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
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.
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.
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.
Rice Bowls and Revitalization: Navigating China's Complex Food Security Landscape
Introduction
CCP Chairman Xi Jinping has proclaimed that the “Chinese people should hold their rice bowls firmly in their own hands, with grains mainly produced by themselves”. Yet this directly conflicts with his other stated goal of “rural revitalisation”, the effort to identify high value crops and agricultural industries for the purpose of raising farmer’s incomes and to alleviate rural poverty. Such tensions denote the contrast between two old visions of the state's duty to Chinese citizens, with both outlooks sharing little in common with the other.
This is reflective of the dual problems China faces over the coming decades: how to continue on the path of uplifting the rural poor from poverty, whilst simultaneously restricting their choice of crops to core staples in the interest of national food security.
This spotlight presents the problems facing China’s domestic food supply and increasing foreign dependence while discussing the complications caused by goals of both economic uplift of citizens and the long term protection of the nation’s dwindling farmland. Additionally, this spotlight analyses historic trends in Chinese food production and demand and their subsequent effect on global food prices, before reviewing the possible Taiwan-related motivations of the Chinese state.
This spotlight concludes that the proclaimed “guozhidazhe”, meaning a national priority or a main affair of the state, can be considered both as a push for food security while at the same time demonstrating a deliberate decision to prioritise the food security of the urban middle classes over the rural poor, this tradeoff itself having political and social consequences.
Rural Policy Background
The Deng Xiaoping market reforms of the 1980s seem to fade further and further into the rear view mirror as China trundles along towards true self-sufficiency. That’s when collective farms, a staple of most early communist regimes, were split and farmers were permitted to sell any crop they wished at market price.
Current Chairman, Xi Jingping, takes the opposite view, that Chinese farmers must forget the days when premium sellers such as flowers and fruit were harvested on China’s dwindling and already small stocks of arable land. Instead, farmers must focus on harvesting the staples that keep a nation going, a factory’s workers churning, and the nation’s stockpiles ever expanding. As such, China has been building up huge stockpiles in basic foodstuffs such as wheat, rice, and corn (around a year’s national supply of each). This has raised the global price of grain, with China now hoarding over half the world’s supply.
China is not blessed with good conditions for agricultural production. China has long been troubled by famine, with the emperors of antiquity usually looking to fill bellies as the first step to win hearts and minds. Today, China attempts to feed a fifth of humanity with less than 10% of the world’s farmland and only 7% of the world’s fresh water. Despite this, it manages to produce around a quarter of the world’s grain and ranks first across the globe for the production of cereals, fruit, vegetables, meat, poultry, eggs, and fishery products.
China's food security strategy today faces several challenges and trade-offs. One of them is the dilemma between increasing farmer's incomes and promoting the production of basic foodstuffs over cash crops. Cash crops are crops that are grown for sale rather than for domestic consumption, such as cotton, tobacco, tea, and fruits. Cash crops can provide higher returns for farmers and stimulate rural development, but they also compete with food crops for land, water, and other resources. This is causing confusion and resentment on the ground, where generations of shifting national priorities have been felt in the pockets of China’s rural population.
Another challenge is the dependence of China's food security on the stability of the global food market and the geopolitical situation. China is the world's largest importer of agricultural products, including soybeans, corn, wheat, rice, and dairy products. Between 2000 and 2020, the country’s food self-sufficiency ratio decreased from 93.6 percent to 65.8 percent. This is predominantly due to changing diet patterns with imports of edible oils, sugar, meat, and processed foods increasing.
This has been spurred on by the increasingly large Chinese urban middle class. More concerned with food safety than their parents, and dismayed from Chinese brands by decades of little to no strict food safety regulations in the country, these people turn increasingly to internationally imported goods. Additionally, there have been many contaminated and unsafe food scandals in China this side of the millennium, for example a large proportion of parents are still loyal to foreign baby formula as the result of six babies dying and hundreds of thousands being poisoned as a result of contaminated domestically produced formula in 2008.
China is also the largest producer of meat on the planet as stated earlier. This has been achieved by diverting many of the basic foodstuffs to livestock instead of to humans. China consumes around 175 million tonnes of corn in animal feed each year and imports approximately 100 million tonnes of soybeans to also use in animal feed. The growing urban middle class has increased demand for animal products domestically, such that corn used for animal feeds tripled from around 20% in the 1960s to 64% by 1994. This has contributed to state concerns over food security, with more of the staples going to livestock than ever before and the population's nutritional intake increasing in complexity. The reliance on imported food to meet those needs presents China with a problem, not just in terms of quantity for those at the bottom, but also in terms of quality and variety for those in the newly established middle class. China, therefore, is aiming to increase staple harvests not just to meet the needs of the population in terms of calories but also in terms of happiness and nutrition in an evermore complex and dangerous world the CCP perceives in the face of climate and geopolitical threats.
Additionally, it is difficult for food producers to make any meaningful profit farming staples, due to the price controls instituted from the top down. Therefore, another of Xi’s policy staples seems set for the chopping block. Xi has identified the uplifting of the rural poor as a priority for the CCP by allowing them to grow crops of high market value and invest in profitable agricultural industries to achieve rural revitalisation.
China has further diversified its uses for corn into the production of High Fructose Corn Syrup (HFCS). Reforms in the mid-2010s led to a mass sell-off of the nation’s then corn reserves and allowed for HFCS output to increase and for idle capacity to be reignited. HFCS sells for around a third of the price of natural sugar in China and garners a fifth of the domestic sweetener market. Chinese HFCS has also been exported abroad and disrupted the sugar industries of a number of southeast Asian states, with already declining sugar consumption causing concern in the Philippines where sugar cane harvests regularly outstrip demand and where around half of Chinese HFCS ends up. As the CCP pushes for more corn to be grown domestically and therefore be bought within strict price controls, the HFCS industry may further disrupt the growth in sugar demand awaited by many burgeoning economies in the region, particularly India, Indonesia, and Vietnam where imports of Chinese HFCS rank just behind the Philippines.
The Filipino government enacted trade restrictions on Chinese HFCS to protect domestic sugar production, further export of HFCS will increase tensions, place economic pressure on a key Filipino national industry, and inflame tensions in the region.
However, many question what happened to the “Grain to Green” goal set in the 1990s of planting forests to counter soil erosion and limit desertification. China’s food dependence is predicted to continue increasing, as a result of arable land loss. China in 2019 only possessed 95% of the arable land it held in 2013, this has been attributed to overuse of fertilisers, neglect of land, and climate change. Extreme weather, environmental degradation, water scarcity, and pollution all look to be ready to make the problem worse in the coming years and decades. Researchers from both China and the US judged that climate change and the loss of parts of the ozone layer were responsible for a 10% drop in average crop yields from 1981 to 2010.
The implications for global commodities
A fifth of humanity drastically changing the quantities and types of food they eat has unsurprisingly had major effects on the global price of food in the past. The food price hike of 2007-2008 pushed approximately 400 million people into poverty worldwide and was partly blamed by many on China and India’s rising demand for foreign agriculture leading to increased consumer competition on international markets and therefore higher prices.
However, if China stays on course to increase the amount of food produced domestically, at least in the short to medium term, based on the lack of attention paid to the slowly dwindling supply of arable land, then demand internationally for agricultural commodities like wheat, rice, and corn is bound to fall, possibly leading to a reduction in prices for these basic products and the foodstuffs they produce in combination with other materials and ingredients. Some of the poorest and most import-dependent countries on Earth should expect less competition at the table from now on as China prioritises the stomachs of its people over its farmers’ wallets.
Why Change So Much So Quickly?
China’s buildup of stockpiles on top of increasing domestic food production has many analysts worried. With tensions over Taiwan at a high, it raises the possibility that China’s move to increase food security is an attempt to prepare for future US-led sanctions and blockades as a consequence of invading what it considers to be a rebel province.
Alternatively, the justifications of the policy make sense in the opposite terms, not that conflict is planned but that shocks to the global food system, such as the collapse of the Ukraine Russia grain deal of which China was a major beneficiary, are only expected to increase as a result of conflicts in the region, or on the other side of the world.
It can be easily understood that the push for national food security is one caused by external factors alone, but the initiative’s counteraction against ideals of rural revitalisation demonstrate a definite domestic consequence and a readjustment of the urban/rural political and economic relationship in China. Even as improved physical and digital infrastructure draw the educated and successful back to small towns and villages, there has been very little progress towards bridging the urban/rural divide. In 1995, urban workers made three times their rural counterparts, today the ratio is roughly the same even in the face of government efforts to close the gap.
The realignment taking place, for farmers to grow low income but highly needed crops to keep both basic food prices low and maintain a steady supply of cheap other foodstuffs such as meat and sweetener, illuminates China’s prioritisation of the urban middle classes with more complex dietary expectations over the farmers and rural poor reaching to claim their share of the Chinese dream.
