Drilling Dreams, Sinking Realities

Introduction

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

Increasing Severity of Climate Disasters

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

Graph 1.0 (Global Temperature Trends)

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

Graph 2.0 (Energy cost by source)

COP and Delayed Multilateral Action

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

Graph 3.0 (number of lobbyists in COP 26)

The 2024 U.S. Presidential Elections

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

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

Federal Policy and Oil Production

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

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

Conclusion

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

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

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

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

Graph 4.0 (projected warming in different scenarios)

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

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

Small Modular Reactors Nuclear Renaissance?

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

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

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

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

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

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

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

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

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

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

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

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

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

Peter Fawley

The U.S. LNG Pause

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

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

Reasons for the Pause

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

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

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

Impact on LNG Supplies

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

Risk for the Global Fertiliser and Food Markets

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

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

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

Case Study: India

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

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

Concluding Remarks

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

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

2024 Elections Report: Risks & Opportunities for Commodities Sector

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

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

EU Rejects US Offer: Unravelling the Steel Tariff Dispute

Background

The US-EU trade dispute over steel and aluminium tariffs has been ongoing for several years, and there is no clear resolution in sight. The dispute began in 2018 when then-US President Donald Trump imposed tariffs on steel and aluminium imports from the EU, citing national security concerns. The EU responded with retaliatory tariffs on US goods including bourbon whiskey, Harley-Davidson motorcycles, and motorboats.

The two sides reached an agreement in October 2021 to end the dispute over steel and aluminium tariffs. The deal was a significant breakthrough. However, there are still significant disagreements between the two sides on how to define "sustainable steel" and how to enforce emissions standards.

Source: Economist Intelligence Unit

The US has proposed allowing club members to set their own emissions standards for steel production. This would give countries with lower emissions standards an unfair advantage, as they would be able to produce steel more cheaply. The EU has rejected this proposal, arguing that it would undermine the integrity of the Global Arrangement on Sustainable Steel and Aluminium (GSA).

Developments

Now, the EU and the US are at an impasse in their negotiations to end the tariffs on steel and aluminium. The EU has rejected a proposed US solution, saying that it is not WTO-compliant and discriminates in favour of domestic producers.

The dispute is also multifaceted. The EU has said that the US proposal would allow countries to set their own emissions standards for steel production, which would give them an unfair advantage. The US has said that its proposal is WTO-compliant and that it is necessary to protect American jobs. The two sides have also been unable to agree on how to define "green steel." The EU wants to include steel produced with EAF and DRI technology, while the US wants to include only steel produced with zero-carbon emissions.

The dispute is fuelled by several factors. One is the lack of a CO2 allowance trading system in the United States. The EU has heavily invested in the carbon border adjustment mechanism (CBAM) to protect its domestic steel industry, which is one of the biggest CO2 emitters in the world. However, the US steel industry is a much cleaner producer by international standards and relies more heavily on Electric Arc Furnace (EAF) and Direct Reduced Iron (DRI) technology than the European Union.

Another factor is the EU's apparent lack of interest in reducing its own steel capacity. The US government has a greater interest in fighting overcapacity, but the EU is more concerned with protecting the jobs of its steelworkers. This is especially true in Germany, one of the world's largest steel producers.

Implications

The outcome of the negotiations between the EU and the US on steel and aluminium tariffs will have a significant impact on the global steel market. The tariffs are 25% on steel and 10% on aluminium from Europe, while EU measures target products such as bourbon whiskey and Harley-Davidson motorcycles. If the two sides reach a deal, it could help to reduce tensions and prevent a trade war. However, if they cannot come to an agreement, the tariffs will go back into effect in October, which could disrupt the global steel market and lead to higher prices for consumers. The dispute is also a test of the strength of the WTO. If the two sides cannot reach a deal, it will be a blow to the WTO and could make it more challenging to resolve future trade disputes

However, the chances of an agreement are slim. The US is demanding that the EU reduce its steel capacity, while the EU is refusing to do so. The US is also concerned about the EU's carbon border adjustment mechanism (CBAM), which could give European steelmakers an unfair advantage. The US presidential elections in 2024 are also likely to make an agreement even more difficult. The current US administration is willing to make concessions to reach a deal, but the next administration may not be as willing. This means that the two sides may be unable to reach a deal before the tariffs go back into effect in October.

On July 20, the EU's trade commissioner reiterated his position that the US cannot resolve its steel dispute with Europe through a deal that discriminates against other countries. This underscores the challenge of finding a compromise to end the standoff. Ultimately, the outcome of the negotiations between the EU and the US on steel and aluminium tariffs is uncertain. If the two sides cannot reach a deal, it could have a significant impact on the global steel market and lead to higher prices for consumers.

Gallium and Germanium: Pioneers in China's Export Ban

From August 1, 2023, China has announced a ban on the export of gallium and germanium along with their chemical compounds. As per the Critical Raw Materials Alliance, China produces 60% of the world’s germanium and 80% of gallium. Both these metals in question have heavy industrial uses such as in defence, semiconductors and communication equipment. Gallium and germanium, however, are extracted as by-products of aluminium and zinc - metals of which China is largest global exporter - which means that alternative sourcing and supply chain diversification becomes difficult.

