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COLUMN-The green revolution; a double-edged sword for metal markets: Andy Home
April 5, 2017 / 1:04 PM / in 8 months

COLUMN-The green revolution; a double-edged sword for metal markets: Andy Home

(The opinions expressed here are those of the author, a columnist for Reuters.)

By Andy Home

LONDON, April 5 (Reuters) - On March 29, El Salvador made a little bit of history.

The tiny Central American country passed a law banning all exploration, mining and processing of metals. Without exception. It is the first nation to do so.

The decision, which enjoys broad popular support, is all the more remarkable given the parlous state of the country’s economy.

But in a public debate that pitted water supplies against economics, water won.

The decision will not affect any metals supply chain. There are no major mines in the country, although one was planned.

El Salvador has specific issues with water. Its Ministry of the Environment and Natural Resources estimates that 90 percent of surface water is contaminated.

However, it is symptomatic of the environmental pressures that are building across the developing world and increasingly impacting industrial metals.

This is the flip side of the green revolution, which holds so much demand promise for industrial stalwarts such as copper and which has propelled new materials such as lithium and cobalt into the public spotlight.

WATER VS MINING

The vote in El Salvador follows a protracted battle with a Canadian junior, Pacific Rim Mining, over its proposed El Dorado gold and silver mine. The project was bitterly resisted by locals and environmental activists because of its impact on water supplies.

Pacific Rim had sued the government for failing to issue a mining licence after the company had submitted its environmental impact study.

The case ended up with the World Bank’s International Centre for Settlement of Investment Disputes, which found in favour of the government last October.

That paved the way for the new anti-mining law, which was passed with cross-party support and codifies a previous de facto moratorium on mining permits.

El Salvador may be an extreme case but it is not unique in looking again at the trade-off between the economic benefit and environmental impact of mining.

Pacific Rim was bought in 2013 by OceanaGold, which operates mines in New Zealand, the United States and the Philippines.

The company’s Didipio gold and copper mine in the Philippines was served on Feb. 14 with a suspension order by the country’s Department of Energy and Natural Resources due to allegations including “the potential adverse impact to the agricultural areas of the province”.

OceanaGold, which is appealing against that order, had ironically just won for the second year running the country’s Presidential Mineral Industry Environmental Award.

But that has been swept aside by the government’s anti-mining campaign, which at the last count had led to the closure of 23 mines out of a national total of 41 and the suspension of 75 development licences.

Eco-warrior turned government minister Regina Lopez appears to have taken a leaf out of El Salvador’s book, linking her environmental audit of the mining sector to water supplies.

And she has the support of Philippine President Rodrigo Duterte, who has upped the rhetoric in an already heated national debate by suggesting he might favour a total ban on mining similar to that in El Salvador.

The threat may turn out to be overstated but Lopez’ actions have already roiled the nickel market because of the impact on the flow of ore to China’s nickel pig iron sector.

Similar arguments have been playing out in Malaysia over that country’s bauxite mining, which also stands accused of environmental depredation.

Malaysia placed a moratorium on bauxite mining at the start of 2016. It has been extended several times, most recently until June this year.

The issue in the Philippines and Malaysia has been one of unregulated operators maximising profit over environmental impact.

But as OceanaGold will attest, the danger is that all operators pay the price for the bad behaviour of the few.

CLEAN AIR VS METALS

Such pressures on mining impact only the very start of the supply chain for many metals.

China’s alumina refineries have already adapted to the Malaysian bauxite ban by searching for raw material further afield in countries such as Guinea and the Solomon Islands.

But it is China that has opened a whole new chapter in the environmental metals story.

Here the issue is first and foremost air, not water, as Beijing seeks a solution to the smog that plagues many parts of the country, not least the capital.

The old environmental inspection regime has been dismantled and replaced with a new centrally controlled system with inspection teams fanning across the country with increasing regularity.

In China too, mining is being targeted by policymakers but such is the low level of visibility on large parts of the sector that the impact of the clampdown is hard to gauge.

Not so when it comes to the country’s giant metals-processing industries.

Steel capacity is being aggressively closed and a new plan for alleviating smog over the winter months in Beijing and the surrounding area will force large swathes of industrial capacity off-line, including the entire aluminium supply chain from carbon anode plants to refineries to smelters.

Environmental clampdown has become a defining part of the price narrative in steel and aluminium as a result. The latter, it’s worth noting, is the best performer among the major industrial metals so far this year, as the market tries to work out the implications of the planned Chinese shutdowns.

DOUBLE-EDGED SWORD

All of which is ironic for a metal that is expected only to benefit from the green technology revolution due to its lightweighting potential in vehicle construction.

It’s not the only one.

Copper has a similar green story thanks to the increased call on the metal from everything from electric vehicles to wind stations.

And then there are the next-generation metals such as lithium and cobalt, which have seen extreme bull rallies on expectations for usage growth in the electric transport and grid storage sectors.

But even while the green revolution is generating a demand boost of varying intensity across the industrial metals spectrum, it is also pinching with increasing frequency the supply of those metals, particularly at the mining stage.

This is a story that has been playing out in miniature in small communities across the developing world.

El Salvador’s decision to reject any sort of mining elevates it to a national level.

It may yet turn out to be a historical outlier in the mining industry’s evolution but the battle for hearts and minds in the metals vs environment war is only going to become hotter.

Editing by Dale Hudson

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