipping routes in the region could be interrupted due to a possible conflict between Venezuela and Guyana. Military operations may cause disruptions at the major trade sea ports in Venezuela and Guyana, as well as target Guyana’s shipping lanes for naval blockades aimed at container ships. Freight companies may be forced to reroute cargo, impacting regional supply chains, raising transit times, and increasing costs. The conflict may also replicate the logistical difficulties that followed Russia's invasion of Ukraine, such as the halting of port operations or even oil production operations. Such a scenario could also create volatility in the oil market.

Potential Market Volatility 

Geopolitical tensions can demonstrably impact oil market prices, especially when they involve major oil-producing countries. An increase in tensions and hostility between Venezuela and Guyana could cause oil price volatility. Several studies have analysed the impact that geopolitical risks have on oil market dynamics. Observing two studies, one study stated that “geopolitical risks can increase speculation through investor attention” and the other saying geopolitical risk can “lead to oil market fluctuations”. In the past, according to the European Bank’s ECB Economic Bulletin from August, 2023, there has been a mixed effect of geopolitical events on oil prices. For example, following Russia's invasion of Ukraine, oil prices increased by around 30% in just two weeks, while prices increased by about 4% following the October 7, 2023 attacks by Hamas in Israel. The ECB also states that oil prices are primarily impacted by geopolitical instability through 1) the increased economic uncertainty brought on by high tensions and interruptions in commerce, and 2) financial markets might account for potential dangers to the oil supply in the future. Risks to the oil supply could raise prices if they impact large oil producers or strategically critical distribution nations. The table below indicates a VAR model from the ECB Economic Bulletin, revealing that geopolitical tensions involving Venezuela could drive up the price of oil by roughly 1.4%. Thus, according to the studies and model, escalating tensions between Venezuela and Guyana could increase oil market volatility. The potential disruptions to shipping lanes and oil production could lead to increased speculation and oil market fluctuations. 

Estimated responses of oil prices to country-specific and global geopolitical shocks (percentages)

Source: European Central Bank

Conclusion

A potential conflict between Venezuela and Guyana could have implications for the global oil market. The importance of maintaining stability in the region is highlighted by the fact that Venezuela has always been a significant oil-producing country, and that Guyana is now becoming a new major player in the oil market. Market volatility is a concern due to the possible disruption of oil supply and shipping lanes associated with potential conflict between the two nations. For now, oil market observers can rest easy knowing that both the presidents of Guyana and Venezuela met in mid-December, promising not to use force or threats. However, their dispute over the Essequibo region remains unresolved.

The Houthi Campaign in the Red Sea and Gulf of Aden - An Update

Key Findings

• There are currently no indications that either the US or Iran’s “Axis of Resistance” have an appetite for wider conflict in the Middle East

• The 13-week old Houthi campaign against international shipping in the Red Sea and Gulf of Aden shows no signs of abating

• The Houthis are probably capable of conducting more damaging strikes than have been reported hitherto, but are acting with restraint for the moment

• If even a measured attack against a commercial or military vessel were to cause significant casualties, this could lead to an escalation

• The forthcoming holy month of Ramadan is not likely to precipitate an increase in Houthi attacks

Background - The Story So Far

Since 19th November 2023, at least 38 mainly commercial vessels transiting the Gulf of Aden and the Bab-al-Mandeb Strait have been targeted by the Yemeni Houthi group. Ostensibly undertaken in solidarity with HAMAS as the group continues to fight the Israel Defence Forces (IDF) in the Gaza Strip, 13 (34%) of the ships attacked have sustained some damage from either drone or anti-ship missile strikes. Additionally, two other commercial ships have been targeted to the southeast, in the Indian Ocean, in attacks that were almost certainly a part of the same campaign. Notwithstanding, no casualties have been reported and nearly all of the vessels have been able to proceed to port subsequently. There have also been six probable attempts to hijack vessels in the Red Sea, but gunmen have succeeded in boarding only two of the ships targeted. 

Source: The Washington Institute for Near East Policy

In response, since 11th January 2024, the US and UK have conducted at least three waves of joint airstrikes against targets in Yemen to degrade Houthi capability. Washington has also ordered its aircraft to conduct an unknown number of unilateral missions against similar sites. Exactly how much punishment Houthi targets have taken is impossible to assess, but their intent is undented as their attacks continue at a rate of between two and three per week.