Conclusion
China's dual objectives of ensuring food security and promoting rural revitalisation underscore a complex challenge. Balancing the imperative for self-sufficiency with the need to uplift rural communities reveals tensions between historical legacies, socioeconomic aspirations, and global realities. The intricate interplay between these goals not only impacts China's domestic landscape but also resonates internationally through changing trade dynamics and geopolitical considerations. The nation's journey to navigate these complexities will define its agricultural trajectory, with far-reaching implications for both its citizens and the global community.
Image credit: Colin W via Wikimedia Commons
Decoding TotalEnergies’s massive $27 billion dollar deal with Iraq
On the 10th of July 2023, French major oil company TotalEnergies and the Iraqi government finally signed a much delayed $27 billion dollar energy deal, directed towards increasing the country’s oil production capacities by developing four oil, gas, and renewable projects. The signing of the deal, named the Gas Growth Integrated Project, took much longer than expected owing to several key reasons. First, a number of Shi'ite lawmakers had also cried foul over the deal, pointing to the lack of transparency and absence of bids from other oil companies. Another significant setback in the initial days of negotiation arose from TotalEnergies rejecting the now abolished Iraq's National Oil Company (INOC) as its partner in the project, mainly due to its lack of full legal status from the new Iraqi government. Iraq’s state owned Basrah Oil (BOC) will now be a partner in the project. The main hindrance to the project stemmed from sharing of revenues, which was finally resolved when Iraq agreed to take a stake in the project of 30 percent, in place of initial demand of 40 percent, giving majority stake to the French company.
Despite initial hiccups, the deal is seen as a welcome move both overseas and at home, one that will optimistically put Iraq on the path towards achieving energy sufficiency and helping to improve the business climate and attract further foreign investment. Iraq holds the world’s fifth largest proven oil reserves at 145 billion barrels, representing 8.4 percent of global reserves. Iraq’s potential as an oil producing nation has been held back due to years of sectarian violence, lack of transparency, governance, and poor environmental laws, leading to the withdrawal of many oil majors from the country. Exxon Mobil, Shell and BP have all scaled back their operations in recent years.
The launch of the Gas Growth Integrated Project is a watershed moment in Iraq’s history. The deal will see TotalEnergies intensify its efforts to increase gas production in the Ratawi field in the oil rich Basra region. This will help reduce Iraq’s reliance on gas imports from neighbouring Iran. For a long period of time, Iraq has relied on its neighbour for electricity and gas imports. Iran uses this as a leverage to exert influence on Iraqi politics. Iran, in the past and in the present, funds the training of the Popular Mobilization Forces, a paramilitary group trained to flush out the remaining US troops and anti-Iranian Kurdish elements that have operated in the northern region of the country. All of Iran’s initiatives are aimed towards keeping Iraqi and the American governments on its heels and exerting its influence in the region where the US has sought, from time to time to forge alliances and partnerships in order to nullify Iranian clout. Iran is a significant partner for Iraq in terms of trade and development prospects, with the latest breakthrough being in the railways sector. An MOU had been signed in March 2023, outlining executive procedures for establishing a rail connection between the two countries. Iran is making significant inroads into Iraq's economic landscape, creating an opportunity to invalidate America’s significant investments in the region. Iran’s economically driven shrewd tactics, such as these, will likely help to negate the US influence in the region as a whole and compel the US to rethink on its sanctions against Iran given that the commercial interests are at stake.
It appears that the US has also sought help from its Middle Eastern allies to hold back Iran’s ascendancy into Iraqi soil. Keeping its political differences aside, Saudi Arabia’s ACWA has agreed to develop The 1 GW solar power plant project in collaboration with TotalEnergies. The project seems to be part of the Iraqi government’s long term plan of solving electricity supply woes through installation of renewable sources. A portion of the revenue generated from the Gas Growth Integrated Project will be used by the French company to fund three additional projects: 1 GW solar power plant; a 600 million cubic feet a day gas processing facility, and a seawater project to boost Iraq’s southern oil production.
From the outside, the establishment of the solar power plant is a welcome move towards advancing Iraq on the path of self-sufficiency through sustainable modes of energy production. At the same time, it also appears to be a well crafted move by the Iraqi leadership to deviate attention from the environmental hazards that oil majors in Iraq have already created over a substantial period of time. Prior western oil majors have caused significant water shortages and pollution during its operations. The same environmentally catastrophic outcomes are likely to happen when TotalEnergies drives its efforts to increase production in the Ratawi oil field.
Past records also demonstrate that plants used by oil companies including BP and ExxonMobil accounted for 25% of the daily water consumption in a region of almost 5 million people. This leaves significantly less water for agriculture and other activities upon which the local rural communities are dependent upon. The harmful affluents emitted as a result of gas production has already affected the health of the residents in Iraq’s Basra region, with cancer rates having significantly grown in the region. While the deal has been projected to herald a new dawn in Iraq’s history, what remains to be seen is the possibility of the deal causing more harm than good to the Iraqi people in the long run.
“De-dollarization” – A Teaser
In February 2023, the yuan’s share of global trade increased to 4.5% — close to the Euro at 6% — from less than 2% no longer than a year ago. Simultaneously, the dollar share of central bank foreign reserves fell to a 20-year low of 58% in the same period (IMF). This situation followed the sweeping sanctions imposed by the West on Russia after its invasion of Ukraine, notably freezing Russian dollar reserves through the SWIFT payment system. The financial blockade has naturally led Russia to seek alternatives to the dollar to conduct international trade, rapidly making the Chinese yuan the most traded foreign currency on the Russian exchange.
Beyond Russia, Western sanctions have acted as a shock therapy for emerging economies, with numerous countries announcing their intentions to diversify their currency usage, and multiplying bilateral trade agreements denominated in their own currencies. For instance, Saudi Arabia has reportedly entered into active talks with China to price some of its oil sales in yuan. Similarly, Brazil has positioned the yuan as the second foreign reserve currency, ahead of the Euro, while Banco BOCOM BBM—a Brazilian bank controlled by China's Bank of Communications—became the first bank in Latin America to sign up as a direct participant in China's competing settlement agreement, CIPS, in March 2023. India is also slowly departing from the dollar, multiplying regional trade agreements settled in its own currency.
This movement away from the dollar system reignited the debate around “de-dollarization,” an hypothesis which has featured economic debates since former US President Richard Nixon upended the original Bretton Woods agreements in 1971. However, macroeconomics pundits call for moderation: Money is first and foremost a game of trust, it requires users’ confidence to work. Countries do not hold a foreign currency if their trade partners are unlikely to accept it as payment for their exported goods. On this benchmark, the US dollar is expected to remain the game in town in absence of deep structural changes. Indeed, its closest competitor—the Chinese yuan—is a closed currency: It cannot be exchanged for other currencies without the CCP’s approval, which maintains a tight control over international capital flows. This fundamentally limits the ability for central banks to accumulate yuan as reserve and to use it to trade internationally. As the liberalization of the Chinese financial system would pose major challenges on its economic governance, most believe that the convertibility of the yuan represents an unrealistic scenario for the foreseeable future.
Yet, the underlying trend seems to be clear: BRICS countries are gradually developing into a trading alliance. On August 22nd, the BRICS will hold a meeting in South Africa to explore the possibility of introducing a new shared currency. Such a solution would tackle one of the main impediments of de-dollarization through bilateral agreements. Through a shared currency, the BRICS would tap into a geographically diversified basket of commodities and manufactured goods, making a compelling argument for parking said-shared currency as a central bank foreign reserve, rather than converting it back to US dollars or Euros for international trade.
Would this shared currency be a credible threat to the US dollar in the long-run? Yes. Under its current organization, BRICS countries have outgrown the G7 on a PPP basis. Their geographical diversity would allow a level of self-sufficiency and production range beyond current monetary unions such as the Eurozone, while BRICS’ combined trade surplus would underpin the currency’s stability (FP). Furthermore, as regional economic powerhouses, BRICS could influence their local trade partners to adopt their currency, allowing goods to circumvent any potential bilateral trade restrictions through third countries, thus ensuring global trade continuity. With 19 other commodity-rich countries—such as Argentina, Iran, Egypt, Indonesia, and, most importantly, Saudi Arabia—interested in becoming part of the BRICS association, the challenge to dollar hegemony appears increasingly tangible.
