China & Russia Could Seek to Dominate Metals in the World’s Most Vulnerable Areas

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The critical metals discussed here — copper, nickel, lithium, iron-ore — pertain to geopolitical trends which have resulted in a worldwide politicization effort, which are notably captured in two of the latest news stories about Canada’s Indo-Pacific Strategy and a new trade route via Tunisia for Russian exports to South Korea.

The SCO Summit of 2022

The Shanghai Cooperation Organization (SCO) is a regional initiative that promotes military and security cooperation as well as economic development, among other things of a multilateral nature.

It is a classic example of economic regionalism.

To illustrate further how the latest theories and discussions regarding economic regionalism — and the subsequent focus on regional development — is over-sold by political analysts and economists alike, I have compiled some of the most significant analyses about the results of the Shanghai Cooperation Organization (SCO) Summit in 2022:

  1. The growing mutual interests in trade between China and Russia’s Far Eastern region
  2. China and Russia want to disrupt oil markets by axing the US Dollar
  3. Russia’s invasion of Ukraine reveals divergences within Central Asia
  4. President Xi’s decision to not assist Russia’s war effort
  5. The dilemma or China’s gas supplies via Power of Siberia 2 pipeline
Photo by Freeman Zhou on Unsplash

Commodities are global in nature. The only attention truly being paid to regional development is in relation to large investments in infrastructure — these investments do not seek to enhance regional connectivity, but rather to give an advantage to a producing country so that it can more efficiently transport raw materials to markets far away from the original source.

This is the essence of the Arctic Strategy, Belt and Road Initiative (BRI) and Indo-Pacific Strategy: each of which revolve around the maritime domain, while also seeking defense mechanisms through military cooperation.

In my view, this is the future trend toward which the world is headed; the politicization of commodities.

As a result of nascent, unpredictable cyber threats from adversaries, countries are henceforth rethinking industrial policies, while also emphasizing the need for new security measures for industrial assets.

An adversary, or group of adversaries, can target an industrial asset because it has immediate results, the trajectory of which the perpetrator can determine and control. Governments, corporations or even individuals could even be consumed in a cyberattack that effectively shuts down an industrial asset or network upon which it is operating.

It is very important to understand this phenomenon in the context of sanctions on Russia and China. Under the backdrop of a resurgence of tension in the global commodities market, the legal aspects of Russia’s sanctions include industrial asset seizures and targeted oil and gas mergers with Russia’s national companies. (Both of these aspects have a cybersecurity dimension).

What this means at a political level is that Russia intends to transform its industrial policies in a way that favors the “anti-West” rhetoric. From a geographical point of view, raw materials are located in vulnerable areas where supply-chains are being disrupted by sanctions. This is why Russia must expand its “sovereignty” over global commodities.

Dominating and controlling vulnerable regions rich in highly-sought commodities is, simply put, thus Russia’s geopolitical objective and since China basically has the same geopolitical strategy, this explains the critical nature of the China-Russia relationship.

The question of whether China and Russia will align industrial policies shall be determined by the outcomes of the Arctic Strategy and BRI — not the Shanghai Cooperation Organization (SCO) — and how the defense and security interests of the United States converge with other actors in the Indo-Pacific region. This is the long game of geopolitics that will inevitably play out decades to come.

Russia’s Proposed Metal Merger

Norilsk Nickel «Норникеля» is a Class 1 nickel producer and the world’s largest producer of the base metal. The company is also Europe’s largest suppler of nickel, which has deterred the European Union (EU) from applying sanctions on the corporation and its affiliates, but didn’t stop the United Kingdom (UK) from sanctioning Nornickel executive Vladimir Potanine on 29 June 2022.

Potanine responded after the sanctions were announced by the UK government with the following statement:

‘We have a fairly huge volume of mutual relations with UK banks and UK entities that arranged loans for us. Therefore, we are analyzing now the extent of the effect on the company. We definitely understand there will be no negative impact on its stability, but certain loans will probably have to be repaid in advance.’

Due to these sanctions, Nornickel is seeking to merge with Rusal «Русала» in what has been heralded by Potanine as a “national champion” to defend Russia’s nickel industry against the economic impact of sanctions from USA and the EU as a result of the war in Ukraine.

