These days everything is politicised it appears to me so perhaps it’s no wonder that it seems as if commodity trading is increasingly about politics and not so much about supply and demand. When we give our briefings these days, geopolitics seem to form or be behind the larger drivers in the commodities world including everything from increased regulations of all forms and especially net zero, sustainability and other political initiatives, as well as sanctions, tariffs and duties, and so on. Geopolitical forces are reshaping the commodities industries for better or for worse depending upon your viewpoint.
In the couple of weeks since the new year began, this political influence appears to be growing. We have seen the German Government razing a village to expand a coal mine (the only other Government I am aware of razing villages was the Soviet era Czechoslovak Government along the Austrian border to protect its people from the decadent west), the British Government using the Russian situation to justify its investment in nuclear fuels, and the Malaysian Government threatening to retaliate against EU edicts on deforestation by banning the export of its palm oil. Now, maybe I’m just seeing something that was always a feature of commodity trading and I just didn’t notice it before, but I am inclined to think we have entered a new era in which political justification and narrative is a serious driving force in looking at commodities.
This also causes me a tad of concern. If you take a look at things like European projections of power needs over the next few years, you will note a steady increase for sure but there is no sign of the planning for power production capabilities that would appear to support everyone being forced to switch to EVs in that time scale especially when you add to that the removal of gas for electricity in domestic heating, cooking and more. On the other side of the coin, I see little sign of the kind of investment necessary in metal extraction that will be needed to supply elements like Lithium in the quantities needed for the batteries we are going to need for EVs and so on. I could cite many other examples.
Could it be that the politicisation of everything means that goals are set and strived for according to deadlines set by politicians that are simply unreal? By politicising everything are we headed for a major disaster in planning and execution somewhere in all of this? One major shift in political thinking seems to me to have been from security of supply to net zero at any cost? Is that wise?
We will see how it all turns out. Probably just fine as there will be a recognition that things cannot be achieved by political will alone and plans will be tweaked to avoid a catastrophe. Signs of that are emerging already as various European Governments have had to backtrack on coal, nuclear and more going into this winter.
Whatever your politics and whatever you think about which way things should be going, it seems that politics are set to play a much larger role in commodities and indeed already are. In turn this drives the needs for software and solutions and these need to be agile enough to adapt not just to traditional supply/demand type economics but political whims as well. It also requires risk professionals to think about political risks and try to anticipate politically driven requirements and exposures. For example, if Malaysia and Indonesia ban exports of Palm Oil to the EU, what will those that rely on this commodity do to find alternate sources and protect against price risk?
For an analyst like myself, it sure helps make things more interesting than they already were.