To achieve global acceptance, the BRICS would need to demonstrate successful joint currency management. This would, evidently, be a long and challenging undertaking for the BRICS. However, initial steps toward this vision have already been taken with the creation of the BRICS Interbank Cooperation Mechanism and BRICS Pay, a cross-border payment system that avoids conversion to dollars, while talks of aligning Central Bank Digital Currencies have also been floated. While past efforts to establish ambitious projects have often fallen short of expectations, such as the BRICS credit rating agency or the BRICS’ New Development Bank, the group remains steadfast on de-dollarization, having a history of overcoming internal crises. Despite significant upheavals between its members, the BRICS group has intensified its collaboration and persistently expanded the breadth of policy matters it tackles, a phenomenon which should sound familiar to our European readers. Having now identified de-dollarization as a common goal, it appears unlikely that the group deviates from its trajectory.
On July 7th, the Russian Embassy in Kenya declared on Twitter that “the BRICS countries are planning to introduce a new trading currency, which will be backed by gold,” propelling the yellow metal to $1954 per ounce, along with silver. While Russia’s bombastic announcements should be approached with caution, this path is not unlikely. By tying their currency to gold, BRICS countries could introduce a degree of confidence into their shared currency, harkening back to pre-Bretton Woods monetary arrangements. In today’s fragmented international order, commodities are reclaiming the center stage, as global demand for resources surges amid industrial onshoring, and increased emphases on energy transition and energy security in advanced economies. Those emerging needs are pushing nations to secure strategic reserves and developing their local processing capacities, thereby reshaping antiquated trade dynamics. In this scenario, commodity-rich countries, once sidelined, are finding themselves in positions of increased influence against debt-laden, service economies. As investors reinterpret what constitutes a good sovereign debt collateral, a shift from fiat back to a commodity-backed monetary system could provide the necessary impetus for the BRICS shared currency plan to gain traction and begin the slow erosion of dollar dominance.
Regardless of what will come out of the next BRICS meeting, stay posted for the next joint release from London Politica Global Commodities Watch and Business and Market Watch. We will explore in depth the likelihood, as well as the consequences, of de-dollarization on world politics.
The Dangote Refinery and its Effect on Commodities
The Dangote Refinery is a massive oil refinery project owned by Nigerian billionaire Aliko Dangote that was inaugurated on the 22nd of May 2023 in Lekki, Nigeria. It is expected to be Africa’s biggest oil refinery and the world’s biggest single-train facility, with a capacity to process up to 650,000 barrels per day of crude oil. The investment is over 19 billion US dollars.
The refinery is expected to have a significant effect on the commodities market, both internationally and in Nigeria. Possible impacts include:
Reduced oil import dependence
The refinery will help Nigeria meet 100% of its refined petroleum product needs (gasoline, 72 million litres per day; diesel, 34 million litres per day; kerosene, 10 million litres per day and jet fuel, 2 million litres per day), with surplus products for the export market. This will reduce Nigeria's reliance on petroleum product imports, which cost the country $23.3 billion in 2022. Nigeria currently imports more than 80% of its refined petroleum products.
Lower fuel prices
The refinery will likely lower the domestic prices of fuel products, as it will eliminate the costs of transportation, demurrage and other charges associated with imports. This will benefit consumers and businesses in Nigeria, as well as reduce the burden of fuel subsidies on the government budget.
Economic growth and diversification
The refinery will stimulate economic growth and diversification in Nigeria, as it will create thousands of direct and indirect jobs, enhance value addition and generate tax revenue for the government. The refinery will also spur the development of other industries that depend on petroleum products, such as petrochemicals, fertilisers, plastics and power generation.
The refinery also faces some challenges that could affect its performance and impact. Here are some of the possible challenges:
Crude supply issues
The refinery needs a constant supply of crude oil to operate at full capacity, but Nigeria's oil production has been declining due to oil theft, vandalism of pipelines and underinvestment. In April 2023, production fell under 1 million bpd, below Angola's output. Lower production could affect the state-owned oil company NNPC Ltd's ability to fulfil an agreement to supply Dangote refinery with 300,000 bpd of crude. According to economist Kelvin Emmanuel, who authored a report on oil theft last year: “The challenge is that if you don't have enough crude production then you can't supply Dangote Refinery with enough crude. And if you don't have enough crude then you can't produce enough refined products for domestic consumption or export.”
Commissioning delays
The refinery has faced several delays and cost overruns since it started in 2013. It was initially planned to be completed in 2016, but was pushed back to late 2018, then late 2019 and then early 2020. However, due to the COVID-19 pandemic and other factors, the refinery was not mechanically complete until May 2023. According to Reuters, citing sources familiar with the project, construction was likely to take at least twice as long as Dangote publicly stated, with partial refining capability not likely to be achieved until late 2023 or early 2024. Oil and gas expert Henry Adigun told the BBC that Monday's launch was “more political than technical” and that “there are still a lot of technical issues that need to be resolved before the refinery can start producing at full capacity”.
Market competition
The refinery will face competition from other refineries in the region and globally. Nigeria's existing refineries are undergoing revamping and are expected to resume operations by 2024. Other African countries such as Ghana, Senegal and Uganda are also building or expanding their refineries. Moreover, the global refining industry is undergoing a transformation due to changing demand patterns, environmental regulations and technological innovations. The progression towards bio-refineries worldwide may divert future research and development towards cleaner fuels and cleaner facilities, leaving traditional refineries at a technological standstill. The refinery will have to adapt to these changes and offer competitive products and prices. According to Bala Zakka, an energy analyst and former NNPC engineer: “The Dangote refinery will have to compete with other refineries in the Atlantic basin and beyond. It will have to be efficient, flexible and innovative to survive in the market.”
Monopoly concerns
The refinery will dominate Nigeria's downstream sector and potentially create a monopoly situation that could harm consumers and other players. Some stakeholders have expressed concerns that Dangote could use his influence and connections to gain unfair advantages or stifle competition. For example, Dangote could lobby for favourable policies, tariffs or subsidies that could undermine other refineries or importers. Alternatively, Dangote could abuse his market power by setting high prices or limiting supply. The government and the regulators will have to ensure a level playing field and protect the public interest. Dr Diran Fawibe, the Chairman of International Energy Services, said: “The government should not allow Dangote to dictate the market or become a monopoly. There should be a regulatory framework that ensures fair competition and consumer protection.”
The refinery's economic, political and social impact will depend on how well it can overcome these challenges and deliver on its promises. Here are some of the possible projections:
Economic impact
The refinery could add up to 2% to Nigeria's GDP, which was $432 billion in 2022. It could also save Nigeria up to $12 billion per year in foreign exchange by reducing fuel imports. There is potential to generate up to $5 billion per year in export revenue from refined products. The refinery could also contribute up to $1.5 billion per year in tax revenue for the government and create up to 70,000 direct and indirect jobs.
Political impact
The refinery could enhance Nigeria's energy security and sovereignty by reducing its dependence on foreign refineries and traders. It could also boost Nigeria's regional and global influence by becoming a major supplier of refined products to other African countries and beyond. It could also improve Nigeria's image and reputation as a destination for investment and innovation. It could also reduce the risk of social unrest and violence caused by fuel scarcity and price hikes.
Social impact
The refinery could improve the living standards and welfare of millions of Nigerians by providing them with affordable and reliable fuel products. It could also improve the quality of life and health of Nigerians by producing cleaner fuels that meet Euro-V standards, reducing air pollution and greenhouse gas emissions. It could also support the development of other sectors such as agriculture, manufacturing, transport, education and health by providing them with cheaper and more stable energy sources. It could also empower local communities and entrepreneurs by creating opportunities for skills development, technology transfer, value addition and backward integration.
Conclusion
The inauguration of the Dangote Refinery marks a significant milestone for Nigeria and the global oil industry. The refinery's immense capacity and ambitious goals hold the potential to bring about transformative impacts, including reduced oil import dependence, increased oil export revenue, lower fuel prices, and overall economic growth and diversification. By meeting Nigeria's refined petroleum product needs and generating surplus for export, the refinery addresses a critical issue of import reliance, saving billions of dollars in foreign exchange annually. It stimulates job creation, boosts local content development, and creates opportunities for value addition and tax revenue generation.
The refinery is not without its challenges. The availability and consistent supply of crude oil pose potential risks, as Nigeria's oil production has been affected by theft, pipeline vandalism, and underinvestment. Furthermore, the refinery's construction delays and cost overruns indicate the need for careful management and resolution of technical issues before achieving full operational capacity. Competition from regional and global refineries, as well as concerns of monopoly control, necessitate the implementation of fair competition policies and regulatory frameworks to safeguard consumer interests.
The success of the Dangote Refinery will depend on how these challenges are addressed. If overcome effectively, the refinery has the potential to make a significant contribution to Nigeria's GDP, enhance energy security, and improve the lives of Nigerians by providing affordable and reliable fuel products. Additionally, it can position Nigeria as a major player in the global oil industry, while reducing environmental impacts through cleaner fuel production. The government's commitment to ensuring a level playing field, protecting consumer interests, and fostering competition will be crucial in maximising the refinery's positive impact on Nigeria's economy, politics, and society.
