Trade Finance TV: Securing critical commodities in a volatile world

Clarissa Dann: Welcome to Trade Finance TV. With no sign of the Russia-Ukraine conflict stopping anytime soon and China’s zero-covid policy locking down Beijing and Shanghai. What does this mean for the supply of particular commodities and what should other economists do about this?

Aife Howse: For the world to access the metals it needs to achieve net zero and Paris Agreement goals. We need a lot more investment than we’re seeing at the moment. We’re going to talk a little bit about what this might look like.

Clarissa Dann: Thanks Aife. So how dependent is the world on China and Russia for those commodities? It’s a worrying, isn’t it?

Julian Kettle: Russia typically supplies about 5 to 6% of global commodities. China, on the other hand, has dominance, particularly around the battery volatile supply chain. So it has around about 80% of the battery, the precursor, the refining of metals. And it’s increasingly taking ownership of the mining of these commodities, particularly thinking about lithium, cobalt. It would love to get its hands on copper, but it’s struggling but also nickel in Indonesia. And that in itself creates a challenge around ESG.

Rebecca Harding: We’ve also got a sort of second tier dependency on Africa as well. And there are a lot of Chinese and a lot of Russian interests in Africa. DRC actually has the dominant share of world exports of cobalt. China has control of about 90% of the exports of the rare metals that are critical to digital supply chains. Russia also has palladium, rhodium as well. So we’re seeing dependency on a lot of those metals which aren’t just important for ESG, they’re important for our transition to digital and also for our sort of security as well, if you like.

Hauke Burkhard: Without metals, there is no transformation either being digital, albeit a sustainable transformation. If you think about it all electricity, you need a lot of copper. If you look at the batteries, you need a lot of cobalt, lithium, nickel, or if we look at all the wind parks, we will need a lot of rare earths, when we look at the magnets.

Clarissa Dann: Aife, what are your readers telling you about this? It’s a big topic, isn’t it?

Aife Howse: Yeah, it’s a big topic. We’re seeing a lot of traders kind of access the market in regions such as the DRC through secondary debt that they’re raising through banks. So it’s kind of a way to get through that more risky transaction and offset the risk. So I guess we’re seeing quite a lot of diversification in the area. Yeah.

Julian Kettle: We have the West putting critical raw materials on lists, whereas China is actually going ahead and investing. In terms of how the economies affected are going to have to change their strategy, I think they’re going to have to go into partnerships with governments, finance producers to enable the development of the raw material supply in places like Africa, Latin America, and also create partnerships with, for example, Australia and Canada to secure raw material supply from what you might call friendly countries.

Hauke Burkhard: We’re actually shipping lithium from Chile and Australia to China to refine it and then we ship it to Europe. So. China has taken over the refinery work for the world. 50% of global metals refinery is in terms of value in China. So if we move to a strategy, we will first need to create optionality and that is really who is going to refine it and where. And then additionally, as truly and rightfully so, that is the question where will the mining come from and where will we take the resources?

Rebecca Harding: One of the issues is actually around developed world regulations. So actually, lithium can be extracted in Texas, for example. But the regulations there mean that it shipped to China to be refined properly because the environmental considerations around actually processing all of that stuff are very severe indeed, huge quantities of water and huge quantities of chemicals. So we have to work out what we are prepared to tolerate because it will be expensive, needs a lot of infrastructure, but it also means potentially softening some of our sustainability regulations as well.

Julian Kettle: It’s relatively easy to build a refinery, 2 to 3 years. So when you get all the way down to the mining from first discovery to delivery, which stretches beyond ten years, if some various organizations are coming up and saying we’re behind the curve in terms of achieving Paris goals. So if we decide to invest now, we’re not delivering the metal till towards the end of the decade s otoo late.

Hauke Burkhard: If we think about localization and having also more mining as well as refining within Europe, it also comes down to what is the production cost of that. And a massive topic of that is energy cost and availability of energy. And that’s a key thing next to the environmental topic to solve.

Aife Howse: Julian, do you see offsetting of emissions from mining and building that energy transition actually kind of counteracting the green infrastructure once it’s built? Or do you think we’re just going to have to accept that there’s going to be an uptick in emissions before it gets better?

Julian Kettle: I think the reality is the energy transition will be built on hydrocarbons, and that’s an inconvenient truth for society and for policymakers. But we don’t have the green infrastructure in place yet for it to be self-sustaining. So unfortunately, I think hydrocarbons will grow all the way through to the end of this decade, but that will then set us on a pathway to build out this green infrastructure. Offsets are an interesting one. At the moment it is cheaper to buy the credit than it is to abate. So if the regulation isn’t there for you to abate, then you will buy the credit. It makes economic sense.

