Three megatrends impacting the natural resource sector in 2021

The world is entering 2021 in a state of flux. Governments are confronting increasingly urgent questions about how to address the pandemic’s economic scars – and how to pay for it. While many countries are keen to reopen their economies and get back to business as usual, distributing and administering vaccines to the global population will be a huge undertaking. Developing countries in particular are likely to struggle to get access. Latin America and the Middle East, both of which were under political and economic pressure before the pandemic, are facing higher levels of instability. Political extremism remains a growing threat in much of the developed world, including in Europe and especially in the US. Notwithstanding new leadership in Washington looking to restore the US’s relationships with its allies, the global order is under strain. Competition between China and the US will continue, and everything from vaccine distribution to economic aid to telecommunications is likely to become an arena of competition for geopolitical influence.

These economic, social and geopolitical variables are likely to play out in ways that are complex and difficult to predict. Among the various trends that might emerge in 2021, Critical Resource has picked out three potential megatrends that will shape the operating context for the natural resource sector.

By Caitlin Purdy (Senior Associate), Elizabeth Humphrey (Analyst) and Matthew Clarke (Analyst)

1. Low oil prices are likely to exacerbate political instability

A weak recovery in oil prices threatens to increase pressures on already strained governments, especially in the world’s oil-dependent economies. This is likely to create further instability and may rebalance geopolitical influence in some regions.

Emerging economy debt has doubled since 2010

Global lockdowns triggered the sharpest collapse in demand for fossil fuels in 25 years and drastically weakened the finances of oil-dependent economies. The International Monetary Fund’s World Economic Outlook projects 2021 prices averaging between $46 and $47 a barrel – up from the already low $41 per barrel in 2020. Despite a build-up in coronavirus vaccine distribution, global energy demand is expected to rise only slowly as business travel and tourism remain buffeted by health concerns. Global economic activity is slated to only return to pre-pandemic levels in 2022.

A low price environment will have a destabilising effect on many of the world’s oil-dependent economies in 2021. Debt levels in low-income countries across Africa and Latin America are already untenably high. The total debt of emerging economies was $72 trillion at the end of 2019, more than doubling in value since 2010. The situation is especially dire in oil-dependent economies following almost a year of low prices, which, coupled with the economic fallout of the pandemic, has left them struggling to make payments. In Iraq, where oil accounts for over 90% of GDP, Baghdad was forced to devalue its currency and neighbouring Iran cut its supply of electricity and natural gas due to non-payment.

Natural resource companies should expect more challenging and politically complex operating environments this year, especially in oil-dependent economies. Firstly, greater domestic political instability is likely, particularly in a sub-US$50 per barrel oil price scenario, as governments navigate economic stagnation, reform delays and socio-political unrest broadly remain elevated. Inability to recover the economic shortfall in lost oil revenues will inevitably result in sacrifices elsewhere for many governments, with cuts to state spending and currency depreciation likely. As a result, political institutions will struggle to meet the demands of citizens facing ever greater economic insecurity.

Secondly, world powers are likely to leverage bailouts as geopolitical bargaining chips with debt-mired countries seeking relief. This may have potentially significant ramifications for the geopolitical context in which companies develop and operate assets. For example, Baghdad recently agreed to a US$2 billion five–year prepayment oil supply deal with China’s Zhenhua Oil, which reportedly beat out two European companies in a bid round. This is likely to create an even more complex geopolitical context for other international oil companies operating in the country. Meanwhile, the US International Development Finance Corporation (DFC) struck a debt-relief deal with Ecuador, in which it will help the country repay billions of dollars of loans to Beijing provided it agrees to exclude China from its telecommunications networks. The Biden administration is reportedly intrigued by the novel structure of the deal, viewing it as a potentially innovative way to wean countries off what it views as predatory Chinese debt. It may pursue similar deals in other countries with string attached to limited Chinese influence.

2. Vaccine access widens inequities between the global north and south

Countries in the global south are struggling to get the vaccines needed to reopen their economies and the aid needed to manage the pandemic’s impact. In 2021, Covid-19 is likely to further propel an ongoing debate about how to address the inequities between the global north – along with issues like climate change, tax havens and the legacy of colonial exploitation. As before, natural resource companies– which predominantly operate in the global south while repatriating profits back to shareholders in the global north – could continue to find themselves partly in the crosshairs of these debates.  

The Covid-19 pandemic has worsened inequality between countries. According to the World Economic Forum (WEF), more than 100 million additional people fell into extreme poverty in 2020, mostly in the developing world, while acute hunger doubled. The pandemic has threatened the livelihoods of an estimated 80% of the 2 billion workers globally who labour in the informally economy, the majority in developing economies.

