Climate change, El Niño and food security in China
Heavy rainfall in China has caused significant damage to wheat fields, leading to an increase in wheat prices. As the world's top consumer and producer of wheat, China's agricultural sector plays a crucial role in global food security. The impact of the recent extreme weather events on wheat production could be catastrophic for China’s food security, and the Chinese Communist Party (CCP) has announced measures being taken to mitigate the risks.
Henan province, accounting for 25% of China's wheat production, has suffered the worst rainfall near harvest in over a decade. This extreme weather pattern has caused flooding and landslides, resulting in the loss of lives, and further exacerbating concerns about food security. The recent occurrence of record-breaking heatwaves and droughts in China, including Shanghai's hottest May in a century, has raised alarm bells regarding the vulnerability of the country's food supply. Despite the current rain, officials remain worried that the drought may extend to the Yangtze River Basin, which provides China with two-thirds of its rice. Animals have already succumbed to the intense heat, further underscoring the urgency to address the water scarcity issue. El Niño, a natural phenomenon that brings even warmer temperatures originating from the Pacific, is also a cause for concern, as it could exacerbate China's food security challenges.
China's wheat production reached 140 million tonnes in 2022, highlighting its significance as a key crop for the nation and the world. The country is expected to have a bumper crop this year, which is a harvest with an unusually high yield. However, the heavy rains in the last few weeks have resulted in damaged wheat crops, pushing up prices in regions like Henan and causing concerns for both domestic and international markets. Due to the damage to wheat crops, animal feed markets have started to replace corn with cheaper wheat, leading to further price fluctuations. While the rains have temporarily supported prices, the long-term impact remains uncertain, as commodity analysts in Shanghai suggest that clarity will only emerge once the rainfall subsides, which could be as late as August.
Several government agencies agree with the Ministry of Emergency Management also predicting that rain, floods, and hailstorms are likely to persist until August. Northern China faces water-related disasters, the South may experience drought, and the East Coast, a key driver of economic growth, could encounter typhoon storms earlier than usual. Sichuan and Chongqing provinces face a significant risk of reduced rainfall, increasing the threat of drought and adding to the complexity of China's food security situation. Food security has been identified as a top priority by the Chinese government, with President Xi Jinping emphasising its critical importance to national security. Scientists have already warned that climate change will exacerbate global food security challenges in the future, making it crucial for China to address its vulnerabilities and develop resilient agricultural practices.
So far, markets have been focused on the destruction of the Kakhovka Dam in Ukraine. On 6th June, following the sabotage and subsequent flooding of the surrounding area, the price of global wheat spiked 2.4% to US$6.39 per bushel. Corn and oats both rose by 1% and 0.73% respectively. Markets have likely priced in the upcoming possible disruptions in wheat supplies from China, but the extent to which the disasters could damage this year’s yield is yet to be seen, and could surprise analysts. The Kakhovka Dam’s destruction is a reminder to markets of the volatility of wheat supplies, especially to developed countries which are particularly affected by shortages.
The Russian Oil Maskirovka: Why Aramco is Cutting Oil Prices
Oil markets have had an interesting year following the Russian invasion of Ukraine, to say the least . While firms have benefitted from this, with many announcing record profits, Saudi Aramco announced that it would be lowering oil prices in its main market Asia. This is off the back of weak manufacturing data from China that triggered a fall in Brent and WTI futures which track global oil prices. Although prices were raised in Asia, they remain unchanged in the United States but increased for European consumers. Aramco cut prices to $2.55 above the regional benchmark while Brent Crude futures jumped up to $87 per barrel before stabilising at $73 per barrel. Markets now look to the OPEC meeting in June, with some analysts believing that the group may decide to cut production again in a bid to keep high prices inflated.
On the one hand, it is not that surprising that Saudi Aramco’s profits dropped 19 per-cent considering their record profit of $161 billion off the back of an abnormal year for markets, but this is not just because of the oil market correcting itself. Saudi Arabia is competing with cheap Russian oil in key markets, like China and India, and, with 60 per-cent of its crude oil going to Asian markets - this is beginning to hurt the Kingdom’s economy. The IMF has halved its prediction on Saudi GDP growth from 8.7 per-cent to 3.1 per-cent, after cheap Russian oil undercut OPEC and priced Saudi Arabia out of key markets. However, this will only last until the Ukraine crisis is resolved and Russian oil can freely flow in global markets again. By convincing Saudi Arabia and OPEC to help sustain high prices, Russia has been able to sell its own oil at a discount to make up for the damage Western sanctions have caused on its economy. Unsurprisingly, this has ruffled feathers in the United States.
