In today’s Exponential Investor:
- The global infrastructure gap
- Decades of offshoring may come undone… or may not
- Invest in companies that do more than just dig up rocks
I’ll almost guarantee that you started this year not knowing what “nearshoring” or “reshoring” meant… but not long after Russian President Vladimir Putin sent his men west, both of these rapidly entered our vernacular.
Nearshoring or reshoring mean the same thing.
That is the repatriation of suppliers and supply chains – and particularly in heavy industries like mining and steel manufacturing.
In the past these sectors have been politically unpopular because they are seen as environmentally destructive and polluting sectors. That is why many governments have been more than happy to let other countries be dominant in these industries.
Effectively outsourcing this dirty work came with other benefits too.
Not only were there no giant holes in the landscape or plumes of smoke from distant chimneys, but materials became cheaper… which in turn meant that goods became cheaper.
Cheaper products meant that people consumed more by spending less. Mass consumption of less expensive goods (fuelled in part by expanding credit) meant that economies grew faster than they would have done otherwise.
Of course… that was then, and this is now.
With the Chinese Communist Party on the nose for most US politicians, and leaders in the UK and European shut out from Russia’s mineral wealth, politicians are scrambling to work out how to undo decades of offshoring in just five years.
In theory at least, it is time for reshoring and nearshoring.
The Haves and the Have Nots
A few years ago, it dawned on leaders of poor but minerally rich countries, the Haves, that they were perhaps being exploited for the gain of rich western countries. The poorer countries saw that perhaps there’s more money in processing minerals than just digging them up and putting them on a boat.
For example, nickel for in its raw form is a low value export. Nickel smelted and refined however, attracts a premium.
The Indonesian government realised this back in 2016 and banned the export of raw nickel within 12 months from the announcement. Less than two years later, only smelted and refined nickel was allowed to be exported.
Roughly the same tonnage is still exported: however, the value has increased from US$1 billion in 2015 (£822 million) to US$21 billion (£17.2 billion) last year.
Indonesia therefore has realised a huge opportunity. Conversely, it is the (often developed) countries that don’t have ready access to minerals – the Have Nots – that have a problem.
In particular, how do the Have Nots meet their Green Energy Transition targets if there are not enough processed minerals available to them?
The problems facing the Have Nots – many of whom were, until recently, happy to import minerals from the Haves – have many dimensions. Examples include: the sheer variety and volumes of resources that are needed; processing bottlenecks; and the challenges of actually reshoring or nearshoring in practice.
The infrastructure gap
The real challenge, though, is that there are currently not enough minerals and processing facilities for all the Have Nots. As a very recently published academic paper points out, someone is going to have to go without. Specifically:
The global ‘infrastructure gap’ may prevent the world from meeting the targets set forth by the United Nations Sustainable Development Goals by 2030.
An immediate challenge is how to acquire the unprecedented volumes of raw materials essential to close the infrastructure gap and decarbonize global energy systems in a sustainable manner
The international dimension and complexity of globally connected and interdependent raw materials and advanced materials supply chains and ecosystems are often underestimated. While there has been a policy focus on recycling, efficiency, and reductions in material intensity efforts that collectively contribute to the concept of the circular economy projected gains are not expected to meet most demand forecasts, further exacerbating the problem.
Who really controls the mineral processing?
As many in the United Kingdom and across Europe are cruelly about to discover this winter, their energy system was reliant on someone else filling the supply gap.
Elsewhere, the US government is confronting a similar, indeed bigger, problem that has a geopolitical aspect. Indonesia is not the only one of the Haves to realise that processing minerals is good business. Another country has long understood the profits and potential of processing. In some instances, that country controls up to 95% of the world’s processing capacity. That country is China, as the following chart shows.
Source: IEA; NS Energy
Ripping control away from China won’t be simple. More to the point, the sheer amount of minerals needed and processed to make the Green Energy Transition happen is huge. This means that some Have Not countries will have no choice but to forget about nearshoring and reshoring. Like it or not, many of the Have Nots will have to deal with Haves with whom they would rather not do business.
The conclusion from the aforementioned academic paper is simple. The Have Nots should combine in their pursuit of processed minerals that are essential to the Green Energy Transition: they should not each go their own ways.
What’s the bottom line?
A lot of governments are talking the talk about the Green Energy Transition. That includes the governments of pretty much every Have Not country. These governments do not understand what is involved with walking the walk to the Green Energy Transition, given the infrastructure gap.
The lesson for investors is quite simple. You should invest in miners that do more than just “dig up rock”. You should look for companies that are investing in smelting, refining and processing. Benefit from the infrastructure gap.
Until next time,
Co-editor, Exponential Investor