Hauke Burkhard: If we look at carbon emissions around metals, transportation is obviously a huge topic transporting from Chila to China and then to Europe. These are long distances, a long way. Let’s not talk about how do I get ships and ship capacity and how do I get into a harbor. I think that’s an additional topic around supply chain resilience. But really, what is the CO2 footprint of mining, transporting it around the world and bringing it back? So if you look at this, I think there’s obviously also a benefit of shorter supply chain routes.

Julian Kettle: We’re aware of consumers dictating to their suppliers that they are unwilling to accept material unless there is a decarbonization pathway. At the extreme case, they would choose between suppliers depending on the carbon emissions. And if you think about what’s happening with the unfortunate situation in Ukraine, we have Russian aluminium, which is about as green as it gets, being precluded from sale and being replaced with Chinese material, which is about as carbon intensive as it gets.

Rebecca Harding: Politically, there’s a huge element of risk involved with anything that we do right now. So we’ve had the supply chain war around semiconductors and there’s always going to be a risk that somebody will shut off supply in the whole area of Russia, Ukraine, China, the US, China, Europe. It’s all been deeply politicized at the moment. So we’re actually on the knife edge of sort of is this feasible in sustainability terms? We need to manage expectations. Is this feasible in terms of geopolitical terms? We need to work together and we’re not in that place as a world at the moment. And then how is this going to guarantee energy security in the future?

Julian Kettle: We saw what happened during the pandemic with PPE. We have put ourselves in a position totally reliant upon China for batteries. Yeah. Now politicians love standing in front of a building site and saying, We’re building a battery plant and you look fantastic whether ownership is going to come from where’s the money supply, where’s the refining, where’s the precursor supply?

Rebecca Harding: The other thing is that there’s this critical supply chain review that’s going on in the US at the moment and obviously across Europe as well. We’ve got supply chain reviews going on linked to things like modern slavery and human rights, things like that. And the problem is that actually our ethical stance is creating almost this sort of vicious circle of indecision and uncertainty. I mean, in policy terms, I think we need to think very, very hard about what we will tolerate. I do think there’s capability of producing more. The UK actually produces and exports quite a lot of lithium. There is capability there, but we have to think and we have to think very quickly and there’s no sense in which we can be complacent at the moment.

Aife Howse: One of the questions when there’s such a steady upward trajectory for demand for base metals is why is there not enough investment? And also how can we even begin to sort of counteract it?

Julian Kettle: Right now, the challenge is that there may be a looming recession. So investors are getting a little bit twitchy and investors love their dividends. So given a choice between spend CapEx or the promise of long dated returns or dividend, now investors are choosing dividend.

Hauke Burkhard: Along this value chain you will have different risk capital needed. So in some parts you basically need way more from an equity point of view. On other paths, it’s easier to actually raise debt and it will be really everybody coming together. It will be the offtake us providing pre-payment money. It will be equity investors being active in the commodities and the mining market. It will be public money and it will obviously be capital markets as well as banks.

Rebecca Harding: The key thing is this has to be strategic. This is about energy security. So this issue about public private partnership is really important on the financial side. But the problem is we’re going into a period of time when prices are very high, when government debt is very high, but it has to be governments that spend the money and facilitating the building of infrastructure. Its a worrying time.

Clarissa Dann: So how will the next ten years play out?

Rebecca Harding: We are going to have to see people working together and I think that will happen. I think we have to be optimistic that the time is now and everyone knows the urgency of all of this.

Julian Kettle: Unless these partnerships happen. And very, very quickly, if we deliver the metals, we can we won’t achieve one half degrees. If we commit to two one half degrees, we can’t deliver the metals.

Hauke Burkhard: If we think about the CHIP Act or the battery fabrication that we now build up in Europe. That came because we are short of semiconductors and as a shortage actually created the strategy. Here I think we are a bit more ahead. Hopefully if we redefined the right governance of industry, public, the financial industry, as well as university and education, I think there’s really a big chance that we get this right.

Aife Howse: I think from a quality trading point of view, prices are going to stay very high and traders are going to see that as a massive opportunity. So they’re going to want to get in there and secure offtake and be more and more involved in financing further down the line.

Clarissa Dann: It’s going to be an interesting ten years.

Aife, Rebecca, Julian and Hauke, thank you so much for coming into Trade Finance TV.

Published on May 24, 2022