All of what we covered in Part One — the threat resource nationalism poses to metal prices, supply chain and commodity risk management — begs the question: will metal export bans achieve the desired outcome on behalf of these governments seeking to implement them? Will these countries successfully attract outside investment in processing smelters? Can they build the energy grids and infrastructure required to carry out these activities?
Those questions will likely take some time to address.
In the short term, however, we’d argue these tactics create leverage for the exporting countries to compel mining firms to pay more for their right to mine and export key raw materials. But in the longer term, the strategies incent the “wrong behavior.”
Take, for example, China’s export restrictions on rare earth metals. Though many suggest China implemented these restrictions to address growing environmental issues (I don’t believe that for one second), the export restrictions really have more to do with policy-making – moving the industry toward more refining and processing to grow the value-added green energy industry, both within China and (perhaps even more importantly) as higher value-added export industry.
But bans, export restrictions and threats of bans all create unintended consequences not necessarily analyzed and thought through by those that implement them.
Buying organizations that rely on these materials tend to resort to one of a few strategies. They tend to stockpile (driving up the price of copper, rare earth prices, etc.), or they look for alternative suppliers, more reliable investments and other partnering relationships.
Molycorp has come back to life in the US as a result of these types of dependencies. Furthermore, as a mining organization, why would one invest big in a country that sustains a high risk of electing a populist that threatens nationalization?
Export bans may work in the short term, but longer-term, methinks they look like a poor policy alternative.