Why Haven’t the Houthi Attacks Been More Effective?

The true military capability of the Houthis is something of a moot point. However, the recent attacks in the Red Sea and Gulf of Aden are indicative of a group well-supplied with drones and a variety of anti-ship missiles of mainly Iranian and former Soviet Bloc providence. The majority have likely been supplied directly by Iran or purloined during the Yemeni civil war. Media reporting also indicates that the Houthis have developed something of a homegrown industry for manufacturing their own weaponry - or at least copying that supplied by Tehran. As recently as 11th January this year, a team of US Navy SEALs attached to the 5th Fleet intercepted a dhow en route from Somalia to Yemen and found "Iranian-made ballistic missile and cruise missiles components". 

History shows that even military vessels can be put out of action by relatively cheap, unmanned drones. On the night of 31st January 2024, the Russian Tarantul-class missile boat, the Ivanovets, was sunk after being hit by five Ukrainian Magura V5 drones in the Black Sea. Each Magura costs around $273,000 as compared to $70 million for the Ivanovets, which was capable of carrying four anti-ship missiles. This is not a bad return on a small investment for a country with a navy consisting mainly of small patrol vessels. Moreover, in late 2023, the UK government estimated that Russia had lost up to 20% of its Black Sea fleet tonnage to such Ukrainian attacks.

Looking further back, in October 2000, two al-Qaeda suicide bombers crashed a small, fibreglass Zodiac speedboat packed with explosives into the side of the USS Cole, a $1 billion American Arleigh Burke guided-missile destroyer of the same class as the USS Carney, which is currently operating in the Red Sea. At the time, she was refuelling in Aden, Yemen, and 17 of her sailors were killed and 37 others injured. This attack took place long before remote-controlled drones and the success of such an operation now would not have to depend on suicide bombers willing to steer a device onto its target. Indeed, a worrying development came on 11th February, when US Central Command reported that one of its vessels had destroyed “two remotely controlled explosive-laden boats”. Also known as Unmanned Surface Vehicles (USV), they were somewhere near the Yemeni port of Hodeidah at the time. In another first  one week later, the US military also claimed to have destroyed a Houthi unmanned underwater vessel (UUV) somewhere near the coast of Yemen.

The most serious Houthi attack to date was the 18th February missile strike on the Rubymar, in the Bab al-Mandeb Strait. At the time of writing, unconfirmed reporting suggested that the crew may have had to abandon ship, although none were injured. Although given their bulk, large commercial vessels are quite difficult to sink, their size, low speed and lack of drone or missile countermeasures makes them relatively easy targets. Since the start of the Houthi campaign in the Red Sea, the international press has widely reported that US, UK and French military vessels have shot down missiles or drones on a number of occasions, almost certainly preventing more serious damage. However, with the Ukrainians proving that even military vessels can be sunk with drones, this does beg the question of why the Houthi attacks in the Red Sea  have not caused more damage or casualties.

Source: The BBC

First of all, the Ukrainians may simply be better equipped and have the advantage of intelligence support from their NATO allies, making their task easier than that of the Houthis. Additionally, there have been some signs that the recent US and UK airstrikes are impeding Houthi freedom of movement in the Red Sea. On 6th February, a British-owned ship named the Morning Tide was hit by a probable drone which, according to unconfirmed reporting, may have been launched from a nearby vessel rather than from on land. If this was the case, it might suggest that the air attacks are limiting Houthi freedom to launch projectiles from coastal areas. Indeed, three days before the Morning Tide attack, the US military reported that it had identified six anti-ship missiles ready for firing and destroyed them prior to launch. 

However, even if this is taken into account, the amount of reported damage from the Houthi attacks to date does seem low. As described earlier, 15 vessels have been hit by their extensive anti-ship arsenal, making it probable that the lack of damage or casualties is a question of intent rather than capability. If given totally free rein, the Houthis probably could cause more damage. One only has to look at their extremely professional hijacking of the Galaxy Leader on 19th November 2023. Although all the talk across the Middle East is currently that of “escalation” between Israeli, the US and their allies and Tehran’s “Axis of Resistance”, there does not appear to be any desire for widening conflict.

