The Ukraine crisis and South-East Asia's commodity markets

  • Asia Pacific
  • Political and Country Risk
  • ESG and Sustainable Business

The Ukraine crisis and South-East Asia's commodity markets

The crisis in Ukraine has inevitably led to disruptions in the global supply chain, imperilling the prospects of global post-COVID-19 economic recovery. We look at the likely impact on South-East Asia’s commodity markets.

  • South-East Asia will be poised to make the most of the growing demand from global companies to secure new raw material markets, and augment global commodity supply chains.
  • However, growing raw materials demand will intensify social risks and increase volatility in commodity prices in the region.
  • More broadly in Asia, supply disruptions for energy-intensive raw materials are likely to persist in 2022-23. However, these disruptions will be particularly acute in markets such as China and Indonesia.
  • Aluminium, copper, and nickel will be vulnerable to regulatory change and politically motivated export curbs.

The rising global commodities hub

Russia and Ukraine, before the conflict, led the global production of metals, such as nickel, copper, and iron. They were also involved in the export and manufacture of other essential raw materials such as neon, palladium, and platinum, all critical in semiconductor production. Their dominance in the commodity export markets have upended global manufacturing and infrastructure operations. The ongoing crisis underlines the geopolitical implications of such armed conflicts on the global economy.

South-East Asia is poised to make the most of the growing demand of global companies to secure new raw material markets, and augment global supply chains. According to estimates from the International Energy Agency in May 2021, Indonesia will account for more than half of global nickel production growth between 2021 and 2025, making it a crucial player in the global transition to cleaner energy; nickel is used in rechargeable batteries for electric vehicles (EVs). The country also has 7.5% of the world’s known reserves of copper, more than 13% of known reserves of tin, and 4% of the world’s known gold reserves. Among the other South-East Asian countries, Malaysia is a leading tin exporter, Myanmar is a major copper producer, and the Philippines is a substantial copper, nickel, and gold exporter.

Regional governments in the coming months will be keen to tap this investment opportunity, redirect investments in infrastructure and roll out policy and tax incentives in a bid to improve their attraction in global supply chains. Governments in Indonesia, the Philippines and Bangladesh have already increased efforts to improve existing ports to court investors.

The downside

However, the rapid escalation of the Russia-Ukraine conflict has sent metal prices soaring. It could trigger intense resource competition in South-East Asia, thereby exacerbating integrity risks and localised environmental, social, and governance (ESG) issues associated with the extraction and production of such materials.

The lack of stringent environmental standards and regulations have made extractive projects in South-East Asia increasingly vulnerable to protracted local opposition. Separately, the labour rights situation in the region’s key mining and manufacturing hubs has precipitously deteriorated amid the pandemic, wiping out decades of socio-economic gains. Countries that have posted better-than-expected economic recovery in the past year – such as Indonesia (set to play a dominant role in the upstream and midstream sectors of the EV battery supply chain) and Malaysia (a key player in downstream battery pack assembly activities) – have shown limited signs of improvement in addressing domestic labour and human rights issues in their industrial sectors. In particular, child labour appears to be worsening across the region in most of the important commodity hubs.

Policy measures to address ESG risks more broadly are unlikely to be a priority for South-East Asian governments, with major countries such as Indonesia, Thailand, Malaysia, and the Philippines holding elections in the next two years. Leaders will instead prioritise political survival. Making it more likely they will reach for familiar tools, including easing legal protections and corporate governance standards for domestic crony capitalists and financial backers of their electoral campaigns. Meanwhile, growing ESG-driven pressures from global investors and international stakeholders will increase scrutiny on the ethical mining and production of nickel, aluminium, and copper in the South-East Asian region. Changes in administration could also see regulatory upheavals.

The unequal pace of international ESG regulations, focussed on greater transparency for commodity production and the region’s ability to respond to these demands, will increase compliance costs for international industry operators. It will also heighten their exposure to legal challenges and regulatory penalties addressing child labour, human rights violations, and supply chain issues. This also means that the trend for heavier regulation on commodity derivatives transactions (in the form of enhanced disclosures and certifications) is expected to continue in the coming years.

Combined with the region’s highly fragmented supply chain, these issues will exacerbate supply disruptions for critical raw materials, putting upward pressure on commodity prices. Additionally, the ongoing curbs on energy consumption in China’s carbon-intensive sectors such as aluminium and copper production and the resurgent resource nationalism in Indonesia in the form of politically motivated export controls on raw materials (especially nickel) will further disrupt minerals and metals production in the next three to five years.

Foreign companies should review their raw materials supply chain in South-East Asia for locations with elevated exposure to social risk-driven policy disruptions, which could result in supply shortages or volatility in commodity markets.

Energy disruptions

Separately, the region’s extractive operations will face disruptions due to tighter energy supplies, and high prices triggered by the Ukraine conflict. Most countries in Asia will continue to rely on coal to tide over periodic power disruptions. Although these measures could help prevent widespread power outages and loss of industrial productivity, they will slow down the pace of transition-related reforms in the power sector and exacerbate structural vulnerabilities in the countries’ energy mix. Separately, coal supply will remain vulnerable to extreme weather events in India and parts of North-East Asia.

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