Image credit: FrankvEck
Panama Canal drought- effect on commodities
The Panama Canal is a vital artery for global trade, since it connects the Atlantic and Pacific Ocean. The decrease of rainfall in Central America has caused water levels to drop, which may increase the difficulty of large ships to pass through the canal, leading to rising transport costs and potential repercussions for various commodities worldwide. The picture below shows where the Panama Canal is situated, connecting the Caribbean Sea and the Pacific Ocean.
Map 1 - Panama Canal Map. Credit: Port Economics, Management and Policy.
Climate change is primarily responsible for the challenges that encounter the Panama Canal. Rising global temperatures have disrupted traditional weather patterns, leading to prolonged dry spells and reduced rainfall in the region. This drought has the potential to hinder the passage of ships and cause disruptions in global trade flows. The impact of climate change and global warming on the canal highlights the urgent need to address environmental concerns and develop sustainable solutions.
In 2021 the canal transported more than 500 million tonnes of goods, mainly grains and oil. Therefore, the Panama Canal drought is expected to have a substantial impact especially on bulk commodities, since they rely on the efficient and cost effective transport offered by the canal. Crude oil and gasoline may face a cost increase due to the drought in the Panama Canal.
This scenario affects companies in the short and long run. For the immediate effects, shipping company Hapar Lloyd has increased the Panama Canal charge by $500.00 dollars per container on July 1st. Asian shipments arriving in the US East Coast via the canal will be hit hardest by the surcharge. This policy will most likely contribute to higher expenses and squeeze profit margins further.
Companies involved in international trade and reliant on the Panama Canal may face upcoming challenges in the future as the result of the drought. With climate change getting more unstable each year with unpredictable rain scenarios, transport costs are likely to rise due to the canal’s operational limitations impacting profit margins for companies shipping goods through this route. In extreme circumstances, more severe droughts may pose challenges in accommodating larger vessels within the Panama Canal. For now, it is not possible to measure the likelihood of such events taking place in the upcoming years.
Companies specializing in affected commodities such as agricultural exporters and mining firms may experience decreased demand or reduced competitiveness in global markets due to higher prices or delayed shipments. They need to explore alternative transportation routes or consider investing in technologies that minimize reliance on the Panama Canal. One example is Transshipment Hubs, which can provide more flexible options to transfer cargo between larger and smaller vessels that can fit in alternative routes. Infrastructure improvements are also important, since they can directly benefit the canal’s operations. For example, implementing water management techniques and the use of data and artificial intelligence can help optimize vessel traffic and ensure smooth operations despite the drought conditions.
Additionally, companies indirectly connected to the affected sectors, such as transportation and logistics providers, could experience decreased business volume and revenue due to the overall slowdown in canal operations. The main solution announced so far is reducing the load of the transportations on the canal.
It is important to acknowledge that some specialists believe the Panama Canal drought will not have severe consequences since it is not as important as the Suez Canal and that sea-faring world trade hasshown itself resilient in the last years. However, this event sheds a light in climate change risk and how it is already affecting business and commodities. For many years, global warming, droughts, lack of water, and other environmental issues were seen as a problem for the “next generation” that would not impact companies and supply chains. However, as observed, climate change is already affecting commodities and therefore should be treated as a current and not future risk.
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.
Extension of the Ukraine Black Sea Grain Initiative: Impact on Global Food Supply Chains
Since the beginning of the Russian invasion of Ukraine in February 2022, Ukrainian grain exports have been severely disrupted. Russian military vessels were carrying out a blockade of Ukrainian ports in the Black Sea for four months. On July 22 2022, an agreement was signed between Russia and Ukraine, mediated by the United Nations and Turkey, to maintain a safe maritime humanitarian corridor in the Black Sea, also known as the Black Sea Grain Initiative. Since then, about 900 ships carrying grain and other food items have departed from the Ukrainian ports of Chornomorsk, Odessa, and Yuzhny/Pivdennyi. When the time came of the end of the original deal, Ukrainian President Volodymyr Zelensky and the UN Secretary-General António Guterres both called for an extension of the deal, thereby enabling Russian and Ukrainian wheat and fertilisers to be exported through the Black Sea.
Initially, Ukraine and Russia had signed the deal for an initial 120 days last July, thereby averting a possible global food crisis. A subsequent November extension to the Black Sea Grain Initiative for an additional four months was due to expire on March 18, 2021, unless it was extended. While the UN and Ukrainian government backed the extension, the Kremlin was unhappy with specific provisions of the deal, thereby renewing fears of grain traders regarding potential risks to supplies and the potential increase in global grain prices. On March 18, 2023, the Ukrainian Deputy Prime Minister elucidated that the deal had been extended for 120 days. However, Moscow reckoned that it had agreed to a 60-day extension only, and a Russian Foreign Ministry letter to the UN said that the country was only willing to extend beyond the stated 60 days in the face of ‘tangible progress' towards unblocking flows of Russian food and fertilisers to world markets. The Turkish President, Recep Tayyip Erdogan, confirmed the rollover of the deal but did not comment on the exact duration of the extension.
As of March 2023, over 23 million tonnes of grain and other foodstuffs have been exported via the Black Sea Grain Initiative. Approximately 49 per-cent of the cargo constituted maize, the grain which was most affected by blockages in Ukrainian granaries at the start of the war, i.e. (75% of the 20 million tonnes of grain stored). It had to be displaced quickly to make room for the summer harvest. Wheat constituted 28 per-cent, sunflower products 11 per-cent and others 12 per-cent. Over 65 per-cent of the wheat exported through the Black Sea Grain Initiative went to developing countries. Maize was shipped to both developing and developed countries almost equally. 63 per-cent of wheat was exported to developing countries and 35 per-cent to developed countries. So far, approximately 456,000 tonnes of wheat departed Ukrainian ports to reach Ethiopia, Yemen, Djibouti, Somalia, and Afghanistan. The EU is a major global producer and exporter of wheat. In 2022, according to estimates, the EU exported approximately 36 million tonnes of soft wheat to Algeria, Morocco, Egypt, Pakistan, Nigeria and others. The Russian invasion of Ukraine caused a significant surge in food prices in global markets; the prices of particular grains rose steeply. The impact on price and the types of grain which have been exported through the Black Sea Grain Initiative is made available by an infographic published by the the Council of the European Union.
The extension of the deal is a significant success. Grain traders were concerned about the effects on global food prices and what it would imply for Ukraine’s summer wheat harvest had it not been extended. Shipping industry Representatives also appreciated the smooth functioning of the grain corridor. They feared that any end to the agreement would lead to the instantaneous stopping of vessels travelling to the Black Sea. Guy Platten, the Secretary General of the International Chamber of Shipping, elucidated that while the corridor had been a great success, any failure in a roll-over would have caused significant concern for shipping companies, who would not want to endanger their vessels and crew and would find it difficult to obtain insurance.
Market experts had also shared the fears that at a time when developing countries like Pakistan have been impacted by their own fair share of climate catastrophes like floods, leading to a massive destruction of crops, surge in energy prices as well as shocks to global supply chains due to the Russian invasion of Ukraine and high levels of inflation, a shock to grain exports, and subsequent rises in food prices would lead to a significant food crisis. Even in the developed world, for instance, in the EU, amid the cost of the living crisis and supply side shocks, higher global food prices would make essential edible items too expensive for people. Thus, the renewal of the agreement has been deemed a significant achievement.
Before the war, exports from Russia and Ukraine constituted about 30 per-cent of the global food trade. Between 5m to 6m tonnes of grain were exported each month from Ukraine’s seaports, according to the International Grains Council (IGC). The volume carried by ships via the grain corridor gained momentum towards the end of 2022, as per the Executive Director of the IGC, i.e. a very impressive level of export. In November and December 2022, Ukraine was close to approximately the same level as before the war in terms of exports by sea plus inland. While exports had slightly reduced in January and February 2023 due to poor weather, Ukrainian power outages affecting port facilities and delays in grain inspection delays, however, the overall success of the shipments of essential wheat, maize, oil seeds and barley from the Black Sea since August 2022 to countries reliant on grain imports had led to a fall of 30 per-cent in global wheat prices since its June peak. Thus, the 60-day extension of the agreement was widely praised and calmed fears of potential after effects on a wide range of industries and food prices.
Despite Kremlin’s concerns, it is likely that the UN and Turkey would mediate to have the agreement extended beyond the 60-day period and that Russia would agree to that because both Ukraine and Russia export considerable amounts of world’s grain and fertiliser, together supplying approximately 28 per-cent of global traded wheat and 75 per-cent of sunflower oil during peacetime. Moreover, as of 18 March, the UN Secretary General was adamant to seek ways to unblock Russian food and fertiliser shipments, which were blocked by sanctions targeting Russian oligarchs and the state agricultural bank. The Kremlin blames these sanctions for the ongoing food insecurity in the Global South. In the coming days, we may see easing of some sanctions that target Russian food exports, while overall sanctions may persist.