A further positive indication of this came on 18th February but passed almost unnoticed as the international media focused on the death of the Russian opposition leader, Alexi Navalny. It was reported that Brigadier General Esmail Qaani, the commander of the Iranian Revolutionary Guards Corps (IRGC) Quds Force, had met the leaders of several unnamed militant groups affiliated with Tehran at Baghdad International Airport (BIAP) in late January and instructed them to cease operations against US targets in Iraq. At the time of writing, his diktat seems to have been respected as there had been no such strikes reported since 4th February.

Tower 22

On 28th January, three American servicemen and women were killed when what was almost certainly a drone fired by Kataib Hezbollah - one of Iran’s Iraq proxy militias - struck an isolated base known as “Tower 22”, in northeastern Jordan. They were the first reported US casualties in the region since the HAMAS attack on 7th October. President Biden promised retaliation and this duly came on 2nd February 2024, when 85 targets across Syria and Iraq were hit by aircraft and missiles in a thirty minute window. 

Notwithstanding, the gap of nearly one week between the Tower 22 strike and the evening of 2nd February is a little curious. With the entire Dwight D. Eisenhower Carrier Strike Group at his disposal in the region - not to mention the US Fifth Fleet based not far to the north in Bahrain - Biden could probably have struck much earlier if he had chosen to. In addition, the President advertised his intention to attack several days before any aircraft took off, leading to the suspicion that he wanted to minimise casualties, giving Tehran more of a slap on the wrist than a major blow which could have increased the temperature across the region substantially. It is probably no coincidence that a spokesman for Harakat al-Nujaba, one of Iran’s Iraq proxies, subsequently claimed that the US targets in the country were “devoid of fighters and military personnel at the time of the attack”. 

This apparent tit-for-tat modus operandi can be compared to the ongoing situation on the Israel-Lebanon border. Since the 7th October HAMAS attack, the IDF and Hezbollah - Iran’s most powerful franchise in the Levant - have been engaged in daily, set-piece melees involving missile and rocket fire. The casualties reported - 146 on the Lebanese side of the frontier - have been comparatively low so far.

What Lies Ahead?

At this time, there are no signs that any of the main actors in the Middle East are looking for an escalation of violence. However, the Houthis could, almost certainly, conduct more effective attacks if they chose to, or were ordered to by Tehran. Even though they may bristle with sensors, the USS Cole attack showed that Western combat vessels are not infallible, even to small boats. Moreover, they only carry a finite number of weapons with which to counter the drone and missile threat from the Yemen coastline. Swarming much larger ships with multiple smaller vessels is an established Iranian modus operandi in the Persian Gulf and this could be quite easily transferred to drone operations, potentially overwhelming radars or onboard defence systems. Notwithstanding, there is no obvious intent to conduct any such operation at the moment.

Before the lethal drone attack against Tower 22 on 28th January this year, there had been some 160 strikes against US military assets in Syria and Iraq since the start of the HAMAS-Israel conflict in October 2023, none of them causing any major casualties or damage. Although it might be tempting to regard the three deaths at Tower 22 as an Iranian “escalation”, it is probable that this attack was no different in intent from any of the other previous 160; for whatever reason, the single drone just happened to get through US defences and strike home. Indeed, there has been some suggestion that it may have been mistaken by air defences for an inbound friendly aircraft, giving it unimpeded passage to its target.

A comparable threat does exist in the Red Sea and Gulf of Aden. The more missiles and drones launched by the Houthis, the greater the chance that one or two might just penetrate defences and cause much greater destruction and casualties to a commercial or even military vessel. The current situation in the Middle East is one of measured response by Washington and its allies on the one side and the “Axis of Resistance” on the other. However, there is a danger of unintended escalation attendant upon an attack such as that which occurred at Tower 22.

As a final word, Islam’s Holy Month of Ramadan is now fairly imminent, this year falling between 10th March and 9th April. Historically, the international media has tended to equate this period with an uptick in Islamic terrorist violence, but the evidence for this is largely anecdotal. During the Iraq insurgency following the US-led invasion of 2003, increases in mass casualty attacks during Ramadan and on other key dates in the Islamic calendar were a result of these attracting large numbers of people onto city streets to mark Iftar - the breaking of the Ramadan fast every evening - or to conduct pilgrimages. The strikes were not planned to specifically mark important dates. As things stand, there is no suggestion that Ramadan will have any significant impact on the Houthi campaign against international shipping.