While Saudi Arabia is considered an ally of the United States, the relationship between the two nations has been less than cordial in recent years. The Kingdom has found itself becoming a rival oil exporter to the United States, and so has shown less interest in cooperation. President Biden refused to communicate with Crown Prince Mohammed Bin Salman, due to his involvement in the assassination of Jamal Khashoggi, and the relationship was further strained in March 2020, when Saudi Arabia dumped 40 million barrels of oil onto the market while in the midst of an oil price war with Russia. The resulting price decrease to -$37.63 per barrel was unprecedented and pushed American fracking companies out of business, thereby benefitting Saudi Arabia by decreasing global production and increasing prices.
Since then, Russia and Saudi Arabia have led their respective group of oil producers, together called OPEC+, to sustain high oil prices which had been placing inflationary pressures even before the Ukraine crisis began. In March of last year, they decided to increase production by 400,000 barrels a day each month, signalling that they had no interest in providing a safety net for Western Europe which has faced a decrease in Russian oil imports. This was following a call between Biden and King Salman in February, in which the former asked for more Saudi oil to relieve American allies, but nothing came of this. This coupled with Saudi Aramco making a $3.6 billion investment in Chinese Petrochemical firm Rongsheng and Xi Jinping calling for oil trade in Yuan, has caused security concerns in Washington. Biden might be facing more personal political problems due to oil markets though. Since WW1, sitting presidents won re-election only one out of seven times the economy has been in recession 2 years before they were up for re-election. With the OPEC meeting in June being held when the US is expected to breach its debt ceiling, if Biden does not receive favourable outcomes from both these issues, he can all but wave re-election in 2024 goodbye.
In the same way that neither Russia nor Saudi Arabia officially admitted to being in a price war in 2020, neither side has acknowledged the deception Russia orchestrated in convincing Saudi Arabia to sustain high oil prices. While the war in Ukraine has helped to keep these prices high, this has backfired in allowing Russia to snap up key markets in Asia. Whether this will remain the case going into the future is dubious. Looking at China, Russia was only able to unseat Saudi Arabia for 2 months of this year as the main supplier of oil, so if peace talks progress this year Saudi Arabia is likely to retake their lost market share. Moving forward we can expect oil prices to spike again if OPEC decides to cut production in June, but these prices are also dependent on the US debt ceiling. Although a default has never occurred before, OPEC are still looking at developments in the United States warily and it is evident that bad news coming from Capitol Hill will overshadow whatever decisions OPEC makes.
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Brazil-China: Trade Relations and their Impact on Commodities
Brazilian President Lula's recent trip to China has stoked tensions between Brazil and the West. From both a geopolitical and financial point of view, Lula’s actions surrounding the trip represent a marked change from his predecessor Bolsonaro. Where Bolsonaro had backed ally President Trump’s aggressive rhetoric on foreign policy, Lula is not only trying to reestablish Brazil’s role in global diplomacy, but is also toeing a more neutral line in the developing cold war between China and the US. Lula seems to be aligning himself with the other BRICS (Brazil, Russia, India, China, and South Africa) nations, but due to rivalries between the member nations, it is the bilateral economic deals that will have a more visible effect on the world, rather than empty foreign policy promises.
Alongside 240 Brazilian business leaders, Lula headed to China for the inauguration of former Brazilian President Dilma Roussef as head of the New Development Bank, a multilateral development bank established by the BRICS to help fund infrastructure projects in developing countries. This set the financial tone for the rest of his visit, in which 15 deals worth about $10 billion were signed between Brazil and China. China has long been Brazil’s largest export market and Lula wants to leverage this relationship to help with the reindustrialization of Brazil. With US companies leaving Brazil, the symbolism of Ford seeking to sell its plant to BYD cannot be understated. This coupled with talks between BRICS to dethrone the dollar as the currency for international trade will come as a blow to Biden, though it is unlikely that China will want the Yuan to become an international currency. Lula’s comments surrounding the Russo-Ukrainian war sparked more controversy in the West after he offered to join China in mediating peace talks while also placing partial blame for the conflict on the US.
Overall, Lula’s visit is most surprising as it marks a shift in Brazilian foreign policy, though this is only surprising when looking at the policies of his predecessor. Indeed, Lula is known to be a staunch leftist and had started cultivating a relationship with China in his previous presidency, so we can assume that this relationship will only be strengthened under his administration. President Xi has made it clear that Brazil is a key part of his plans of challenging US global hegemony, and this is shown by bilateral trade increasing by 10.1% from 2021 to 2022. A key commodity being sold by Brazil is beef, as China has a huge demand for it with 55% of their imports coming from Brazil and 10% of Brazil’s sales being to China. However, Brazil is also a key part of the iron, soybean, and crude petroleum markets. In addition to this, Brazil was the single largest recipient of Chinese FDI in 2021. This is part of Xi’s plan of integrating Brazil into the Belt and Road initiative, to increase China’s influence in Latin America, so we can expect trade to grow in coming years.