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.
Dire Straits: China’s energy import insecurities and the ‘Malacca dilemma’
In 2003, then President of China Hu Jintao named China’s energy imports passing through south-east Asia as the “Malacca dilemma”. The dilemma refers specifically to the Strait of Malacca, 1,100 kilometres in length and at its narrowest point only 2.8 kilometres wide, which has been a persistent source of vulnerability for the Chinese economy. Located between Malaysia, Indonesia, and Singapore, this strait is a transit point for around 40 per cent of global maritime trade and, perhaps more consequentially, 80 per cent of China’s energy imports. As the main shipping channel between the Indian and Pacific oceans, this connects the largest oil and gas producers in the Middle East with their largest markets in east Asia and is a strategic chokepoint for the 16 million barrels of oil that pass through daily. The Strait of Malacca is therefore critical to China’s energy production and wider economy, yet is not under Chinese control. What makes this shipping route a particular insecurity for Beijing, and what is being done to mitigate against it?
Major risks
China’s reliance on imported hydrocarbons for energy production, mostly on oil, is at the root of this insecurity. To fuel continued industrial development, energy consumption will increase rapidly alongside a widening gap between domestic energy supply and demand- in 2017, China surpassed the United States as the world’s largest importer of crude oil. Around 70 per cent of the country’s oil requirements come from imports, with analysts estimating this dependency will increase to 80 per cent by 2030. China is thus vulnerable to external shocks, whether in the price of oil or in its supply. That the vast majority of this oil supply passes through the Strait of Malacca chokepoint adds to Chinese evaluations of a precarious overreliance.
Geographically, the strait’s narrow span is a particular threat. With strong regional security actors in Malaysia, Indonesia, and Singapore added to the projection capabilities of India or the US, the risk for China is that a country or group of countries could easily control the strait and its flows. The Indian navy is notably building its presence in the area with its base in the Great Nicobar Islands, largely in response to China’s maritime Belt and Road Initiative projects. Additionally, Singapore is a major US ally that frequently participates in joint naval drills and is located at the eastern mouth of the strait. There is a strong possibility that states other than China can control the strait and greatly hurt the Chinese economy if desired, due to its high imported oil dependence.
South-east Asia is also particularly prone to piracy. A total of 134 separate piracy incidents were identified in the Strait of Malacca in 2015, with oil tankers among those targeted. Malaysia, Indonesia, and Singapore have been able to curb this issue to a large extent, but ships will still face insurance premiums on piracy when passing through the strait. Whilst this remains a background issue when compared to China’s oil import dependency and the strait’s potential for blockades, there is an ever-present risk of losing assets to piracy.
If access to the Strait of Malacca was hindered by piracy or indeed by other states, the economic impacts would be colossal. Beyond short-to-medium-term adjustments in the Chinese economy, a shifting of supply to using longer routes through the alternative Lombok or Makassar straits would add an estimated $84 to $250 billion per year to shipping costs. Rerouting one of the most important shipping lanes would gridlock global shipping capacity and, highly likely, increase energy costs worldwide. The economic upheaval as a result of the 2021 Suez canal blockage illustrates this strongly, yet would pale in comparison to a blockage of the Strait of Malacca.
Forecasting scenarios
The above risk factors thus place China in a precarious position regarding the strait. Whilst states blockading an open seas shipping lane may seem fanciful at the moment, China’s ‘Malacca dilemma’ could become a reality very quickly, especially when considering a change in Taiwan’s status quo. Taiwan is geographically far from the strait but if tensions were to increase over its status, the Strait of Malacca could see a greater security presence in response. Tangibly the US security guarantee to Taiwan means in the event that Taiwan was invaded, or even blockaded as a precursor to invasion, the US could impose an analogous blockade in the Strait of Malacca. China’s vulnerability regarding this strait leaves it open to some proportional responses should it grow more assertive in regional security. The prospect of greater American or US-allied control over the Strait of Malacca is likely in a hypothetical wartime scenario.
On allies, the wider Indo-Pacific region is seeing greater security cooperation as a reaction to increasing Chinese presence. The recent AUKUS military alliance between Australia, the United Kingdom, and the US entrenches American security interests in the region and provides new capabilities for Australia. The Quad grouping between Australia, the US, India, and Japan does not yet have a concrete security element, but could rapidly become an important player in the Strait of Malacca if the threat perception from China changes. Overall the expectation is for these budding Indo-Pacific alliances to gain a stronger strategic focus on the Strait of Malacca and the oil passing through it, critical to China’s economy.
Supply chain mitigation
Beijing is attempting to decrease its vulnerability to the risks and scenarios identified above. Above all other strategies, the China-Pakistan Economic Corridor (CPEC), a part of the Belt and Road Initiative, seeks to mitigate against the ‘Malacca dilemma’. CPEC is an opportunity for China to have an access point to the Indian Ocean through the construction of a new pipeline from western China to the new port of Gwadar in Pakistan. The overall infrastructure investment is valued at $62 billion, with the Gwadar port expected to be fully operational between 2025 to 2030. However, CPEC faces various problems. The difficult topography of the Himalayas means high transit costs for the pipeline, far beyond that of shipping through the Strait of Malacca. Passing through unstable regions adds to the logistical difficulties, with terrorist activity reported in regions the CPEC passes.
The recent China-Myanmar Economic Corridor (CMEC) can be evaluated in a similar manner. The Kyaukpyu Port developed by the Chinese government will send 420,000 barrels of oil a day via the Myanmar-Yunnan pipeline. This nevertheless pales in comparison to the 6.5 million China-bound barrels per day that pass through the Strait of Malacca. In addition, Myanmar’s military coup and the future possibility of high-intensity civil war puts CMEC in peril. Chinese investments have been damaged, with serious doubts about CMEC’s security evidenced by fighting along the infrastructure route.
It is therefore clear that while China is developing alternatives to the Strait of Malacca, these remain woefully inadequate and there is no single replacement for the importance of the strait. Because of their respective political instabilities, ensuring that CPEC and CMEC are successful can only be one part of a solution. Diversifying away from crude oil shipping is another, and land-based pipelines will continue to be developed with central Asian countries and Russia. Of course, avoiding foreign control of the Strait of Malacca is preferable, but China is beginning to hedge on other sources for its imported oil.
In summary, it seems likely that China will continue to heavily depend on the Strait of Malacca to meet its energy needs. The strait remains a vulnerability, especially in the regional context of increasing security competition with other states. Various mitigating measures are being taken to lessen the impact of any change to this strategic chokepoint, but no cure-all solution exists. The geographic production centres and transit lanes for oil are one of the most significant issues for China and its economy and are sure to command the attention of all parties involved.
Image credit: dronepicr via Flickr
Lithium in Iran: Iranian Gold is Black & White
Iran's Ministry of Industry, Mine, and Trade has declared that a significant discovery of 8.5 million tonnes of lithium has been made in Qahavand, Hamadan. The discovery puts Iran in possession of the largest lithium reserve outside of South America. Furthermore, the Ministry has indicated that there could be even more significant amounts of lithium to be discovered in Hamadan in the future. These developments position Iran to potentially overtake Australia as the top supplier of lithium in the world, although it will be heavily reliant on Iran's diplomatic trajectory.
Background
Lithium is widely referred to as "white gold", similar to petroleum being “black gold”, and is a critical element in the shift towards green energy. It serves as a fundamental component in lithium-ion batteries, the primary energy storage system in electric vehicles (EVs). While lithium-ion batteries have been employed in portable electronic devices for several years, their use in EVs is growing rapidly. By 2030, it is anticipated that 95 per-cent of global lithium demand will be for battery production. However, the price of lithium has been declining for several months, and the recent discovery of Iran's reserve is expected to continue this trend. The extent of the impact on global markets will depend on Iran's ability to export and their production capacity.
Iran's economy is facing significant challenges due to a combination of domestic and international factors. The country has been under severe economic sanctions from the United States since 2018, which has severely impacted its ability to trade with other countries and access the global financial system. The ongoing protests and civil unrest have also taken a toll on Iran's economy. Inflation has been a major problem in Iran, with the annual inflation rate reaching over 40% in 2022. This has led to a decline in the purchasing power of the Iranian currency, the rial, and made it difficult for many Iranians to afford basic necessities.
Analysis
Given Iran's current domestic instabilities, the new find will likely be used as a tool to stabilise the Rial (IRR) which is especially volatile due to international sanctions adversely impacting the country and international political disputes, like the developments linked to the JCPOA. However, as extraction is not planned to begin till 2025, there will not be any real direct short-term economic relief; the government will have to rely on the market’s reaction to future potential.
