Covid-19: Complex consequences for commodity markets
Localisation in South Africa’s mining sector is a controversial subject. The government has increasingly asked for it, making procurement from local firms a feature of legislation, most notably in Mining Charter III.
As the Mining Charter currently stands, about 70% of all procurement by SA firms must be local in three years’ time to comply with mining licence regulations. The government goes so far as to prescribe the level of empowerment required of suppliers.
The mining sector said it recognises the benefits of localisation, but says the targets are too onerous.
That’s where the matter stands while the government and the Minerals Council await the outcome of a High Court process which is primarily focused on deciding whether past empowerment efforts should be recognized.
But could global economic trends fall increasingly in the government’s favour? In a global economy after the Covid-19 pandemic that might be possible, according to PwC, the consultancy.
Commenting in Mine 2020, an annual publication that spots trends in the mining sector by monitoring the activities of the world’s top 40 firms, PwC said the sector may have to rethink long-held assumptions about the unassailable wisdom of ultra-lean principles and global supply chains.
“Miners may need to think about de-risking critical supply chains and investing more in local communities. A shift towards localisation in supply chains and in deals, as well as different forms of community engagement, may turn out to be enduring consequences of the pandemic.”
PwC commenting in Mine 2020.
PwC’s observation is partly to do with how Covid-19 might accelerate an already existing swing towards bilateralism as demonstrated in trade politics. The re-emergence of trade tariffs is the direct result of heightened political tensions between China and the US over the last two years.
Bilateralism is also demonstrated in the US government’s withdrawal from the World Health Organization and extends to practices such as nations relocating data within national borders. In other cases, manufacturers as being forced to consider moving manufacturing facilities from tariffed countries to regional bases, also called ‘onshore’.
According to the World Bank in its April edition of the bi-annual World Commodities Report, the unravelling of global value chains (GVCs) would be exacerbated by national security concerns regarding the reliability of supply of critical equipment, such as personal protective equipment which would favour local production.
“For commodity markets, such a development could potentially lower transport demand if it reduces [the] average distance of imports,” said the report’s authors.
“All else equal, this would result in permanently lower oil demand as GVCs are more transport-intensive than other forms of trade,” the bank said. “It could also lead to shifts in the source of commodity demand as manufacturing hubs shift.”
In one interesting interpretation of the potential impact of tariff changes, the French economist Thomas Piketty observed that while tariffs are generally feared (because where do they stop?), they might be the only way the world economy pays for the common threat of greenhouse gas emissions.
In any event, even a degree of de-globalisation may start to change the game for the mining sector, which relies on international trade flows to sell products, and to procure goods and services.
“There is a visible impact for mines where there’s a just-in-time approach to securing stock,” says Andries Rossouw, resources team leader for PwC. “The industry is used to buying cheap goods from China, and in not having to buy back-up supplies,” he said in an interview with finweek.
He thinks mining firms will have to diversify their supply risks. They have already had a taste of what might be coming with the most recent Covid-19-related lockdowns, especially if trade flows are interrupted by tariffs, international tensions and flaring virus threats in the future.
“It’s got a similar role to play in SA. SA is geographically advantaged and there is potential to manufacture equipment here as we’ve got a mature mining sector,” he says.
“At least for their most critical supply chains, the Top 40 may need to consider an alternative approach; improved inventory management combined with globally diversified or locally sourced and financially viable resources,” said PwC in its Mine 2020 report.
“This would not only de-risk mining companies against a similarly disruptive event but also help develop and build resilience in local communities,” it said.
Henk Langenhoven, chief economist of the Minerals Council, comments that governments would be well-advised not to make “knee-jerk” decisions around tariffs and localisation without considering existing dynamics such as demand and cost structures. This is especially true currently while commodities are engulfed by chaos.
There’s obviously a significant amount of guesswork at play, if only because the economic signs are contradictory. Kostas Bintas, head of copper for Trafigura, a commodity trading firm, told Bloomberg News that copper was coming out of Covid- 19 relatively well, while a report by Morgan Stanley this month forecast a V-shaped recovery for global markets, reasoning that Covid-19 is a crisis without endogenous factors (no pre-existing economic crisis), and government-led stimulus efforts have been comprehensive and effective.
As many, if not more, analysts think the opposite is true, including the World Bank. It thinks Covid-19 may even change consumer appetites. Increased work-from-home activity will lower transport usage and oil demand as would a possible decline in international business travel.
A reduction in long-haul travel routes will undoubtedly continue the shake-down in travel but may also provide impetus to continue reducing emissions and therefore result in greater pressure to implement fuel standards and the transition to electric vehicles, which is helpful to platinum group metals as well as lithium and a host of other minerals.
Finally, transport cost increases and a retraction of supply chains could see substitution between domestic and imported commodities, said the World Bank in its commodity report. It said the higher cost of imported commodities due to increased transport costs could promote the use of domestic resources.
“If exact replacements are costly or unavailable domestically, the use of substitutes may occur, such as the use of domestically-produced glass in drinks packaging instead of imported aluminium,” the bank said. “This would benefit commodity importers at the expense of commodity exporters,” it reasoned.
Thus, the Covid-19 pandemic introduces a complexity of positive and negative economic effects for the commodity markets. While localisation would favour the manufacturing business in SA, similar trends elsewhere in the world lowering the demand for exports would deal a major blow to the mining sector and the SA fiscus at large.