Three Problematic Frontier Markets and the Hunt for New Strategic Metals Sources
5th September 2021 - Approximate reading time, 8 minutes.
Three Problematic Frontier Markets and the Hunt for New Strategic Metals Sources
Strategic metals, oftentimes referred to as technology metals or critical metals, are generally defined as elements that are increasingly vital to a number of advanced industrial and technological processes. Such metals can be found in a wide array of products, from consumer electronics to medical equipment, semiconductors, clean energy devices, jet aircraft engines and much more. They also serve as key alloying agents in many standard and specialized metal applications. What technically comprises "strategically critical metals" (a description sometimes employed by environmental economists) has changed over time, with some overlapping in category types. Presently, the standard listing of metals deemed "strategic" or "critical number about 70. However, by and large, those considered as highest in import by government agencies, major industries and scientific and economic research organizations are the following:
Further, there are the rare earth elements (REEs) - particularly cerium, neodymium, lanthanum, praseodymium, yttrium, gallium, and dysprosium; seen as particularly crucial to environment friendly / green energy technologies, aircraft engines, leading-edge magnet production and semiconductor applications.
Regarding the first grouping, the consensus of mining and economic experts is that demand for copper, lithium, cobalt and platinum will jump significantly throughout the 2020 decade, as the world increasingly moves away from fossil fuel usage and high capacity battery, renewable energy and automation technology development accelerates. Moreover, sources of supply are expected to diminish. Needless to say, all these ores play essential roles in country infrastructure, defense and numerous facets of economic growth. Manganese and nickel will also see greater demand but possibly a bit less than the four other minerals discussed above.
As for rare earth elements - although not necessarily rare in the pure sense of the word - can prove rather complicated in terms of identification and extraction since distribution is sparsely distributed throughout the Earth's crust and usually can only be extricated through the processing of base and precious metals. There can also be some rather daunting geographical challenges concerning access and retrieval which, at times, necessitates the use of specialized robotics.
The countries currently with the greatest strategic metals potential fall into the frontier markets category, since most metrics indicate they are less developed or economically "primitive" in pace of development. In this grouping, the three that stand out the most for strategic metals are the Democratic Republic of Congo (DRC), Afghanistan, and Mongolia. In addition to having severe economic weaknesses, the first two are very high-risk conflict zone countries and the third, although politically stable, has high-order structural economic problems and requires significant sustained levels of external investment in essential industries.
The DRC has, by far, the most developed mining sector compared to Afghanistan and Mongolia, measuring fifth globally in copper production and first for cobalt. Furthermore, results from geological research suggests that lithium deposits may be among the highest in the world and actual extraction could initiate as early as 2022. Chinese companies are the DRC's biggest foreign mining investors, followed by Swiss metals giant Glencore and several Australian entities.
Despite its impressive ranking in the metals tables, it should be noted that the DRC's mining sector is seriously under-performing but, with a more equilibrated political environment and increased targeted investment, output could expand well above current levels. Quite a tall order as some of the most mineral rich (and less explored) areas of the country are located in the east and northeast (more specifically South Kivu, North Kivu and Ituri provinces) of the country; socially and politically volatile regions that serve as home bases for more than 100 anti-government militias, Muslim fundamentalists (among them ISIS affiliates like the ADF) and assorted tribal gangs. Many rural areas in the Kivus and Ituri are pretty much no man's lands where federal and regional government controls are virtually non-existent. In May of this year, DRC president Tshisekedi declared a "state of siege" in North Kivu and Ituri. Last month, Tshisekedi accepted U.S. special forces assistance to help in combating area insurgents.
Mining operations in the three mentioned provinces have not escaped the steady stream of violence as sporadic attacks on extraction sites over the last few years resulted in loss of life, equipment theft and major damage to facilities. By United Nations estimates, in the east of the country alone, at least several thousand people have been killed by rebel and tribal / ethnic violence over the past 24 plus months, with perhaps another quarter million displaced (UN NEWS: Armed Group Atrocities Creating Havoc in Eastern DR Congo: UN Refugee Agency. 16th February 2021).
The mining difficulties posed by the DRC pale by comparison to those in Afghanistan, a perpetually failed state with mineral deposits that, by some late 2020 estimates, could amount to as much as USD 3 trillion - everything from copper to rare earths (CNBC: China May Align Itself with Taliban and try to Exploit Afghanistan's Rare Earth Metals, Analyst Warns. 17th August 2021). Moreover, geological research indicates that Afghanistan may have the world's largest reserves of lithium, as mentioned above, a vital element in green energy technology in addition to other evolved industrial and scientific processes (INDO ASIAN COMMODITIES: How will the Talibans Manage over $3 Trillion Worth Untapped Minerals and Resources in Afghanistan's [Many Trillions] of Minerals. 23rd August 2021).