China’s export ban stems from the US-led restrictions on the export of semiconductors and related equipment to China. It also comes in the wake of restrictions heralded by Japan and Netherlands against the export of of chip making equipment to China. Given the momentum to diversify supply chains from the world’s largest manufacturer, countries such as Belgium, Canada, Germany, Japan, Ukraine, South Korea, Russia and Germany have been identified as potential sources to produce gallium and germanium. India on the other hand has been identified as a potential destination to take over China’s sway in manufacturing of semiconductors. Such developments present a cue from Kaname Akamatsu’s ‘Flying Geese Model’ that promotes diversification of supply chains. With Taiwan Semiconductor Manufacturing Co allocating resources to develop semiconductor plants in Japan and the USA, plans to cut China’s dominance in chip making have already been rolled out. However, hiccups exist as despite the passage of the CHIPS and Science Act in the US, suppliers based in South Korea and Taiwan remain reluctant to shift their manufacturing bases outside of China given their large-escale investments in the country. Also, the recent protectionist measures unleashed by the US have accentuated concerns about the stability in supply chains as trade and military tensions rise between the globe’s two major economies. 

Although considered a ban, experts opine that China’s ban is more limited in scope as it requires exporters to apply for licences and report details of overseas buyers and their applications. The ban has been identified as a means of retaliation that the Chinese government is willing to take to secure its national interests. China has previously used trade restrictions to sustain its downstream industries and has also faced legal hurdles at the WTO. In the wake of such rising trade restrictions announced by several countries, an examination of Article XI of the General Agreement on Tariffs and Trade (GATT) under the WTO allows for the temporary application of export controls to relieve critical shortage of the commodity in question. In the realm of politics, nation-states tend to manipulate this concept of ‘temporary application’ by laying claim to Article XXI. Article XXI gives WTO members absolute sway in implementing their respective trade restrictions by justifying their policies as crucial to ‘essential security interests’. 

As legislative enactments promoting export control gathers stream across economies, the concept of balancing stakeholder interests both upstream and downstream becomes challenging due to geopolitical issues. Contingency planning, diversification in sourcing and procurement, establishing manufacturing plants outside traditional locations, etc. may become the norm in the future as businesses swim through the ripple effects of deglobalisation policies.

“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.

“Protecting America's Strategic Petroleum Reserve from China Act”: Assessing the US Congress’ new idea for depleting Chinese oil markets

On January 12, 2023, the United States House of Representatives passed Bill H.R. 8488, titled the "Protecting America's Strategic Petroleum Reserve from China Act." If enacted, the legislation would prevent the Secretary of Energy from exporting the US strategic petroleum reserve (SPR) “to any entity under the ownership, control, or influence of the Chinese Communist Party”.

The bill received approval with 331 favourable votes and is currently awaiting deliberation by the Senate ever since. The Upper House can either reject or approve the bill and if approved, it would proceed to the President for consideration. This spotlight attempts to clarify the potential impacts on China (if any) in case the Act ever becomes law and restricts its access to imported SPR reserves.

The road ahead on Capitol Hill

The Bill had significant bipartisan support in the Lower House to secure a comfortable majority, with all the 218 present Republicans and about half (113) of present Democrats voting “yes”. Analyst Benjamin Salisbury from Height Capital Markets argues that approval in the Senate might not be so smooth as the Upper House is controlled by Democrats, but it’s still feasible under “tough compromises” - and under greater pressure from voters for a stronger stance against China. The greatest obstacle, however, might arise from the President's Office

President Joe Biden has been depleting the SPRs at an unprecedentedly faster pace to manage oil prices driven up by the war in Ukraine. However, some argue that the move is more about political concerns involved in alleviating inflationary pressures on fuel ahead of an election year.  Since the SPRs are only meant to be used in times of great uncertainty and with due restraint - only enough to secure minimal levels of energetic security - critics point out that the President might be compromising the country’s long-term energetic security for short-term political gains. From this point of view, the Executive would hardly sanction a bill that would constrain its influence on oil markets.

But even in a scenario where the Act is approved by both the Legislative and Executive branches, current data suggests that its effects on China’s energy markets are likely to be minimal.

How will China be impacted?
China is the world’s second-largest consumer of crude oil in total volume, and the commodity accounts for roughly 20% of the country’s total energy generation. This figure is roughly comparable to other large emerging economies like India (23%) and Russia (19%). Nevertheless, China represented only one-fifth of the total foreign purchases of SPR released in 2022, while the US itself accounts for only 2% of China’s total crude imports.

Source: S&P Global Commodity Insight

As evident from the chart above, China depends more on oil producers in the Middle East and Eurasia and has concentrated its diplomatic efforts accordingly. It has expanded economic and financial ties with Saudi Arabia, mediated an agreement with Iran, and continues to purchase Russian oil in large quantities. These efforts are likely to provide China with greater resilience against disturbances that may affect energy supplies and limit the US' ability to manipulate oil markets to harm the Chinese economy. Rather than a practical purpose, the act’s eventual approval would likely serve a rhetorical one: Washington is taking a tougher stance against Beijing.