The markets for each of Brazil’s main commodities, beef, soybeans, and crude petroleum could change drastically by the end of the year. Both beef and soybean sales are interconnected. Soybeans are instrumental for feeding beef cattle with cattle feed making up 18% of soybean sales in the US and 52% of the oil gathered from soybeans are used in the food industry. With growing demand for beef from China opening up, we can expect beef sales to increase through restaurants reaching pre-pandemic levels of demand and pushing soybean prices up as restaurants need more oil for frying food, while farmers will need more soybeans to feed growing cattle numbers. While some feared stricter controls on cattle rearing in the Amazon with the election of a left leaning President, Lula has been unwilling to change his predecessor's profitable policies. While Lula has talked about placing people and nature in front of profits, this philosophy has not yet reached the agricultural sector, but this does not necessarily mean it will enjoy projection for the rest of his term. For now the only thing which has stopped the flow of Brazilian beef has been cases of mad cow disease, but suspensions were normally lifted within a few months of being placed.
Iron ore makes up the largest portion of Brazil’s exports and its price shifts are harder to predict. In the short term, prices will increase as China opens back up. As it eases its coronavirus policy and its real estate sector gradually recovers, it is likely that demand for iron will increase from Brazil’s main trading partner. However, as the markets recover their supplies from India and Brazil, it is likely by the end of the year that prices could decrease. There is even the chance that Russian and Ukrainian supplies flood back into the market, which could drastically change the price of iron ore but it is unclear if a peace settlement can be reached anytime soon.
How unrest in the DRC is affecting commodity supply chains
In late February, M23 rebels seized the town of Rubaya in the North Kivu province of the Democratic Republic of Congo (DRC). The town is a major coltan mining centre and its seizure is just the latest in a series of attacks by rebel groups on mining operations in the DRC, which has some of the world’s largest reserves of minerals including cobalt, copper, and coltan. In the same month, M23 captured the key towns of Mushaki and Mweso, bringing them ever closer to the regional capital Goma.
The M23 rebellion first emerged in 2012 and was initially defeated by Congolese and United Nations (UN) forces in 2013 but the group has continued to carry out sporadic attacks in the region since then. The latest seizure of Rubaya highlights the continued instability in the area and the challenges faced by the DRC government in maintaining control over its mineral wealth. The coltan supply coming from North Kivu will likely decrease because of this, which will lead to prices increasing in an already expensive market. Coltan contains niobium and tantalum, critical components in many electronic devices, as well as being important in the aerospace, healthcare, and energy industry. The international community may have to shift their attention away from the ongoing crisis in Ukraine if the situation continues to spiral.
The mining of these minerals often involves dangerous and exploitative working conditions, and profits from the industry have been linked to armed groups in the region. The situation is further complicated by the involvement of neighbouring countries such as Rwanda. Despite the DRC government alleging that M23 are receiving support in arms and men from Rwanda, this accusation was not levelled against Rwanda at the Community of Central African States nor the East African Community’s (EAC) at recent gatherings. With the DRC already struggling to contain the issue from spreading to other provinces, it is unsurprising that they would not want to throw more oil onto the fire and risk inciting harsher retaliation from Rwanda.
While it is unclear yet what this means for the future of the DRC, the loss of Goma would represent a major challenge to the authority of the government. Other dormant rebel groups may try their luck against a weakened central government. In addition to this, the DRC will likely pay close attention to the actions of Rwanda if M23 marches on Goma. With Lake Kivu preventing any attack from the south on Goma, the rebels will have to attack in two prongs from the north and west of the city. If reports emerge of fighters attacking Goma from its eastern border with Rwanda, Rwanda’s claims to not be supporting the group will become even more dubious.
The scale of the humanitarian crisis caused by such an attack, whether with help from Rwanda or not, would lead to a catastrophic loss of life. In the case of a capture of the city, thousands of people would be displaced or trapped within the zone of conflict with few options of escape. Both the UN and EAC have recognised the scale of this upcoming problem, with the UN calling for more than half a billion dollars in aid and the EAC calling for all rebel groups to withdraw from Eastern Congo.
With war in eastern Europe still ongoing, EU nations and the US are focused on Ukraine. This means material assistance to the DRC will most likely come from the EAC. In the best case scenario, this may not even be needed as M23 have previously caved to international diplomatic pressure and retreated from recent gains in December and January. But it is doubtful that they will take the same actions again given how close to a major objective they are and after already retreating from it.
