A fractured world: how political divisions could impact mining investments

JP Casey 4 November 2019 (Last Updated June 18th, 2020 13:29)

Mining is one of the industries most impacted by changes in international relations, with the disparity between the location of resources and the demand for minerals requiring countries to cooperate with one another to mine and produce commodities on a global scale. From trade wars to Brexit, JP Casey considers how international tensions could benefit or damage mining investments.

A fractured world: how political divisions could impact mining investments
From trade wars to Brexit, JP Casey considers how international tensions could benefit or damage mining investments.

US-China trade war

The most significant economic dispute of what EB Tucker called our new “fractured world” has a significant impact on mining, with the US and China dominating the production and trade of a number of key minerals; the two economic superpowers generated almost two-thirds of global coal production in 2013 according to World Atlas. The escalating conflict stems from President Trump’s desire to see the US decrease its reliance on imported Chinese goods, but his hostile policy has encouraged China to place similar tariffs on US goods, with the two sides now placing 25% tariffs on around $260bn worth of products.

The dispute has already had a significant impact on the mining industry, with the value of BHP shares falling by 16%, and the price of nickel tumbling 22%, over a three-month period last year. The consistency and coherence of the US policy has also been called into question, with the Department of Commerce approving 108 requests from Chinese aluminium producers to have their goods exempted from the tariffs, despite an increase in US production from 39% of the country’s capacity in 2017 to 63% in 2018.

In response to this uncertainty, US companies and organisations have looked farther afield for new sources of minerals, rather than double down on domestic production. The US military has worked with Malawi’s Mkango Resources to provide rare earth minerals, while Texas-based Blue Line Mining aims to develop a rare earth production facility in the US, albeit one reliant on support from Australian miner Lynas, and raw materials from Malaysia.

At the heart of the dispute is the disconnect between the Trump Administration’s eagerness to reach a stage of mineral independence, and the reality of the situation that the US simply lacks the mineral reserves to effectively challenge China, especially with regard to commodities such as rare earths, of which China produces 90% of the world’s supply. This conflict between political interest and practical reality is a microcosm of many of the international conflicts that have increased uncertainty in the mining sector, and helped create this fractured world.

Tensions over Brazilian niobium

Like rare earths, the mineral niobium is seeing increased attention as technological developments shift the demand for a number of commodities. Niobium is used to make steel lighter and stronger, and has obvious uses in the automotive and aerospace industries. With an expected combined annual growth rate of 5.9% between 2019 and 2024, there is significant interest in niobium, especially from China, which is expected to operate 5,000 aircrafts across 500 airports by the end of 2020.

However, much of the world’s supply comes from Brazil, with Brazilian firm CBMM responsible for 84% of the world’s niobium production, and President Jair Bolsonaro has long touted the mineral as a potential cornerstone of the country’s economy. He highlighted the potential of niobium to deliver economic independence for Brazil as early as 2016 when campaigning for office, and has objected to the purchase of a niobium mine in the country by the China Molybdenum Company.

Furthermore, CBMM is 15% owned by a consortium of Chinese steel companies, and with niobium only mined in six countries as of 2013, there are fears that growing Chinese involvement in Brazilian niobium will threaten the country’s monopoly over the mineral.

This combination of uncertain international relations and the scarcity of niobium have severely undermined investment in the mineral. Beyond CBMM’s operations in Brazil, Iamgold’s Niobec mine in Canada is the only other large-scale niobium operation in the world, and has been in operation for more than 30 years, highlighting the relative stagnancy of the niobium market, and its unattractiveness to investors.

Positive outcomes from Brexit

While uncertainty generally discourages investment in new operations, there is optimism that one of the most uncertain political disputes, Brexit, could lead to positive developments in mining. The structure of several mining majors – where they are headquartered in the UK but operate predominantly in other countries – means a weak pound inflates their earnings. Open Democracy reported that following the Brexit referendum, Glencore’s share price jumped 104%, while the value of Antofagasta’s shares saw an increase of 81%.

These instances of growth have developed into new projects for the miners; this year alone, Glencore has announced plans to provide cobalt to Umicore’s production of advanced batteries from its subisdiaries, Mutanda and the Kamoto Copper Company, and a separate project to develop the Agua Rica copper project in Argentina, alongside Goldcorp. Similarly, Antofagasta announced the successful funding of a $1.3bn expansion project at its Los Pelambres project in Chile in April this year, as the miners look to capitalise on fluctuations in currencies following Brexit.

Uncertainties regarding the future of the UK’s trade relationship with the EU could also have a positive impact on smaller-scale UK mines, with the national government investing in domestic sources of minerals such as lithium, as it is forced to be less dependent on foreign imports. In June, the government announced around $28m in funding for advanced battery technology, part of which will go to a joint venture involving the Natural History Museum and private miner Cornish Lithium to explore for lithium deposits in the region, which could kick-start the country’s lithium mining industry.

Optimism in Australia

The fallout of the US-China conflict has led to optimism in other parts of the world, with the superpowers looking for new sources of critical minerals. Australia stands to benefit from this reduced reliance on goods produced in the US and China, with the national government noting in its June 2019 quarterly report that the economic growth of Australia is set to remain unchanged until 2021, while the growth rates of both the US and China are set to decline, according to IMF figures.

The outlook is similarly positive for individual commodities, with the World Steel Association predicting that Australian iron ore exports will increase from 835 million tonnes (Mt) in 2018 to 881Mt in 2021. This increase is set to deliver an increase in the country’s iron ore export earnings from $61bn in 2017-18 to $74bn by 2018-19. Australia is also the world’s largest exporter of metallurgical coal, and coal exports are expected to increase from 180Mt in 2018-19 to 198Mt by 2020-21, delivering a record $42bn in value.

Alongside this growth, Australia continues to be an attractive destination for mining investment. Despite opposition from local and environmental groups , the Adani-owned Carmichael coal mine looks set to go ahead, and benefit from around $4.4bn in government subsidies, according to a report by the Institute of Energy Economics and Financial Analysis, firmly establishing Australia as a country that welcomes mining investment.

Furthermore, the $381m United Wambo operation in New South Wales was also given approval to extract 150Mtof coal by the state’s Independent Planning Commission in August, as the country looks to invest in new mining projects of all sizes.