2024 Elections Report: Risks & Opportunities for Commodities Sector

In the ever-evolving landscape of global commodities, the year 2024 stands as a pivotal juncture marked by transformative elections across diverse regions. As nations prepare to cast their ballots, the outcomes hold the power to shape policies and strategies that will significantly influence energy, trade relations, and resource management worldwide.

This report encapsulates the intricate intersections between political shifts and their repercussions on the commodities sector. London Politica’s Global Commodities Watch has made a selection of the most significant countries, and analysed the potential impact of elections based on election programmes, past policies, and scenario planning.

The 2024 BRICS Expansion: Risks & Opportunities

With its 15th summit on August 2023 BRICS gained increased attention. The main focus of the summit was on the potential enlargement of BRICS by admitting new members. During the summit, it was announced that 6 countries - Argentina, Egypt, Ethiopia, Iran, Saudi Arabia, and the United Arab Emirates - had been invited to join the group, with their official entry into the bloc set to take place in January 2024.

The expansion of BRICS has raised questions regarding the implications for international politics and economics. And while most analysts seem to agree that it means something significant, it remains unclear what exactly. This report, therefore, analyses the potential risks and opportunities of the expansion, with a particular focus on the commodities sector. Our analysis addresses questions regarding the interests of BRICS+ countries, the challenges and opportunities for the bloc itself, and the wider commodities sector.

Potential scenarios for Israel - Palestine conflict and effect on commodities

On October 7, Israel was attacked by Hamas. The event, which was classified as Israel’s 9/11 by Ian Bremmer, led to at least 1,300 fatalities and 210 abductions. Israel has launched a strong military response, and as of the 20th day since the original attack the situation remains unresolved. Both sides are experiencing ongoing hostilities and Netanyahu, Israel’s president, stated that the country is preparing for a ground invasion of the Gaza Strip, which will result in further civilian casualties. 

Various groups are threatening to involve themselves in the conflict. Hezbollah, for instance, has issued warnings indicating the possibility of launching a significant military operation from Lebanon to northern Israel if the latter enters the Gaza Strip. It also has been discussing what a ‘real victory’ would look like with its alliance partners Hamas and Islamic Jihad. Israeli forces, on the other hand, bombed Syria shortly after air raids sounded in the Golan Heights, a disputed territory that has been annexed by Israel since 1967. This offensive targeted the Aleppo airport and sources claimed its goal was to stop potential Iranian attacks being launched from Syria. Additionally, Iran has faced accusations of funding the attack, which raises concerns about its involvement. 

Consequences for commodities 

The ongoing conflict has emerged as a significant geopolitical factor on global oil markets. However, there have not been immediate impacts on physical flows yet. During the weekend of 7th to 9th October there was an increase in Brent crude prices of about 4% , which later fell 0.2% after Hamas released two American hostages. Prices fell even further after Israel appeared to hold off on its widely expected ground invasion of Gaza. These dynamics show that the risk premium in the oil price takes into account the severity of the conflict and the likelihood for escalation. 

Yet, Israel’s limited oil production capacity means that, if the conflict remains localised, it is unlikely to have a significant impact on global oil supply. Traditional energy commodities (and their prices), that can be viewed as a substitute to oil, have not been impacted so far either. Natural gas, for example, is both a substitute to oil and also largely produced by Israel with its southern offshore Tamar field. Despite European gas prices reaching their highest price since February on Friday 13th, markets do not appear to be pricing in the possibility of an escalation extending beyond Israel and Gaza. If that was the case, even higher prices would be recorded.

The most significant impacts on oil markets are more likely to occur if other nations actively engage in the conflict. After the explosion of a hospital in Gaza on 17th of October, Iran called for an oil embargo against Israel in retaliation for the deadly attacks. The Gulf Cooperation Council (GCC) countries have expressed their unwillingness to support Iran, stating that “oil cannot be used as a weapon”, which helped markets to not consider any embargos for the moment. Moreover, the impact of this action would be limited, since Israel could source its oil from a wide array of other countries.