The Atlantic Declaration: Real Opportunity or Political Dialectic?

“Global Britain” is a slogan that became popular as a result of the Brexit referendum. In the words of former Prime Minister Boris Johnson, and in the minds of all Brexiteers, it would have represented the newly-founded freedom of the UK to reach economic and trade agreements around the world to reimpose its lost global influence. After some years, it might safely be said that none of this is foreseeable in the near future. This is why the expectations around the “Atlantic Declaration” just signed by the UK and the USA should be lowered. However, the document proves interesting when analysed from a global commodities point of view.

The Declaration

The document, it must be said, has a political value that is quite higher than its potential substantial one. Indeed, the first part is dedicated to showing in detail the relationships between the two countries in the last decades after the Second World War. The emphasis is put on the shared history and the democratic and liberal values the two countries share, especially in light of the war in Ukraine. Then, various cooperation sections are outlined: the main areas are about the protection of critical technologies, emerging technologies in the fields of health, security and space, and especially, clean energy and supply chains. Most importantly, the Declaration comes at a critical point for the world economy and the commodities sector specifically. On this note, the Declaration eases some trade barriers between the two countries, strengthens defence and security ties and implements a framework to safeguard sensible data in the face of Chinese threats. Crucially, the two countries agreed to mitigate the adverse effects of the Inflation Reduction Act (IRA) on trade relations, since the law prevents countries without a trade agreement with the US foreseen, under some circumstances, by IRA: indeed, under the Declaration, the UK will be able to access these advantages, notwithstanding the lack of such a trade agreement with the United States.

Potential Consequences

For now, it is fair to say that the Declaration seems no more than a piece of political communication, indicating the willingness by the two historic allies to cooperate and, in the hopes of the UK, to reach a free trade agreement in the near future. However, the document offers some reflection points.

American influence and potential dominance in the commodities sector

The Declaration is a positive step for the United States since it is another demonstration of its resolve to assert itself as the main global actor in the commodities sector. Indeed, Covid, the Ukraine War, and the renewed international tensions made it imperative for countries to relocate their energy supplies. Especially, Western countries have striven to distance themselves from China and Russia and build a coalition guided by the United States to ensure the safety of global chains. In this scenario, the Inflation Reduction Act might be considered one of the most important passages for Biden’s presidency. However, the Act also creates problems for the relationship between the US and other allied countries, in that it is specifically aimed at favouring domestic production over foreign ones. In this sense, the Declaration is a way for the United States to redress this imbalance. In any case, there seem to be doubts about the capability of the United States to assert itself as the dominant actor on the energy market. Indeed, while pump prices in the US have been falling, there is disagreement among experts on whether this might be attributed to decisions made by the Administration or the Federal Reserve. As a consequence, the Declaration, from a political point of view, is certainly significant and underlines the willingness of the United States to “build” a coalition of like-minded states to drive a decoupling move from Chinese and Russian commodities markets. However, it remains to be seen whether the effects will be as good as the words used to present them.

Impact on UK firms

It’s important to analyse the potential effect the Declaration might have on UK firms, especially since it exempts the UK from some limitations for accessing American critical minerals. This is similar to what was granted to Japan, and it is a further demonstration of willingness to limit Chinese dominance in the sector. This move might be significant since the UK is one of the Western countries paying the highest cost in terms of inflation deriving from the Ukraine war. Moreover, Brexit is not helping, since the impact of the UK on commodity markets might be put at risk by it. Moreover, it is no secret that the so-called “green revolution” might represent an incredible hurdle for the British industrial sector, famously in decline since the second half of the 20th century. The Labour Party has recently announced an investment plan to finance this revolution, but the challenges will be difficult to overcome. Undeniably, the Declaration will have positive effects on British industry. Indeed, since the passage of the IRA, it has been argued that UK industries should be given access to American minerals and critical commodities. However, it remains to be seen how this aspect will develop, whether the US will indeed grant access to British industries and, crucially, which minerals this agreement will take into account. Indeed, from a political point of view, Washington is in a better bargaining position and this might be fundamental for it to build its dominance in the commodities sector.

Final Takeaways

The Atlantic Declaration is, surely, an important step in US-UK relations, and it is an occasion for the two countries to “move on” from Brexit and acknowledge the challenge of the post-Covid, post-Ukraine war world. Importantly, it might be the first step towards the conclusion of a US-UK trade agreement. However, as of today, the agreement is much richer in words than in substance. Indeed, it remains to be seen whether it will help the US to build a coalition of Western states to support its staunch de-coupling policies; moreover, from the British side, the advantages for its industrial sector are still uncertain and, especially, they rest on Washington’s willingness to grant more advantageous market conditions to foreign, even if allied, actors.

Image credit: BBC News

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. 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.