Countries across the global south are struggling to secure the vaccines needed to prevent the spread of Covid-19 and reopen their economies. Researchers at Johns Hopkins analysed vaccine pre-orders, finding that half of the 7.48 billion doses from 13 manufacturers reserved by mid-November 2020 went to high-income countries comprising one seventh of the global population. The World Health Organisation (WHO) has expressed concern that some low-income countries may not receive the vaccine until 2024. A consortium of developing countries led by India and South Africa proposed manufacturing their own, affordable version of the vaccine, suggesting that the World Trade Organization (WTO) waive protections on intellectual property that would normally prevent this. However, the effort was blocked by the US, UK and EU.

Compounding this, counties in the global south are also not receiving the economic aid they need to deal with the fallout of the pandemic. In March 2020, the International Monetary Fund (IMF) estimated that developing countries would require $2.5 trillion to recover from the Covid-19 pandemic. The WEF estimated they had received $100 billion – less than 1% of this – as of October 2020. This is partly because as the economies of major donor countries in Europe and North America have contracted, aid budgets have been slashed.

In 2021, the Covid-19 pandemic is likely to be the newest front in a longstanding debate about the drivers of inequality between the global north and south, and how to address them. For example, international institutions and global civil society have long grappled with how to deal with the inequities in the drivers and consequences of climate change. The global north is responsible for over 90% of excess global carbon emissions but developing countries stand to bear the brunt of the effects in terms of rising sea levels, catastrophic weather events, and increasing desertification. The debate around tax havens has been viewed through a similar lends, which contributes to revenue losses for developing countries of an estimated $50 billion annually. Multinational resource companies may find some themselves tangled up in some of these debates and tensions.

3. Demand for green materials is rising in an age of ‘Green New Deals’ – with potentially major geopolitical implications

Powers in Brussels, Beijing, and Washington are jockeying for global leadership on the climate agenda and green energy investment. To achieve this, they need to secure access to significant quantities of a range of minerals, including rare earth metals, lithium, nickel, cobalt, copper and manganese.  In 2021, we expect to see these minerals receive increased attention and interest as debates around the energy transition accelerate, with the potential for geopolitical tensions as powers make moves to secure their supply chains.

Leaders across the globe are vying for a leadership role in the climate transition. Ahead of the November 2021 COP26, the European Union has agreed to a binding target for net domestic reduction of at least 55% in greenhouse gases by 2030 compared to 1990 levels. The EU is also finalizing the European Climate Law, which aims to ensure adherence to Europe’s target to achieve net zero by 2050. Meanwhile, newly inaugurated US President Joe Biden re-joined the Paris Climate Accord on his first day in office. Although Biden will face ongoing domestic political resistance to his climate agenda, he has repeatedly emphasized the need for the US to re-establish itself as a leader on climate vis-à-vis China. Beijing is currently outspending the US on climate investment on a scale of three to one and has committed to reaching peak carbon emissions before 2030 and to becoming carbon neutral by 2060.

Green investment hinges on access to key ‘green’ minerals crucial for the development of wind and solar energy, and electric vehicles. For example, Biden pledged to accelerate the deployment of electric vehicles on the campaign trail. A single electric vehicle has about 10 kilograms of lithium in it; building 90 electric vehicles requires about one tonne of lithium. One electric vehicle requires roughly four times more copper than an internal combustion engine. Securing access to rare earth metals such as cerium and lanthanum will be especially key, especially for clean energy applications. President Biden has called for 100% clean electricity by 2035, but it is unclear where the rare earths to support this would come from.

China’s dominance of a number of strategic mineral supply chains poses a problem for Western powers eager to advance green agendas. The International Energy Agency (IEA) estimates that China accounts for up to 70% of global lithium and cobalt refining. China also controls over 80% of the global rare earths supply and is the only country with significant rare earths processing capacity.

Concerted industry and diplomatic collaboration will be needed if Washington hopes to gain mineral independence from China. The West has taken initial steps to secure independent green mineral supply chains. The pandemic aid and spending package signed by US President Donald Trump in December 2020 included over $800 million in funding for rare earths and strategic minerals research to reduce China’s dominance. (In the arena of less practical proposals, Trump’s 2019 suggestion that the US purchase Greenland was at least partly prompted by its significant rare earth elements reserves, though the former president was more interested in these for defence applications as opposed to green technology).

However, doing so has proved costly and challenging. For example, although the US, Europe and Australia possess significant rare earths reserves, it’s been difficult for these countries to compete with China, which is willing to deflate its prices in order to maintain its near-monopoly on the market. Competition for minerals is likely to accelerate significantly this year, as global powers increasingly seek to ensure supply to fuel ambitious green agendas.