Another point worth mentioning, it is estimated that 98% of Israel’s imports and exports are made by sea, making the national ports a crucial part of the country’s infrastructure. These ports are currently under a significant risk of potential damage, which has heightened shipping insurance premiums and affected the costs of importing into and exporting from Israel.

Possible scenarios and implications

1. If the conflict remains confined to the Israel - Palestine region

While there could be short-term volatility in oil prices during the most intense attacks and as potential escalation threats rise, neither of these regions are significant oil producers. Therefore, recent rises are not expected to have a  lasting impact on oil prices, which should soon stabilise between $93 and $100 per barrel. However, it is important to mention that this price range was already predicted before the current war between Israel and Palestine took place.

2. War involving Hezbollah

Some recent attacks have taken place between Israel and Hezbollah, however, if the latter joins the conflict, the impact on oil markets could be more substantial. This could lead to potential global economic consequences due to risk-off sentiment in the financial markets, leading to oil prices rising by $8 per barrel, approximately.  Another group that can act on the conflict are the Houthis, an Iran-backed group in Yemen which allegedly launched missiles against Israel on October 19th, that were intercepted by the United States. While Yemen primarily exports cereal commodities, its involvement can further escalate geopolitical tension and instability in the region. 

3. Iran enters the conflict formally 

The most significant impact on the oil market would arise if Iran officially joins the conflict, potentially causing a $64 per barrel increase to a price of $152.38 for Brent crude. Iran controls the Strait of Hormuz, a passage crucial for connecting the Persian Gulf with the Indian Ocean. Thus, if the Strait is blocked, important countries for oil production such as Iraq, the United Arab Emirates, and Kuwait would be landlocked. Consequently, Iran would see its gas revenues rise due to higher prices. This situation also creates challenges for gas importing countries, especially for the EU’s energy security that has already seen a cut of supply from Russia.  

As a consequence of Iran’s increased involvement shipping expenses would likely increase, also associated with war-risk premiums on shipping insurance. Those refer to additional costs that are also included in shipping prices to cover for vessels and cargo that are operating in areas of geopolitical risk. In the Ukrainian and Russian conflict for example, the war risk premium was firstly around 1% and has further escalated to 1.25%. While the overall value may not be significant, it can still present an additional challenge in the trading of energy related commodities. 
Moreover, Iran is still exporting a significant amount through loopholes. If Iran decides to formally join the conflict, there probably would be stricter enforcement of sanctions by the United States which would tighten global oil supplies. Higher oil prices would also cause external geopolitical impacts. In the US, elevated oil prices could be a factor against the election of Joe Biden, who has invested significant political capital on the Middle East’s diplomacy with an attempt to normalise Saudi Arabia and Israel relations. For Russia, on the other hand, higher oil prices are vital to increase the country’s revenue and continue its war against Ukraine. 

The most extreme scenario would entail Israel conducting a strike on Iran’s nuclear facilities, potentially causing oil prices to surge well beyond $150 per barrel. Therefore, heightened efforts to remove U.S. sanctions on Venezuelan oil would help relieve the strain on global oil prices. Increased access to Latin America's oil resources could act as a shock absorber against price increases and supply disruptions. In the US, more specifically, it would offer a more favourable outlook to Joe Biden's administration.  

We’ve Got a Fungal Problem: A Looming Threat to Global Wheat Production and Food Security

Wheat is one of the most important staple crops in the world, providing food and income for billions of people. However, wheat production is facing a serious challenge from fusarium blight, a fungal disease that infects wheat ears and reduces grain quality and yield. It also produces mycotoxins, which are harmful to human and animal health. The fungus is influenced by weather conditions, especially temperature and rainfall, and is expected to worsen under climate change scenarios. This spotlight examines the current and projected impacts of fusarium blight on wheat production, prices, and security, and discusses the political implications.

