Date | Nov 01, 2016:
It is pretty clear now that the concern over energy and bulk materials supply security is overdrawn, if the market and investments trends globally in such areas are any indication. The boom in the global economy during 2003-2008 and the investments in new mining, logistics and infrastructure capacities during this period have been an absolute disruption in the strategic thinking in these areas as the markets almost everywhere have gone to buyers.
There are strong reasons to revisit to reprioritise the issues and actions related to resource security.
For example, investment in oil, both in the upstream and downstream, iron ore and coal have been so large that each industry is faced now with a massive overcapacity creating highly competitive pricing conditions for users. Since rebalancing of the markets will be driven by the low-cost producers, as is being witnessed currently, the user industries and importing countries have more reasons to rejoice. These conditions had not been foreseen in the past before the mad rush happened worldwide to acquire resource assets and control them. It has been definitely overdone, perhaps driven by mistaken strategic thinking and abundance of financial resources to back up mining investments. The industrial nations also saw the consequences of geopolitical risk during the Cold War and continued to pursue their traditional path driven by new opportunities and especially after the rise of China in the first decade of this millennium.
While sufficiency remained the core subject, the businesses and national governments were concerned about the consequences of any potential disruption in the supply line on the larger economy when it came to oil, coal, natural gas and, say, even iron ore. Nations heavily dependent on imports adopted policies to develop strategic reserves to ward off unforeseen shortages whether intentionally created by the source nations or by external conditions such as breakdown of logistics and infrastructure.
Such security hedges do not come free. From ownership of assets, development of infrastructure, investment in inventory and the cost of storage mean a massive drag on financial resources. In the globalised world of the day, the concerns related to energy items and bulk materials have been substantially reduced and much of such resource security efforts may be unwarranted.
Therefore, focus has to change.
For example, India may not be short of iron ore and may not also lose much if certain quantities of iron ore are traded externally. It is a short-term problem with the domestic steel producers who may look forward to derive immediate price and locational advantage. But, that is unlikely to provide a strategic long-term advantage to them or to the nation as a whole as this is one product that is globally available in large quantities, it has a significant substitution possibility with scrap and so widespread the location of the mines are that even in the extremely unfavourable conditions of business, the steel producers do not run any serious supply risk.
But, when it comes to minor metals and rare earths, India’s resource position is not favourable. For example, take molybdenum, gallium, antimony, tungsten, vanadium and niobium. The dominance domestic resources and control over assets located overseas have put China at a huge advantage in respect of all these minerals and subsequently in the development of electronics and critical defence industries.
When it comes to these critical metals and rare earths, so far one has not witnessed serious curtailment of export by source countries which could potentially derail an economy or a user industry. However, the exporting countries or the companies where these resources are concentrated may take advantage of their position in the market to raise prices to uncomfortable levels. This can make the end-user industry uncompetitive. However, in most cases, the impact of these minerals on the final products has been minimal and in most cases these are passed on to consumers.
The question is what happens if there is a spurt in the number of countries or regionally dispersed companies requiring these materials increase? The increased demand and limited and concentrated supplies may lead not only to price increases but also to selective and discriminative trade driven by politics.
When it comes to energy products and bulk minerals, it is no longer a question of just domestic and global sufficiency for now and the future. Shortages and disruptions can happen due to failures in the logistics and transportation of the same. This is a problem where more than one nation is involved and the international order cannot be maintained by a single nation. Therefore, one needs a global and wider outlook in trade policy than remain confined to mere short-term shortage issues.
The overall situation also demands that one needs to be prepared for continued dependence on a single source, country or an owning company, for certain minerals and for that appropriate trade and investment relations are required to be developed meticulously.
Today, in the larger political and global economic discourse, there is a tendency to overstate the economic impact on account of disruptions of critical minerals. It also fails to separate the long-term strategic considerations from short-term compulsions. Most are not even able to appreciate the diversity of the specific characteristics of the resource markets and undermine the lack of integration between the upstream and downstream businesses. Minus these changes, the natural resource development in the country will be misled into uncertain terrains.
(Source: http://infracircle.vccircle.com/)