As mentioned, the DRC is a vital source of other commodities whose supply and price would be adversely affected by the breakdown of the central DRC government. Cobalt and Copper, for example, have a wide range of applications, such as electronics and construction. While companies in these industries look for alternative sources for these minerals, they would be forced to pay higher prices thereby increasing prices for consumers as well. With inflation reaching record highs across parts of the world coupled with the reliance many industries have on technology, rising commodity prices could lead to decreased spending from consumers.
A Second Scramble for Africa?: U.S.- China Competition for Rare Earth Minerals
The global demand for rare earth minerals has been on the rise in recent years, driven by the growth of high-tech industries such as electronics, renewable energy, and aerospace. These minerals are a group of 17 elements that are essential to the manufacture of these products, due to their unique magnetic, optical, and catalytic properties.
The global demand for rare earth minerals has been on the rise in recent years, driven by the growth of high-tech industries such as electronics, renewable energy, and aerospace. These minerals are a group of 17 elements that are essential to the manufacture of these products, due to their unique magnetic, optical, and catalytic properties. However, these minerals are found in small concentrations and are difficult to extract, making them a strategic commodity that is vital to the functioning of modern societies.
China is the world's largest producer of rare earth minerals, accounting for more than 80 per-cent of the global supply. This gives China significant geopolitical leverage, as it is able to control the supply and pricing of these critical minerals. In recent years, China has been using its dominant position to assert its influence in global affairs, including trade negotiations and technology transfer agreements. The United States is heavily dependent on China's rare earth minerals, importing nearly 80 per-cent of its total rare earth minerals. This has become a concern for the US government, fearing that China may use its control over rare earths as a tool of economic and political coercion. This fear has only been exacerbated due to the effect the Russo-Ukrainian war has had on crucial commodities and rising tensions surrounding Taiwan. To reduce its dependence on China, the United States has been seeking alternative sources of rare earth minerals, and it has turned its attention to Africa too. Although many African countries already have long-standing mining agreements with China, there has been a recent push to break free from deals some see as not mutually beneficial.
Several African countries, including South Africa, Namibia, and Tanzania, have significant deposits of rare earth minerals. However, the development of Africa's rare earth industry has been hampered by a lack of investment, technical expertise, and infrastructure making it heavily reliant on foreign investment mainly from China. This has left African countries vulnerable to exploitation by foreign companies, who have been accused of prioritising profit over environmental and social concerns.
China has been actively investing in Africa's rare earth industry, seeking to secure its own supply chain and gain a strategic advantage over other countries. As of 2021, Chinese banks made up 20 per-cent of all lending to Africa and in recent years China has been providing African countries with significant technical assistance, including building infrastructure and providing equipment and training for rare earth mining and processing. This investment has given China a foothold in Africa's rare earth industry and has raised concerns about the potential for environmental and social exploitation. During the World Economic Forum at Davos, the President of the Democratic Republic of Congo (DRC), where 70 per-cent of the world’s cobalt comes from, complained that a $6 billion infrastructure for minerals was heavily one sided, with a majority of the cobalt being processed in China.
These recent signals at a move away from China to potentially better alternatives have not gone unheard by the emerging superpower’s primary rival, the United States. Indeed, the DRC was one of many nations in attendance at the Minerals Security Partnership setup by President Joe Biden and also signed a memorandum with the US in December 2022 to develop supply chains for electric vehicles. In 2019, the US government announced plans to invest in Africa's rare earth industry, with the aim of establishing a reliable supply chain of these critical minerals. These recent acts are just the beginning of what the US government hopes will be a new leaf in their relationship with African countries to develop their rare earth industries and build infrastructure while promoting sustainable mining practices.
The competition for rare earth minerals highlights the need for a global approach to resource management. As the demand for high-tech products continues to grow, the pressure on rare earth minerals will only increase. While some are looking to our solar system’s mineral rich asteroid belt as a way of obtaining these resources, we are most likely decades away from developing the necessary technology and, in the meanwhile, the resources needed to develop said technologies will continue to be fought over. It will take some time before the US is able to really rival China in Africa’s debt markets, but US policy makers are hoping to have made a significant enough dent in China’s hold over the industry before tensions rise any higher between the two world powers.
Wheat supply in a de-globalising world
International sanction regimes are disrupting supply chains across the world. In this research paper, analysts from London Politica’s Global Commodities Watch (GCW) provide an overview of the major stakeholders, critical infrastructure, trade routes, supply and demand side risks, and forecasted trends for wheat.