Mining Indaba: Russia-Ukraine war triggers policy shifts, supply chain disruptions

Russia’s war on Ukraine is dividing the global order along fault lines, and Africa risks being caught in the middle, the Investing in Africa Mining Indaba conference heard this week.

Veracity Worldwide CEO Steven Fox told the conference that Russia’s invasion of Ukraine had triggered an increased focus on geopolitical factors that had once been the topic of polite conversation among corporate leaders.

“This is due to the rapid commodity market and global supply chain disruptions causing massive headaches for investors and businesses,” he told the audience in Cape Town, South Africa.

“It is also the consequence of dramatic national policy shifts and related pronouncements from stakeholders shaping public opinion,”said Fox. “The Russia-Ukraine war has already had tremendous consequences for countries far beyond the battlefield. This is also the first war of the ESG [environment, social and governance] era, and for companies and investors, we are only beginning to grasp its implications.”

Regardless of the war’s outcome, in Veracity’s view, one thing appears to be near certain: Russia’s invasion of Ukraine has fractured the world into different camps.

According to the New York-based executive, the war in Ukraine had already critically threatened the world’s energy supplies. Whereas the green energy transition was the top priority for many corporates and governments less than six months ago at COP26 in Glasgow, increased prices for fossil fuels have shifted the conversation, potentially benefitting oil and gas projects in Africa as importers scramble to diversify supply chains away from Russia.

“In the mad rush to fill supply gaps, it remains to be seen whether governments and businesses will be as attentive to ESG considerations as they may otherwise have been,” he noted.

Supply chains threatened

The war has also upended supply chains and caused significant price inflation. Commodity prices of critical exports from Russia and Ukraine have dramatically increased, affecting African countries that import or export these goods.

Specifically, Fox pointed out that the war had already brought several immediate impacts on the mining sector.

These include the disruption of entire industries, such as significant aerospace and defence consumers fretting over production targets because of expected material shortages. Before the war, for example, Russia supplied 20% of the titanium market.

Fox also noted the green transition is under threat, with essential commodities such as nickel, platinum, palladium, and titanium now in limited supply and only procured at a high cost.

Further, input costs for miners are skyrocketing due to higher energy prices, particularly related to transportation costs to move ore from mine sites.

Similarly, aluminum for commercial production also has been dramatically affected. In Guinea, for example, Russia’s Rusal has had its bauxite operations severely impacted. Before the war, half of its bauxite mined was sent to the Mykolaiv alumina refinery in southern Ukraine, which now sits on the war’s frontlines, Fox said.

Perhaps most concerning, Fox noted that plans for future supply chains were under review. “Substitution for commodities like nickel is being discussed in earnest, and manufacturers are considering upstream moves into mining operations,” he said.

“In the context of higher energy and input costs, nuclear power is set for a revival. Since Ukraine holds Europe’s most extensive uranium supplies, it will have great difficulty getting these supplies to market. In Africa, Niger and Namibia stand to benefit from increased uranium demand and more constrained global supply.

“At the same time, Russia’s ambitions to build nuclear power plants in Africa will be put on hold.”

Fox also pointed out that the diamond sector was set for disruption since Russia accounted for about one-third of global supply.

“Russia’s Alrosa, responsible for 27% of pre-war global diamond mining capacity, is the only Russian mining company to be broadly sanctioned thus far. At a time when the diamond sector was already battling a trend towards synthetic diamonds, younger consumers now associate Russian diamonds as ‘blood diamonds’ compared to lab-grown diamonds that claim to be more ethical,” said Fox.

By extension, he expects the diamond polishing industry to take a hit, given the uncertainty of provenance of many gems on the market, especially smaller carat diamonds. “While certain African countries seek to expand their presence in the natural diamond market, the real shift to watch is the market movement towards lab-grown diamonds rather than market share within the natural diamond space,” he said.

Political instability

Coupled with the deepening global supply chain woes on the back of the war is the threat of rising political instability across the continent, affecting mining operations.

According to Fox, the most notable driver of this concern is food and fertilizer prices have had a severe negative impact on some of Africa’s most vulnerable populations.

According to the United Nations’ latest data, global food prices increased 12% in March to reach their highest levels recorded by the index in 30 years. April numbers look to be even more dramatic, according to Fox.

“Africa imports 85% of its wheat, with one-third of this coming from Russia and Ukraine. Food prices have increased 34% this past year, with wheat prices increasing by 64% in Africa, and these trends are dramatically headed in the wrong direction,” he noted.

Fertilizer shortages will also impact Africa’s crop yields, given the fertilizer industry’s heavy reliance on Russian and Ukrainian supplies.

“Russia produces 23% of the world’s ammonia, 14% of urea, and 21% of the world’s potash, all key fertilizer ingredients. Surging food prices have already triggered protests and riots in Niger and Mozambique. Francophone countries such as Cameroon, Ivory Coast, and Senegal with heavily subsidized bread will likely see unrest,” said Fox.

Further, the spectre of long-lasting sanctions on various Russian entities in place for several years, if not much longer, could hold significant consequences for mining companies.

“Miners will need to dramatically adjust their supply chains, financial transactions, and expectations for certain end markets,” said Fox. “These changes will spawn a host of new challenges, not least the need for businesses to understand and manage the unique social dynamics, governance challenges, and stakeholder considerations at play in unfamiliar jurisdictions,” he said.

Meanwhile, China is closely watching the West’s response to the war in Ukraine. Fox believes it informs Xi Jinping’s calculus over Taiwan and the South China Sea.

“Beijing’s foreign policy apparatus has observed the staying power of the West’s diplomatic and financial commitments to Ukraine and their success in rallying many parts of the non-Western world,” he said.

“For now, Russia and China are drawn closer together by their shared strategic aim to shift the balance of power away from the US-led international order. Yet their ambitions aren’t fully aligned or identical. Beijing seeks a China-centric international order, while Russia had hoped to capitalize on what it perceived to be a lack of Western resolve,” said Fox.

“Geopolitics and ESG considerations related to the war are no ‘parlour game’ for side conversations at annual board retreats. These issues affect our lives and businesses. They must be seen as what they are: the top priority for business leaders to understand and account for as they build their approach to the current and subsequent strategic and risk management horizons.”