The discovery will also have diplomatic and foreign policy implications. According to IEA projections, the concentration of lithium demand will be in the United States, the European Union and China. Iran can leverage the necessity of lithium supply to the energy transition and net-zero emission goals as a bargaining chip in future negotiations with Western powers over sanctions relief and its nuclear activities. Iran's growing and diversifying portfolio of essential commodities is a potential threat to those pushing for its exclusion from global trading networks. The new discovery can even act as a catalyst for Iranian membership in BRICS.
China has long-standing economic and political ties with Iran, even amidst Western sanctions. China has been a significant importer of Iranian oil, and in recent years, they have invested heavily in Iranian infrastructure and other sectors. With the discovery of a large lithium reserve in Iran, China is primed to take advantage of its relationship to further pursue its trade interests for rare earth minerals. This could further strengthen the economic ties between the two countries, and also create a new avenue for diplomatic relations. However, the relationship between China and Iran is not without its complications. China's increasing involvement and improved relationship with Iran's regional rivals such as Saudi Arabia has raised concerns in Tehran.
Despite these challenges, the potential economic benefits of the lithium discovery in Iran are significant enough that China is likely to overlook some of these complications and Iran can strengthen its diplomatic ties with political powerhouse. The demand for lithium is expected to increase exponentially in the coming years, particularly in China, which has set ambitious targets for the adoption of electric vehicles. Therefore, the availability of Iranian lithium could be a significant boost to China's domestic EV industry.
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.
Analysing the Volatility of Coal Prices: Why they Spike in Fall
Coal prices have a tendency to peak in the fall. A variety of factors contribute to this phenomenon. Understanding the underlying causes of this can help inform policy decisions and investment strategies related to coal.
A major factor that affects coal prices is the seasonal demand for energy. As the weather gets colder in the fall, there is an increase in demand for heating which in turn leads to an increase in demand for coal as a fuel source. The increase in demand drives up the price of coal. For example, in the United States, coal consumption for electricity generation tends to increase during winter months as the demand for heating increases. Historical data shows coal prices tend to increase in the months of October and November, as the weather gets colder.
Another factor that contributes to the higher coal prices in autumn is the timing of industrial production. Many industries, such as steel and aluminium sectors, have a seasonal cycle where production increases in the fall. Higher production levels lead to an increase in demand for coal, which drives up prices. For example, in China, a major consumer of coal, steel production typically increases in the fall as demand for construction materials increases. This increased demand for coal can be seen in the historical data, with coal prices tending to increase in the months of September and October, when industrial production increases.
Additionally, supply-side factors also play a role in the peak in coal prices in the fall. For example, in some regions, fall is the time when mines are closed for maintenance and this reduces the supply of coal. This then contributes to higher prices. Furthermore, natural disasters such as floods and typhoons can disrupt coal mining operations, leading to a temporary shortage, again driving prices higher. Among the most important, and also potentially the most overlooked is the nature of monsoon rains in India, and their subsequent effects on the supply of coal. India is second largest producer and consumer of coal in the world after China, with production being 778 million tonnes and consumption being 1052 million tonnes; with it seeming to increase for the short term (till 2030) peaking at about 1192-1325 million tonnes. Coal is a critical fuel source for the country's power plants, factories, and households, accounting for over half the country’s energy needs. The monsoon season typically occurs between June and September and often has major impacts on coal production and transportation. For instance, the Piparwar Area in 2019, which is known for its overwhelming share of coal mining in the country, was hit by severe flooding causing a halt in production, leading to supply crunches. In areas where mines are located near rivers, the monsoon rains can cause flash floods that then completely inundate the mines, making it impossible to extract coal. In addition, the heavy rainfall can cause landslides and washouts along transportation routes, making it difficult to transport coal from mines to power plants, ports, and other destinations.
In conclusion, the peak in coal prices in the fall is the result of a combination of factors such as seasonal demand, industrial production cycles, and supply-side constraints. By analysing historical trajectories, one can assess the impact each of these factors have had to drive the fall peak in coal prices over time. This knowledge can help inform policy decisions, investment strategies related to coal and can also be used to predict future price trends.
All eyes on Algeria: how natural gas is shaping North-African politics
One country in North-Africa seems to be making the most out of the current energy crisis and a new era in great-power rivalry - Algeria. Great potential has fuelled massive interest in the country’s gas industry and led to a significant increase of gas revenues in the past years. As a consequence, the country is able to spend big, both domestically and abroad, and charter a more active foreign policy. The latter, however, is held under increased scrutiny by parliamentarians and senators across the Atlantic, raising questions about the risks of Algerian gas imports. Another question, which is worth asking, is to what extent Algerian gas potential can be turned into actual export flows.
This analysis will take a deep-dive into 1) the drivers of increased interest and cooperation in Algeria, 2) the outcomes so far, and 3) complications and geopolitical dynamics, after which a small outlook will be presented.
Drivers of increased interest and cooperation in Algeria
Increased interest and cooperation in Algeria and North Africa are partly driven by the war in Ukraine and the need to source new gas supplies. In a bid to curb Russian gas imports, both European and international energy companies are scrambling supplies across the globe. Before the war, Russian natural gas accounted for roughly 45% of EU imports or 155 bcm, whereas it is now standing at roughly 10% of EU imports or 34.4 bcm. That leaves a gap of roughly 120.6 bcm to satisfy demand. And while some supplies may be curbed by lowering demand through the increase of energy efficiency and the usage of other fuels, most will have to be sourced elsewhere.
Algeria, as a source of natural gas, offers much potential. It is Africa’s largest natural gas exporter and in combination with its location, the country could offer an ideal place to source gas. Algeria’s potential has led to increased interests in its gas industry. Other countries in North Africa, including Libya and Egypt, have also received increased interest. Notably, Libya secured an $8 billion exploration deal with Italian energy major Eni.
*Note that the Trans-Saharan and Galsi potential or planned pipelines.
Algerian gas market: Facts and Figures
Reserves: The country holds roughly 1.2% of proven natural gas reserves in the world, accounting for 2,279 bcm.
Production: Its production stands at 100.8 bcm per year.
Exports: In 2021 it exported 55 bcm, 38.9 bcm through pipelines, and 16.1 bcm in the form of LNG. European imports accounted for 49.5 bcm, 34.1 bcm by pipelines, and 15.4 bcm in the form of LNG.
Export capacity: Algeria has a total export capacity of 87,5 bcm: the Maghreb-Europe (GME) pipeline (Algeria-Morocco-Spain) 13.5 bcm, Medgaz (Algeria-Spain) 8 bcm, Transmed (Algeria-Tunisia-Italy) 32 bcm, LNG 34 bcm.
Aside from potential, ambition (on both sides of the Mediterranean) is another reason for interest and cooperation. Interest has come from the EU and several member states, but mostly from Italy. Instead of merely securing gas supplies, Italy aims to become an energy corridor for Algerian gas in Europe. This will boost Italian significance in the European energy market, increasing both transit revenues and investment in its own gas industry. Moreover, Rome seeks to increase its profile in the Mediterranean, mainly to stabilize the region and decrease migration flows. It views both Algeria and its national energy firm Eni as key factors in that aim.
Algeria is also looking for a more active role in the region. For the past years, the country has been emerging from its isolationism, which characterized the rule of president Bouteflika, who was ousted in 2019. With new deals and increased gas revenues it hopes to increase defense and public spending, prop-up its gas industry, which suffered from lack of investment, and stabilize its economy and the region. Aside from economic reasons, therefore, cooperation between the two sides is politically motivated as well.
What has this increased interest and cooperation so far led to?
As a result of increasing gas prices and rising demand, the Algerians have seen their revenues increase massively. Sonatrach, Algeria’s state-owned energy company, reported a massive $50 billion energy export profits in 2022, compared to $34 billion in 2021, and $20 billion in 2020. This will allow for more fiscal space and public spending. In fact, the drafted budget of 2023 is the largest the country has ever seen, increasing 63% from $60 billion in 2022 to $98 billion in 2023. Because of bigger budgets, Algeria will also be able to partly stabilize its neighbors by offering electricity and gas at a discount - something the country is currently discussing with Tunisia and Libya.
The Italian trade looks most promising and has led to multiple deals. Trade between the two countries has doubled from $8 billion in 2021 to $16 billion in 2022, whereas dependence on Algerian gas increased from 30% before the Ukraine war to 40% at the moment. Last year, Eni CEO Claudio Descalzi secured approval from Algeria to increase the gas its exports via pipeline to Italy from 9 bcm to 15 bcm a year in 2023 and 18 bcm in 2024, and last month, Italian Prime Minister Meloni, joined by Descalzi, visited Algeria to build upon that earlier cooperation. Again, two agreements were signed, one with regards to emissions reduction and the other to increase energy export capacity from Algeria to Italy.