According to Reuters, the metal merger has the potential to reach a revenue of $30 billion due to the two companies’ exposure to palladium, nickel and aluminum. These three metals are crucial to the global economy as the world strives for Energy Transition and a more commodity-centric investor marketplace.

It was reported by several sources that the sanctioned Nornickel executive, Vladimir Potanin, must step down as an executive of the company in order the the Nornickel-Rusal merger to be successfully completed.

Mining.com then reported on 22 July 2022 that the London Metals Exchange (LME) announced publicly that it would not immediately ban the prosposed metal merger and would instead carry out an investigation of the sanctions.

An LME spokesperson issued this statement to S&P Global Platts, ‘We are looking into the detail of the sanctions and what it may mean for the LME, its participants and Norilsk brands.’But this hasn’t affected the UK government’s position on sanctioning one of Russia’s richest executives.

‘Potanin continues to amass wealth as he supports Putin’s regime, acquiring PJSC ROSBANK, and shares in JSC Tinkoff Bank in the period since Russia’s invasion of Ukraine. As long as Putin continues his abhorrent assault on Ukraine, we will use sanctions to weaken the Russian war machine. Today’s sanctions show that nothing and no one is off the table, including Putin’s inner circle.’

To understand the significance of this massive metal merger, however, requires an in-depth look at how geopolitics and commodities coalesce into a country’s overall strategy.

In the case of Russia, combating sanctions is a key part of the country’s economic development in the future. This metal merger intends to succeed in the strategy of combining two large (national) companies into one massive entity controlled by the Russian state itself.

These metals are becoming so valuable to the global economy that Russia (plus others) must carefully consider how its industries will avoid sanctions from the United States and European Union. Avoiding the massive blow from sanctions, due to its invasion of Ukraine would be a high achievement in their overall strategy to defend Russia’s nationalist policies.

However, the company would be forced to reconsider its supply chains in the aftermath of sanctions, as a broad base of Russian industries have been hit with sanctions from the United States and European Union. For instance, Argus Media reported that Nornickel has considered re-structuring its logistical partners by sending more shipment through the Middle East and North Africa (MENA), an area which is critical to the sustainability of Russian exports through the eastern corridor.

The talks about reconfiguring supply routes has come in tandem with one of the Russia’s strategic dilemmas: the Arctic Strategy. Russia’s Northern Sea Route (part of the Arctic Strategy) seeks to increase exports via transshipments of products through North African ports that will reach Asian markets that have a high demand for the base metals of nickel, aluminum and copper, where Nornickel and Rusal could increase production from plants on the Kola Peninsula and in Monchegorsk of the Murmansk region on the Arctic Ocean.

Concluding Thoughts

The examples of China and Russia do indeed prove how crucial commodities are becoming to geopolitics. One aspect of the China-Russia relationship depends on how much damage the sanctions from the United States and European Union will cause to the global metals industries.

The world has seen numerous export bans on critical inputs to fertilizer and food production since the outbreak of Covid-19 in 2020. This circumstance has created a massive ripple effect on economies of the underdeveloped and undeveloped worlds, where civil unrest has become a source of tension for government stability in many countries of Middle East, Sub-Saharan Africa and South Asia.

Ukraine’s agriculture production has had an impact on the world’s food supply, notably due to wheat cultivation and production. Sanctions on China would only exacerbate the ongoing global food crisis which has seen significant strain to economic production all over the world, including in developing economies, where the historical highs in fertilizer prices has led to high crop prices and thus higher consumer prices at the wholesale and broader marketplace levels.

Imagine if the same tactics were applied by countries to target China’s metals production and supply? It would be disastrous for the global economy, as the massive rollout of EVs, renewable energy installations and more construction projects require massive amounts of copper and nickel — among other metals.

As the world is grappling with the global food crisis the world needs Brazil to produce more food, because it is already one of the world’s largest food-producing countries along with Ukraine.

These trends are part of the much larger geopolitical trends that have been kickstarted by the global COVID-19 pandemic. The global pandemic has caused several countries to unravel, with socio-political instability that was building up for decades, and causing the global economy to be shaken up with uncertainties, putting the world’s largest companies in some of the most vulnerable areas.

I’ll be publishing The Weekend Brief (TWB) regularly touching on aspects of the global markets (including stock markets) which are at the nexus of tech, industrials and global commodities. Please follow the publication Areas & Producers to read more content about the future of core areas and critical producers of the global economy.