Energy Crisis: Disaster Or Opportunity?

By Benjamin van der Veen

Amid worldwide efforts to go green, high demand for basic and precious metals, supply chains that a pandemic has disrupted, and the Russian invasion of Ukraine, the mining industry faces significant challenges.

As the disruption in energy supplies continues to make waves throughout the world’s economies, another equally insidious disorder is unfolding: shortages of crucial basic and precious metals. 

Fluctuations in the oil and natural gas markets, followed by those in agricultural commodities, have dominated the headlines since international sanctions were imposed on Russia earlier this year. But the preoccupation with these shocks has obscured how sanctions affect the metal markets – particularly base and precious metals. 

Whether they involve spare parts or new technologies, sanctions could have longer-term consequences for everything from the sustainability of mining operations to the functioning of the manufacturing base. Apart from recovering from COVID-related interruptions, these supply chain disruptions are compounding the price pressures associated with the global shift to a renewable economy.

The long reach of sanctions 

In early 2022, just as the world economy rebounded from COVID-19 and production operations resumed, commodity prices spiked, although they soon began to stabilise. Then Russia invaded Ukraine, and as the conflict erupted, sanctions were triggered on an unprecedented scale and speed on one of the world’s biggest exporters of raw materials.

By November last year, Russia had been hit with more than 12 000 sanctions – four times the number imposed on the next-most penalised country, Iran. The sanctions have affected leading logistics companies, such as Maersk, MSC, and CMA CGM, which transport solid commodities throughout the globe, from raw materials to semi-finished products (such as rolled steel and copper rods) to finished products (such as wire). 

Bans pinch the supply of spare parts for aircraft and heavy machinery, including hauling and loading equipment, tractors, assembly line machinery, and drilling equipment. 

Igor Hulak, a partner at Kearney, says: “The sanctions against Russia – one of the world’s largest exporters of raw materials – is causing knock-on effects that are rippling throughout many spheres of business, from the sustainability of Africa’s mining operations to the stable functioning of the manufacturing base.”

Opportunity for African producers

Due to foreign shipping operations being suspended, a chaotic domino effect has been triggered, causing a drastic worldwide shipping container shortage. This collection of dramatic sanctions and shutdowns looks set to continue to affect Africa’s consumers, leading to increased prices for food and fuel.

Further adding to this tumultuous time for the industry, over the past 12 months, the five base metals Russia produces on a vast scale – nickel, aluminium, copper, iron and zinc – have all seen dramatic price increases.  

Nickel, a critical ingredient in lithium-ion batteries and essential for global energy transitions such as those in Africa, is in short supply. Russian companies such as Norilsk Nickel, the world’s largest nickel producer, have historically supplied global markets. However, the sanctions have made Russia, which accounts for roughly 10% of the global share of nickel, unable to meet this global demand. 

This deficit in global supply presents an opportunity for African nickel producers, such as Zimbabwe and Botswana, to step in and fill the gap. However, overcoming inadequate export infrastructure will be a significant challenge, requiring government buy-in and a collaborative multi-sector approach. 

According to Hulak, market and pricing drivers indicate long-term price increases for the platinum group metals. This presents a golden opportunity for South Africa, still the world’s largest producer of these metals, to step in and fill the supply gaps. Moreover, this is a unique opportunity for the country to leverage its already strong position, and expand its operations in the sector to meet the escalating global demand. 

“Traditionally a reliable safe-haven investment, gold (of which Russia is a major producer) is likely to see moderate price increases. This could work in favour of Africa’s gold production powerhouses like Ghana and South Africa,” he says.

An alternative in green hydrogen

While the shortage of critical base minerals might derail the energy transition within South Africa and other developing countries, South Africa may turn to its green “hydrogen valley” as the solution to its current energy problem.

The so-called hydrogen valley is a planned integrated hydrogen ecosystem, stretching from Mokopane – where platinum group metals are mined – to Johannesburg, and finally ending in Durban. It was first proposed in 2020, with various feasibility studies conducted in 2021.

The valley will ultimately stretch approximately 835km, and present massive employment and investment opportunities, all while working with the greater strategy of moving away from a dependence on coal.

Hydrogen is categorised into three broad types: grey, blue and green. Where most investor attention is focused on green hydrogen, this production method uses electricity generated through renewable energy (wind, solar or hydro). It splits pure water through an electrolysis process into hydrogen and oxygen molecules.

As the cost of renewable energy and electrolysis technology has plummeted in recent years, green hydrogen is increasingly reaching parity with its more carbon-intensive counterparts. Green hydrogen has already become the preferred investment choice in countries with high renewable energy potential, such as Saudi Arabia, Australia and Chile.

As South Africa has world-leading solar and wind resources, these early mover green hydrogen-producing countries have important implications for the future of the South African economy. Suppose South Africa can properly leverage these resources and combine them with a fertile investor and regulatory environment? In that case, the country could transition to an exporter of green energy to the world, while decarbonising large economic sectors. 

According to PwC energy lead James Mackay: “Hydrogen is receiving an unprecedented level of international traction as the cost of renewables declines and carbon emissions are increasingly penalised.” 

Global momentum is growing across the hydrogen industry, he notes, with few sectors likely to remain untouched by this upcoming energy revolution. At the beginning of 2020, the global hydrogen project pipeline across grey, blue and green projects stood at $95-billion. The carbon reduction of the blue and green hydrogen projects in this pipeline will be significant enough to offset the annual carbon emissions of Nigeria. 

“As part of South Africa’s economic recovery plan, the country needs to develop new competitive industries in the global markets. Hydrogen can fulfil that role and in a complementary manner to other initiatives and sectors,” Mackay says.