The visit and new plans reflected ambitions from both sides. President Tebboune recently announced Algeria’s aim to double gas exports and reach 100 bcm per year and Meloni mentioned a new ‘Mattei plan’ (which refers to Enrico Mattei, founder of Eni, who sought to support African countries' development of their natural resources in order to help the continent maximize its economic growth potential, while facilitating Italian energy security). Furthermore, the Algerian ambassador stated the country’s intention to make Italy a European hub for Algerian gas, whereas Eni CEO Descalzi mentioned the possibility of a north-south axis, connecting the European demand market with the (North) African supply market.
Interest has also led to other plans, potential deals, and rapprochement. Firstly, the EU sees potential and aims to secure Algeria as a long-term strategic partner. Last year, the EU’s energy commissioner visited Algeria as part of “a charm offensive”. Secondly, the Ukraine war and Algeria’s abundance of gas supplies also seems to be the main reason for France’s rapprochement toward Algeria. In addition to this, Slovenia plans to build a pipeline to Hungary to transport Algerian gas as Algeria aims to increase electricity exports to Europe. Algeria’s future as an energy supplier could also go beyond natural gas, as last December German natural gas company VNG signed an MoU with Sonatrach to examine the possibilities for green hydrogen projects. Algeria’s future as a hydrocarbons supplier could also extend beyond Europe as Chevron aims to reach a gas exploration agreement with Algeria and is assessing the country’s shale resources.
Complications & geopolitical dynamics
Translating all that interest and cooperation into more Algerian output, and stable secure supplies for Italy and Europe, on the other hand, is a different story. There are several factors that hamper or complicate the growth of the Algerian gas industry and the potential North-South Axis. Those complications can be divided into two broad groups: (i) industry specific complications and (ii) complex (international) politics.
Industry specific complications
There are specific limitations to the technical feasibility of increasing production. Years of underinvestment, due to corruption, unattractive fiscal terms and a slow bureaucracy, have resulted in less exploration and development of new fields, which roughly take 3-5 years from the exploration phase to production. In combination with decline from maturing fields, this limits industry growth and export potential in the short-term. Internal audits show that Sonatrach can barely mobilize an additional 4 bcm per year, let alone the additional 9 bcm meant for 2024. Doing so will take a bite out of its LNG business, which currently sells for a much higher price. Exploration and development will take time and mostly affect the medium-term in 3-5 years. Furthermore, Algeria has to perform a balancing act between its exports and increasing domestic demand, which is set to grow 50% by 2028.
A North-South axis will require Italy to upgrade its gas network as well. The country will have to establish several energy corridors to demand markets in Europe and expand its domestic gas network, which requires billions of investment. In this light, some analysts point to the fact that claims about such an axis are currently rhetoric and are meant to secure investments that are needed for its own gas industry.
Geopolitics
Geopolitical considerations also may influence gas flows toward Europe. For starters, Algeria has a complicated relationship with Morocco, which according to Algiers, 'occupies’ the Western Sahara. Algeria maintains it is a sovereign territory and in 2021, this row resulted in the suspension of the GME pipeline, which runs through Morocco. While Spanish imports through the Medgaz pipeline increased from 8 bcm to 9 bcm in 2022, the closure of the GME pipeline resulted in an overall decrease of exports to Spain by more than 35%. By using gas (revenues) as a tool of statecraft, Algeria also managed to convince Tunisia in countering Morocco, after handing it economic aid.
The country’s relations with Russia might also complicate gas flows. Its relation encompasses military cooperation, including joint military exercises and weapons purchases. Algeria is the 6th largest importer of weapons in the world and roughly 70% of Algeria’s weapons are sourced from Russia. In 2023, its largest budget draft ever included a rough 130% or $13.5 billion rise in military expenditure and, in November, plans were announced to dramatically increase its acquisition of Russian military equipment in 2023, including stealth aircraft, bombers and fighter jets, and new air defense systems.
With the war in Ukraine, Algeria’s relation with Russia creates a risk of sanctions, with some U.S. senators and EU parliamentarians being particularly vocal on this. As a result of sanction risk, Sonatrach included a clause in its gas contracts, which allows for currency denomination change every 6 months, reflecting warrines of U.S. sanctions and dollar-denominated gas trade. Its recent application to BRICS, will increase the country’s capacity to charter its own foreign policy, without endangering security and trade ties to Beijing and Moscow.
Outlook
Significant rises in Algerian export output, outside of its current commitments, are not likely in the short-term.
Ambitions with regards to a potential North-South axis are largely rhetorical and meant to increase investment and gather broader regional and European-wide support for an energy corridor.
Sanction-risks remain low. Because of Algerian significance to the European gas market, the EU and its member states will likely try to maintain good ties with the North-African country.
The effect of future massive weapons purchases from Russia will likely have a negative effect on relations with the EU, but it is unclear whether that will immediately impact (future) gas flows.
Increasing gas revenues and bigger budgets will decrease the risk of domestic instability. As a consequence, Algeria has the possibility to charter a more active foreign policy - something we are currently already seeing. The main goal of such a foreign policy will be to stabilize its immediate neighborhood.
Red metals reach the red: Peruvian protests impact the global copper supply
As the world gears up to mitigate the far-reaching effects of climate change—many of which are already being felt—investment into zero-emission technologies is growing to complement more than 70 countries’ mid-century net-zero emission targets. Copper will be a key component to energy-efficient technologies, including electric vehicles, charging infrastructure, solar PV, wind, and batteries. For this reason, copper demand is projected to double over the next 10 years and more than triple by 2050; but this may have detrimental social, political, and economic impacts on the surrounding contexts of copper mines, which may, in turn, have repercussions on the global supply and cost of copper.
Peru, for instance, holds the world’s second largest reserve of copper, which contributes to 4% of Peru’s entire GDP; however, local communities that live around the Apurímac-Cusco-Arequipa Road mining corridor continue to be the poorest in Peru. The mining industry has foregone environmental and health restrictions, while increasing inequality in mining districts, thus contributing to existing socioeconomic tensions among local Peruvian communities, for instance against the Antapaccay mine in Espinar, the Las Bambas mine in Cotabambas, and the Cuajone mine in Moquegua. Such enmities have been exacerbated in the ongoing political crisis in Peru that began in December 2022.
The past five decades in Peru were foundational to the country’s current political crisis. Insurgency during the 1970s, multiple dictatorships, and resulting economic instability generated political and social strife, which collectively exploded upon President Castillo’s impeachment after he attempted to install an emergency government and rule by decree in December 2022.
Castillo is highly supported by Peru’s rural populations, many of whom live in the surrounding areas of copper mines, as he denounced foreign mining corporations and their negligence of environmental regulations, promised higher taxes and wealth redistribution policies, safer working conditions for miners, and nationalisation of the entire mining industry.
After Castillo’s removal, political tensions among local miner communities—as well as much of Peru’s left-wing population—rose, leading to worker strikes, protests against mines, and disruption of mining operations. This includes ceasing operations at the Las Bambas mine, which alone supplies 2% the world’s copper. The Antapaccay mine stopped production in mid-January, but has since resumed. Continued nationwide protests threaten to cut access to $4 billion worth of red metal, including copper. In 2022, growth potential of mining GDP from 2.9% to 0.3%, due to social unrest.
To re-establish the export of copper from Peru, mining companies such as Glencore, MMG Limited, and Freeport-McMoRan must enter into agreements with local communities, in conjunction with the newly formed government led by Dina Boluarte. The mining industry should address grievances in a manner that reduces poverty, prevents environmental and health impacts, and allows for inclusive employment of the surrounding communities.
Adding palm-oil to the fire: Malaysia’s proposed ban of palm oil exports to the EU
On 9 January 2023, both Malaysia and Indonesia’s heads of government agreed to work together to “fight discrimination against palm oil”, in a reference to new European Union anti-deforestation legislation. Tangibly, the Malaysian plantation and commodities minister is threatening a wholesale ban on palm oil exports to the EU. Given that Malaysia and Indonesia combine for more than 80 per cent of the world’s palm oil supply and the EU is their third-largest market, the potential ramifications for any such moves would be significant.
How has an issue over palm oil trade reached such a point? For years, Malaysia and Indonesia have railed against EU import barriers on their palm oil, which they characterise as protectionist in favour of the EU’s domestic vegetable oil sector. The EU’s new law, which is expected to be implemented late 2024, obligates “companies to ensure that a series of products sold in the EU do not come from deforested land anywhere in the world” and is aimed at reducing the EU’s impact on biodiversity loss and global climate change. Whilst no country or commodity is explicitly banned, the new regulation covers palm oil and a number of its derivatives. Currently, both Malaysia and Indonesia have separate lawsuits at the World Trade Organization (WTO) pending over the EU’s palm oil trade restrictions.
