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.
Norwegian Deep Sea Mining: A New Frontier
This report on Deep Sea Mining in Norway gives a synthetic and up to date insight into the specifics of the Norwegian project in the broader context of Deep Sea Mining as a viable future strategy to meet growing mineral needs. Its overall purpose is to serve as a case study for this innovative form of resource extraction, as humanity stretches the boundaries into the world’s periphery.
Jointly written betwen the Global Commodities Watch and Geopolitics on the Periphery Desk, read the full report by clicking on the button below:
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.
Conflict in Sudan- impact on critical oil and gold flows
Conflict in Sudan started on April 15 between the country’s army and a paramilitary group called the Rapid Support Forces (RSF). With its strategic location, gold reserves, and access to crude oil, Sudan’s resources have long been desired by its neighbours, Gulf countries, Russia, and Western powers. A previous London Politica article has examined how the conflict can expand and escalate to a civil war or even become the site for international confrontation. There is another side of this conflict that needs to be explored- how the conflict is impacting the commodities Sudan is so reliant upon.
According to The Observatory of Economic Complexity, gold is the most exported product in Sudan, accounting for $2.85B and 52.3% of total traded value. Crude oil is the 4th in the category of exports, with a total value of $395M in 2021.
The RSF claims to have seized a major oil refinery, which supplies around 70 per cent of the country’s fuel. In the official twitter account of the RSF, the paramilitary group posted a video of men standing close to a billboard of “Garri Refinery”. As for now, the crude exports from Port Sudan, which also account for South Sudan’s exports, of around 100,000 b/d have not been impacted. The country’s army has stated the RSF is trying to create a fuel crisis to promote an even more unstable situation on the ground. Imports of oil products have stopped since the conflict started, maybe due to the necessity of using the country’s infrastructure for evacuations.
Historical context
In August 1999 Sudan first started exporting crude oil and the country emerged to be one of Africa’s most important oil producers. Nine years later, in 2008, the country was pumping 500,000 barrels every day. Before the most recent conflict this number dwindled to only 70,000 b/d, an 86 percent fall in 14 years due to war over South Sudan and its consequent secession.
During the 1990s, in the middle of civil war, the present incumbent, Omar Al-Bashir announced that energy would help the country grow its new economy. In order to achieve this goal, the military regime ethnically cleansed the areas where oil would be extracted and partnerships were established with Chinese, Indian, and Malaysian national oil companies. Growing demand in Asia for these crude oil exports saw petrodollars flow into the country, increasing economic growth between 1989 and 2019.
Export Crisis
The conflict in Sudan is making other countries concerned, among other issues, about oil pipelines. South Sudan, for example, exports around 170,000 b/d via a pipeline that crosses the unstable area. Although there is no clear interest of either RSF or the country’s army in stopping oil flows, South Sudan claimed that this week's conflict had already obstructed logistics between the oilfields and Port Sudan. Pout Kang Chol, South Sudan’s oil minister, said that current fighting in Sudan may affect oil production. The Minister also stated that oilfield facilities such as pipelines, pump stations, field processing facilities, and export marine rerminal are safe from any damage at the moment and that logistics and transportation of equipment that pass via Port Sudan are slightly affected.
Despite the fact that, for now, Sudan’s oil operations have not been affected, the takeover of the refinery in Khartoum could lead to fuel shortages.
Imports of oil products are also obstructed. According to Vortexa, at least five vessels carrying around 130,000t of gasoil and 80,000t of gasoline are found in the Red Sea around Sudan. With Port Sudan being their destination, the containers arrived in Sudanese waters over two weeks ago and have not yet been discharged. This may also happen since the port is being used to evacuate foreign nationals from Sudan after operations at Khartoum International Airport were disrupted.
According to the U.S. Energy Information Administration, the main oil companies operating in Sudan are Greater Nile Petroleum Operating Company (GNPOC), Petro Energy E&P (PEOC), Petrodar Operating Company and Petrolines for Crude Oil Ltd. (PETCO). The main countries of origin of these companies are China, Malaysia, India, Sudan and Egypt.
DPOC, GPOC and SPOC have set up an Emergency Response Team that “will structure a contingency plan to mitigate the impact crisis by en-routing all the logistics and transportation of critical materials, Chemicals, and Equipment through other safer routes”.
Oil is not the only commodity being affected by the emerging conflict. Gold, the country's most important commodity export, also has political risks attached to it. The Russian paramilitary group, Wagner, operates a gold processing plant in Khartoum and has been accused of being involved in Sudan's conflict. This gold has helped Russia evade sanctions imposed by Western countries after the Ukraine invasion by using Sudan’s gold to fund war costs.
Therefore, among the humanitarian, economic, political and social issues related to any kind of war, it is important to keep an eye on the commodities sector, and how the conflict can impact already unstable oil exports and prices around the globe.