The article below summarises a very interesting speech made by Steven Fox of Veracity Worldwide at the Cape Town Mining Indaba last week.

Article: Mining Indaba: Global fractures over Russia-Ukraine war trigger big policy, market shifts – Veracity Worldwide

I would like to add a few more points of my own to the topic of the possible direct and indirect impacts that the Ukraine war could have on the broader mining sector.

  • The immediate consequences of sharply rising inflation could be extremely challenging for the mining industry. This is not only in terms of cost pressures eroding margins but equally in the dangers of an impending global recession and what that could do to future commodity demand and pricing. The ripples from the war come at a time when the risks were already on the downside – governments raising interest rates to address cost pressures driven by pandemic related supply-chain disruptions and metal price spikes in perceived ‘critical metals’ needed for the energy transition. Add to this the recent economic fallout in huge commodity consumer China of its zero covid approaches, and you have the mining sector in the eye of a perfect storm. Some investors fear that management teams, and even possibly boards, are not being cautious enough in planning for this scenario.
  • With commodities always designated in US$, the profitability of mining companies can depend as much on exchange rate moves as on product price moves. The financial and currency dislocations stemming from the war and related sanctions will make forecasting and management of exchange rates that much more complex. The danger with emerging markets, as ever, will be escalating interest bills as rates and the US$ value rise.
  • Is there a danger that it hardens anti-western views amongst the loose BRIC’s country alliance? With possible implications for the iron ore sector, so key for earnings in the major diversified mining groups? We have already seen China impose ‘da facto sanctions” on Australian coal twelve months ago. Would they start to do the same with Australian iron ore?
  • If the war escalates, and the divide continues between pro and anti-Russian camps, it may not only be investors who eschew those ‘backing’ Russia in various UN votes, but vital government aid programmes may come under review.
  • The increased sophistication of the tracking of metal flows (helped by blockchain) has been another key development. Both investors and governments are already putting companies under pressure to ensure the ethical sourcing of supplies – not only in the diamond space. At the recent PGM’s Industry Day, the CEO of AngloPlats said that they have been getting all sorts of enquiries from people seeking to buy palladium as Russian metal had been sanctioned. But African producers must make sure that they do not get caught up in some kinds of ‘secondary’ sanctions if their governments are voluble backers of the Russian cause.

Other ESG developments – an increasingly nuanced debate as the pendulum swings back from the extreme ESG views of the last two years (when ESG funds in the US were overwhelmingly made up of tech stocks which have had a bad Q1 and some believe are in a cyclical downturn as interest rates rise, whereas Q1 saw a stellar performance from oil and coal stocks). It may be that the man in the street, followed by the politicians, starts to dictate even more powerfully on energy issues as supply chains disrupt and prices escalate. Could this mean less focus on green energy trends in the short term and more focus on the reliability of supply?!

Secondly, the role of aggressive metals trading companies has come under scrutiny in the recent past as they are seen to take advantage of some murky arbitrage plays (think the recent publication of “The World for Sale”). But will the taking advantage of supply disruptions rippling from the Ukraine invasion really stand up to scrutiny by the ESG investors? And, in fact, should they?