Implications
To date, only Malaysia has explicitly threatened to ban palm oil exports to the EU. Were this issue to escalate and Malaysia to impose the suggested ban, it would have several consequences. First and foremost, Malaysia’s palm oil industry and wider economy would be hit; the industry makes up 5 per cent of Malaysian GDP, of which a non-negligeable 9.4 per cent of its exports are bought by the EU. Additionally, an abrupt ban is likely to harm producers who have contracts to sell in the EU. Alternative export destinations could be found, especially in food-importing markets such as the Middle East and North Africa, but these producers would struggle to pivot in the short-term and likely see financial losses. Even greater disruptions would be experienced by the few Malaysian palm oil companies that have established refineries in Europe, necessitating a reorientation in their supply chains. Yet the outlook is not entirely negative; palm oil’s lower cost as compared to its substitutes such as soybean oil or sunflower oil will sustain global demand. Overall the Malaysian export ban to the EU would cause a limited scope of economic damage in the short-term, and would see gradually less impact as time progresses and firms adjust.
The potential implications for the EU are equally significant. Firstly, if Malaysia were to enact an export ban soon, this would likely be in unison with Indonesia as the larger producer. A unilateral Malaysian palm oil export ban to the EU, with new regulations permitting, would simply lead EU imports to shift to Indonesia along with profits - hence Malaysia is seeking bilateral action. A joint ban on exporting to the EU would cut the EU off from around 70 per cent of its palm oil, meaning significant interruptions in processed food or biofuel production. New import regulations, however, will help the EU’s domestic vegetable oil sector, which is something that Malaysia asserts. Especially in biofuel production, oils such as soy, canola, and rapeseed would fill the palm oil gap and increase their respective market shares. This issue is further complicated by the EU and Indonesia seeking an elusive free-trade agreement, with negotiations routinely stalled by the EU’s palm oil regulations. This could be in the EU’s favour as free-trade negotiations would break Indonesian-Malaysian solidarity on the issue.
Ironically, the EU’s new regulation could also result in greater amounts of deforestation, instead of less. As the EU reduces its palm oil imports through stricter environmental regulations, Malaysian and Indonesian exports would shift even more to the two larger importers in India and China, with less stringent environmental regulations. The EU’s citizens may not be as directly responsible for deforestation, but worldwide deforestation may in fact increase as a result of this policy.
Market forecast
The immediate reaction from markets was nonplussed. Traders don’t see the threat of an export ban from Malaysia holding. This is reflected in palm oil futures contracts (FCPO: Bursa Malaysia Derivatives Exchange, the benchmark for palm oil), where prices remained stable since the EU’s law was proposed and Malaysia’s threat issued. This means the ban is currently not taken seriously, with Malaysian threats interpreted as a knee-jerk reaction. In any case, firms are anticipating decreased demand from the EU and have been exploring new markets to offset potential European losses. If this Malaysian export ban to the EU were to happen, this would nonetheless pale in comparison to the supply shocks experienced in 2022. A brief ban on all Indonesian palm oil exports globally in April 2022, amidst fears of food shortages and high domestic prices, resulted in record-high global prices. This is a level we are unlikely to see again, as stability returns.
On the supply-side the Malaysian Palm Oil Council expects production to recover in 2023 with estimates of a 3-5 per cent increase, after three years of decline amidst labour shortages linked to COVID-19. This is likely to have a greater impact on global markets instead of a ban or the threat of one, and both Malaysia and Indonesia’s output will continue to climb in the years to come.
Forecasting the demand side is more uncertain. Short-term projections suggest lower demand due to China’s surge of COVID-19 infections post-Lunar New Year, but this is more symptomatic of the wider Chinese economic reopening which will, on balance, stimulate demand. In the medium-term, the threat of recession facing the global economy will hurt palm oil demand, with a mild recession expected in the first half of 2023 followed by a gentle recovery. A longer-term positive outlook is observed in relation to biodiesel’s potential. Amidst high crude oil prices, the further development of biodiesel utilising palm oil would incite new demand.
Looking ahead, projections are uncertain given factors such as the Malaysian migrant worker shortage, the Chinese economy reopening, and potential global recession. This is in addition to Malaysia and Indonesia’s unpredictable regulatory environment, where any policy is subject to rapid change. Palm oil exports to the EU are likely to remain a point of contention between the two south-east Asian countries and their European counterparts. Because palm oil forms a significant part of Malaysia and Indonesia’s economies, their respective governments will continue to intervene.
As the two largest producers in this market potential cooperation between Malaysia and Indonesia over an EU export ban must be monitored- acting together would result in greater consequences for EU imports and worldwide prices. While the Malaysian threat to ban exports to the EU may be an empty one, decreased EU palm oil imports will be observed as it shifts towards more sustainable consumption. Combating climate change is the EU’s underlying aim, but this will necessitate a change in trade patterns.
Cry For Me Argentina: What the current soybean rally tells us about climate change and food security
Soybeans are a fundamental commodity for the global food chain. While only a tiny fraction of the crop is used directly for human consumption, soybeans are a crucial component of animal feed, and as such indirectly significant for human consumption. This means that soybeans can have a substantial impact on food prices in general. For this reason, the out of season increase in price of soybean futures (ZSH3: CBOT) and exchange-traded funds (ETFs) like the Teucrium Soybean Fund ($SOYB: NASDAQ) could be a potential warning sign of how climate change might adversely impact global food security. This is because many analysts are associating the increase in price to the ongoing summer drought in Argentina and Brazil – two key exporters, accounting for half of global supply of soybeans. Cultivation of the crop in Brazil occurs traditionally in the state of Rio Grande do Sul, whereas in Argentina cultivation is spread across the Argentine Pampas and the province of Santiago del Estero.
Reuters reported on January 12 2023 that up to 90-per-cent of the expected harvest in Rio Grande do Sul will be wiped out in the absence of heavy rainfall – this lack of rainfall in Rio Grande do Sul was also highlighted in the latest agroclimatic monthly report published by the Brazilian Meteorological Institute. Likewise La Bolsa de Cereales (Buenos Aires’ grain exchange) reports that in the event of a severe drought the country will miss its expected harvest by 12.5 megatons, while a mild drought would dampen this loss to seven megatons. According to the same report, the impact of this dry winter could be a reduction of two per-cent of the value of Argentina’s entire agricultural industry this year. The impact this has had on futures is not so pronounced, however. Since December 1 2022 the value of ZSH3 futures contracts maturing in March 2023 increased 3.75 per cent from $1,489.40 to 1,435.60, peaking at $1,546.40 on January 17 2023. Likewise in the same timeframe, $SOYB has risen a modest 1.48 per cent from $27.05 to $27.45, finding resistance at $28.50 on January 12 and January 17 2023.
In the context of near-record global inflation over the last year and a summer drought in South America, it is difficult to pinpoint the exact causal mechanism of the higher-than-average prices of soybean futures. However, the arid weather conditions in Argentina and Brazil have sprung short-term supply shocks which could be driving this out of season rise in soybean prices. Furthermore, other grain ETFs focussing on different crops, such as wheat ($WEAT) and maize ($CORN) are seemingly returning to pre-covid price fluctuations, although they are still dealing with spillover from the Russian invasion of Ukraine. In the long-term, increasing temperatures and decreasing rainfall will potentially reduce supply. Nevertheless, the impact on price remains unclear. Whether climate change will impact harvest cycles, and by extension price fluctuations, or if harvest cycles and price fluctuations occur with the same seasonality as they have done, thus far, remains to be seen.
The untimely nature of this modest increase in soybean prices and the timing of the droughts in Argentina and Brazil do raise concerns for the long-term supply and price of grains in the context of deteriorating climate change. Both in Argentina and Brazil, average temperatures have increased by over 1 degree celsius since records began in the 1930s. Although historical rainfall data for Brazil is not as readily available, the decrease in average rainfall in Argentina since record-keeping began has been around 50mm/year.
Whilst the recent links between extreme climate events, crop cycles, and commodity prices are cause for concern in the long-run, we ought to be prudent in overstating the negative impacts on crop prices and food security. Yield gaps – the difference between attainable/expected yield and actual yield – in economically developed countries exporting barley, maize, soybeans, and wheat have been decreasing as total output has marginally increased. Other environmental and physiological concerns impacting crop health – such as disease and crop resilience – have also been improving yields with the help of new technologies.
In summary, the current supply-side issues will probably make for a very expensive year for soybean futures and, because of the crop’s use in animal feed and oils, probably will have some impact on supermarket shelves too. The impact of the current drought could well be corrected if inflation subsides or indeed, if a recession occurs. But this remains to be seen. With this and next week’s forecasts pointing to some rain in Junín, Buenos Aires – one of the larger soybean pastures in the province – and Rio Grande do Sul in Brazil, there is still hope that some of the South American soybean harvest can be rescued.