SA can win in the game of commodities diplomacy

Going into COP27, SA needs to think what it can bring to markets and how to leverage those advantages

Commodities markets are set to become the prime currency of diplomacy going forward. Oil has been an oft-used tool, but what this year has shown us is that globally, minerals, metals and fuels are all fair game.

If SA learns to play the game effectively, it has substantial scope for growth. After all, excluding petroleum it is the wealthiest mining jurisdiction in the world, with a non-energy mineral reserve value of more than $2.4-trillion.

Historically, we’ve largely focused on two dimensions when considering the movements of commodity markets: macro, particularly demand dynamics, and physical fundamentals, which includes supply, ore grades, types and quantities of co-products, the life of mines, the type of mining production and levels of automation.

But recently, while market and macro fundamentals remain important, supply and demand considerations are being surpassed by geopolitical factors, by both firms and governments alike. Let’s take a quick trip around the world to see how this is playing out.

The Canadian government has recently decided to invest up to C$220m ($162m) into Rio Tinto’s projects to position its mining operations in Quebec as a centre of excellence for critical minerals processing. The partnership will reduce reliance on China and strengthen the security of supply for critical minerals, particularly titanium and scandium, and provide for US and Canadian manufacturers. Up to now China has produced three-quarters of finished titanium products and 61% of scandium.

Rio Tinto became the first North American producer of scandium, a key mineral in fuel cells and aluminium alloys. With the investment from the Canadian government, the company will quadruple its production capacity to 12 tonnes a year.

Canada’s innovation, science & industry minister announced that his government is “committed to the sustainable development of critical minerals resources, creating good jobs and building strong global supply chains, while strengthening trade relationships with Canada’s closest allies”.

These allies include Germany and South Korea. Earlier this year companies from these countries visited Canada to secure supplies of key commodities, including cobalt and nickel, for electric vehicles produced by Volkswagen and Mercedes-Benz, as well as battery producer LG Energy Solution.

These would be key offtake contracts for Rio Tinto given that sales to China generated 57% of its Canadian revenues in 2021, and trade restrictions in the event of China invading Taiwan would hobble its Canadian operations. The move by the Canadian government and Rio Tinto will therefore simultaneously support the firm’s profitability and Canada’s energy and national security.

In the UK, the London Metals Exchange, the world’s largest market for standardised forward contracts, futures contracts and options on base metals, is experiencing significant pressure to stop holding Russian metals. Russia produces 7% of the world’s nickel, 6% of aluminium and 5% of copper. Further restrictions on Russia could trigger a stockpile of Russian metals, which would trigger global price distortions for key metals, such as copper and aluminium.

Government restrictions are also under consideration. In the US the Biden administration is considering sanctions on Russian aluminium, which could include tariffs or bans and would have widespread implications for the global metals market.

With the Opec oil cartel having reduced production by 2-million barrels a day ahead of the US midterm election next month, the administration could leverage anti-cartel legislation against Opec, release additional supply from the national strategic petroleum reserve, limit US firms’ exports in the face of shortages, or loosen sanctions on imports from Iran and Venezuela.

But what do these geopolitical dynamics mean for SA commodities? Be strategic. Going into COP27 SA needs to think not just about donor funding for mitigation efforts but also what it can bring to the global markets and how to leverage it to strengthen trade relations. For example, SA is the number one palladium producer, followed by Russia. Palladium prices skyrocketed after the Ukraine invasion to levels not seen since November 1984. SA also has considerable platinum and manganese deposits that can be leveraged.

By building ties with partners that are pursuing diversification, as the US has done with Australia for rare earths, and Canada is doing with Germany and South Korea, SA has the scope to bring in considerable — and much needed — long-term revenues.

SA has long had the market fundamentals and favourable macro environments for these clean energy commodities. But prioritising trade relations with pariah states will threaten SA producers and limit what could be substantial windfalls that could be used to contain debt and finance strategic development objectives.

Going into COP27 with this in mind could enable SA to strengthen private sector ties and go beyond a focus on donor funding for mitigation.