A long history of nearly non-stop warfare - a combination of tribal conflict, intra-religious hostilities and lengthy fighting against various foreign powers - has resulted in Afghanistan devolving into one of the most backward countries - one might argue that Afghanistan is not, in strict technical terms, a country - in the world. The recent re-assumption of power by the religiously über-radical Taliban is unlikely to engender peace anytime soon, in fact, just the opposite should be expected. Already we are seeing growing signs of the Taliban fragmenting into competing factions, meaning that a centralized form of government may not materialize in Afghanistan. Contributing to the toxic socio-political environment is ISIS-K, a terrorist Islamic group even more extreme than the Taliban. ISIS-K, an offshoot ISIS, has declared itself "an enemy of the Taliban" and intend to contest them for power. Moreover, there are numerous war lords competing for territorial advantages and an established Taliban resistance (The Northern Alliance) remains active in the northeast of the country (Panjshir province). What all this appears to add up to is a classic backdrop for civil war. Some political experts are already predicting that civil war will eventually break out. "We have a situation that tells us that it's not a matter of if, but when" (ANI: Afghanistan Likely to Plunge into Civil War after Taliban's Victory. 14th August 2021). At bottom, any reasonable level of stability is probably not achievable, at least in the short-to-medium-term, keeping most new foreign investment well away.
Despite this extremely somber portrait, China hopes to somehow take advantage economically by "building a pragmatic relationship [with the Taliban]"; securing access to Afghanistan's enormous mineral reserves by providing financing for desperately needed infrastructural modernization primarily through its "Belt and Road" initiative. Beijing keeps broadcasting an optimistic outlook for Afghanistan, betting that the Taliban will be able to bring together disparate competing tribal / ethnic groups and construct an inclusive government that allows some basic human rights for minorities and women. The Chinese also seem to believe that the Taliban will commit to combating regional terrorist organizations - perhaps a bit of borderline magical thinking at play here - intent on striking China or other nations.
Beijing's positive Afghanistan vision has little chance of materializing for multifarious reasons but, primarily, due to the profound isolation that the Taliban currently faces from the developed world: IMF financing has been suspended to the country and the U.S. maintains sanctions on the Taliban holistically. Billions of dollar deposits were recently frozen by Washington and the U.S. also can exercise its veto power if Beijing or Moscow attempt to soften United Nations Security Council restrictions on Afghanistan's militant government. Additionally, there is growing international pressure on China to provide financial aid to Afghanistan only on strict international terms.
Mongolia, which we recently reviewed (please refer to our 14th July 2021 article presented below), is the least problematic of the three countries in question. This vast Asian nation by all accounts has very substantial strategic mineral resources (copper and lithium in particular) but is lacking an adequately modernized infrastructure and strong investment capital streams to more fully develop its mining sector.
The country is often referred to as the last frontier for large-scale mineral extraction. Once agriculturally dominant economically, over the past four decades, the Mongolian government has prioritized mining and embarked on an array of highly ambitious extraction undertakings, partnering with several prominent foreign mineral companies, including Rio Tinto and Turquoise Hill Resources (TQR). The most notable of these efforts is the Oyu Tolgoi Underground Project (OTUP), considered to be a "high-impact" mining producer, containing some of the largest copper and gold deposits globally. Rare earths are also thought to be present in exceptionally high levels.
Mongolia certainly has extraordinary possibilities in base and precious metals production but, equally important, the country is sitting on some of the highest unexplored strata of lithium in the world. Mongolia's lithium deposits are both hard rock and brine, according to results from a series of test drillings. Extraction activities for the mineral are still in the early stages (CANADIAN DIMENSION: Land Grabs for Rare Earth Metals Continue Outside the South American Lithium Triangle. 26th March 2021).
The countries with the biggest representation in Mongolian mining are China, Russia, Australia and Canada. The latter has recently played a pivotal advisory role in shaping Mongolia's extraction policy reforms, while Russia and China are big players in direct mining investment and imports (much of it coal). In actuality, China absorbs approximately 70% of Mongolia's total exports. The goods are largely raw minerals used in Chinese manufacturing and energy generation.
Despite enjoying a productive trade relationship with China, Mongolians have centuries long reservations about Chinese regional ambitions and are fearful of becoming economically dependent on its neighbor. Apparently, the principal reason why Ulan Bator is now actively seeking closer political and economic ties with the U.S. and Europe as a counterbalance.
As the transition to green industry progresses (along with the associated high-tech demands it brings), the search for strategic metals (and REEs) is expected to greatly intensify and the risk assessments for mining concerns will surely become much more complex since, as discussed, some of the richest, most unexploited, highly sought - after mineral deposits are found in countries with serious economic problems, and at least a few of the prime mining candidates present extraordinary security concerns.
In the final analysis, the high levels of planning and investment - just give some thought to the involuted social dynamics in frontier markets that need to be thoroughly studied by anthropologists and other social scientists in order to construct the necessary guideposts so mining operators may avoid potentially disruptive socio-cultural flashpoints - required to maximize yields in less explored, high value strategic metals territories could prove far greater than some mining experts predicted just a few years ago. In all, a rather difficult landscape that may, in fair part, limit the strategic metals extraction field of play in frontier market countries to a select, well-capitalized, high - tech sophisticated and politically influential club.
Given how important strategic metals have become in a broad variety of industries, one should expect that some western companies in this grouping will receive meaningful exploration and extraction subsidies from their respective governments - and there is little doubt that sufficient access to strategic metals / REEs is a national security issue for the West as a whole - to assist in competing with Chinese miners who, as a matter of course, have historically been buttressed financially and tactically by Beijing in countless international ventures.
WesBruin Capital 5th September 2021