Current Impacts of Fusarium Blight

Fusarium blight is a widespread and devastating disease of wheat, affecting all major wheat-producing regions in the world. The fungus lowers yields and reduces the quality of wheat grains by lowering their test weight, protein content, and germination rate. It also contaminates wheat grains with mycotoxins, such as deoxynivalenol (DON) and zearalenone (ZEA), which can cause acute and chronic health problems in humans and animals, such as vomiting, diarrhoea, reproductive disorders, immune suppression, and cancer. This presence of mycotoxins in wheat affects its marketability and trade, as many countries have set maximum allowable levels for mycotoxins in food and feed.

Fusarium blight outbreaks are highly variable and depend on several factors, such as the susceptibility of wheat cultivars, the timing and duration of flowering, and the weather conditions during flowering and post-flowering. Warm, wet, humid conditions during flowering favour infection by fusarium species, causing ear blights and seed-borne infection. Further rainfall and humid conditions allow secondary infections to occur, allowing further fungal growth and mycotoxin production. Therefore, fusarium blight epidemics are often associated with wet seasons or regions with high rainfall or irrigation.

In terms of specific numbers, the FHB epidemic has been reported to lead to a 10–70% of production loss during epidemic years. For example, in China, a 5–10% yield loss is common due to FHB, but it can reach up to 100% in epidemic years, affecting around 7 million hectares of wheat fields.

These factors can create a supply shortage, which in turn can drive up the price of wheat in the commodity market. However, the exact impact on wheat prices can vary depending on a range of factors, including the severity of the outbreak, the region’s reliance on wheat production, and the global wheat market conditions at the time of the outbreak.

Winter Wheat

Commodity wheat, sometimes referred to as winter or common wheat , accounts for the vast majority of production worldwide as it contains higher protein than other varieties, this allows for a wider range of uses and a higher number of possible products produced from the wheat itself. Winter wheat is planted in the autumn and harvested in the following summer. It is grown in temperate regions of the world, such as Europe, North America, China, and India. Winter wheat also provides soil cover and erosion control during the winter months.

Blight is much more common in winter wheat than in spring wheat because winter wheat has a longer exposure to the risk factors that favour fusarium infection. These risk factors include warm and humid weather during flowering, and susceptible varieties. Winter wheat also tends to flower earlier than spring wheat, which coincides with the peak period of fusarium spore production and dispersal.

Projected Impacts of Fusarium Blight under Climate Change

Climate change is expected to increase the frequency and intensity of extreme weather events, such as heat waves, droughts, floods, storms, and hail. These events can directly affect wheat production by damaging crops or reducing yields. However, climate change can also indirectly affect wheat production by altering the distribution and severity of plant diseases, such as fusarium blight.

The extent to which fusarium blight may affect the prices of winter wheat depends on several factors, such as the magnitude and frequency of fusarium epidemics, the availability and cost of fungicides and resistant varieties, the demand and supply of wheat in the global market, and the regulations and standards for mycotoxin contamination. Fusarium blight can reduce the quantity and quality of winter wheat, which may lower its market value and increase its production costs. Fusarium blight may also pose a threat to food safety and security, as mycotoxins can cause adverse health effects in humans and animals. Therefore, fusarium blight can have negative impacts on the income and welfare of farmers, consumers, processors, traders, and regulators.

Several studies have projected the impacts of climate change on fusarium blight using crop models coupled with disease models and climate scenarios. The results vary depending on the location, time horizon, emission scenario, and model assumptions. However, some general trends can be observed:

• Climate change will advance wheat anthesis dates, the stage of the wheat life cycle that allows for full flowering, it is at this stage that wheat is vulnerable to blight and rainfall during this period is predictive of incidents of blight. Due to higher temperatures and shorter growing seasons this may reduce the exposure of wheat to fusarium infection during flowering, as the peak of infection may occur before or after anthesis. However, this may also increase the risk of heat stress and drought stress during grain filling, which can reduce wheat yields and quality.

• Climate change will increase the incidence and severity of fusarium blight in regions where rainfall and humidity are projected to increase, especially during flowering. This may enhance the infection by fusarium species and the production of mycotoxins in wheat grains. However, this may also reduce the risk of water stress and increase the water use efficiency of wheat crops.

• Climate change will decrease the incidence and severity of fusarium blight in regions where rainfall and humidity are projected to decrease, especially during flowering. This may reduce the infection by fusarium species and the production of mycotoxins in wheat grains. However, this may also increase the risk of water stress and reduce the water use efficiency of wheat crops.

Implications for Wheat Prices and Security

The impacts of fusarium blight on wheat production, quality, and trade have significant implications for wheat prices and security. Wheat prices are determined by the interaction of supply and demand factors in global markets. Supply factors include production, stocks, trade policies, weather shocks, and diseases. Demand factors include consumption, income, population growth, preferences, and biofuel policies. Wheat security refers to the availability, accessibility, utilisation, and stability of wheat for food and feed purposes.

Fusarium blight can affect both supply and demand factors of wheat prices and security. On the supply side, fusarium blight can reduce wheat production by lowering yields and quality. This can create a supply shortage in domestic or international markets, leading to higher prices. Fusarium blight can also affect wheat trade by reducing exports or increasing imports. This can create a trade imbalance or a trade disruption in regional or global markets, leading to price volatility. Fusarium blight can also affect wheat stocks by reducing storage or increasing disposal. This can create a stock depletion or a stock accumulation in national or global markets, leading to price instability.

On the demand side, fusarium blight can reduce wheat consumption by lowering preferences or increasing health risks, even as states maintain high standards, the share of global wheat that meets those standards will decrease thereby decreasing supply and decreasing the amount of high quality wheat products available to consumers. This can create a demand decline in domestic or international markets, leading to lower prices. 

On the supply side, fusarium blight can also affect wheat income by reducing profits or increasing costs. This can create an income loss or an income transfer in producer or consumer groups, leading to price inequality. Fusarium blight can also affect wheat population by reducing growth or increasing mortality. This can create a wheat population decrease or a population displacement in rural or urban areas, leading to price insecurity.

Wider Consequences and Political Risk

The wider consequences of fusarium blight in winter wheat are related to its potential effects on food security, public health, trade, and environment. Fusarium blight can reduce the availability and accessibility of wheat as a staple food for millions of people around the world. Fusarium blight can also compromise the nutritional quality and safety of wheat products due to mycotoxin contamination. Fusarium blight can affect the trade relations between countries that produce or import winter wheat, as different countries may have different standards and regulations for mycotoxin levels. Fusarium blight can also have environmental implications, as it may increase the use of fungicides that can have negative effects on biodiversity and water quality.

The political risk of fusarium blight in winter wheat can be explained as the possibility of conflicts or disputes arising from the different interests and perspectives of various stakeholders involved in the production, consumption, and trade of wheat. For example, fusarium blight can create tensions between wheat exporters and importers, as the former may face lower demand and higher costs due to quality issues, while the latter may face higher prices and lower supply due to scarcity issues. Fusarium blight can also create challenges for policymakers and regulators, as they have to balance the needs and expectations of different groups, such as farmers, consumers, processors, traders, and environmentalists. Fusarium blight can also affect the stability and security of regions or countries that depend heavily on wheat as a food source, as it can cause food shortages, malnutrition, and health problems. Fusarium blight can also trigger social unrest or violence, as people may protest or riot against the authorities or other groups for their perceived failures or injustices related to wheat production or distribution.

Conclusion

In conclusion, fusarium blight emerges as a looming threat to global wheat production and security, with its multifaceted impacts on yield, grain quality, human and animal health, and international trade. The intertwined relationship between fusarium blight and climate change exacerbates the challenge, requiring comprehensive and adaptive strategies. Beyond its immediate economic consequences, the disease's far-reaching effects on food security, public health, trade relations, and environmental sustainability underscore the urgency for collaborative international efforts. Addressing fusarium blight demands not only innovative agricultural practices, resistant crop varieties, and stringent regulatory standards but also necessitates a holistic approach, involving policymakers, researchers, farmers, and consumers to ensure the resilience of global wheat production systems in the face of this pressing threat.

Norwegian Deep Sea Mining: A New Frontier

This report on Deep Sea Mining in Norway gives a synthetic and up to date insight into the specifics of the Norwegian project in the broader context of Deep Sea Mining as a viable future strategy to meet growing mineral needs. Its overall purpose is to serve as a case study for this innovative form of resource extraction, as humanity stretches the boundaries into the world’s periphery.

Jointly written betwen the Global Commodities Watch and Geopolitics on the Periphery Desk, read the full report by clicking on the button below: