It has been a tumultuous year for the Latin American mining sector. As a result of China, Europe and the US imposing quarantine measures to control the spread of the Coronavirus, demand for base metals and prices fell. Problems for the sector have been exacerbated due to disruptions in operations. With Latin America being one of the worst hit regions by the pandemic, governments and mining operations have been quick in shutting down projects and regions where outbreaks have been registered. While prices have rebounded as governments around the world have passed economic stimulus packages to bolster the impacts of the pandemic, prospects for the sector are uncertain and closely coupled to how new outbreaks are controlled in producing and consuming countries.
At the other end of the mineral supply chain, the end-product manufacturing sector, the pandemic has also reaped havoc. Automobile demand, for example, has slumped and while car manufacturing plants have restarted production in much of Europe, the supply chain continues disrupted. The cost competitive ‘just-in-time-production’ model with numerous suppliers dotted across the world has become a liability. Smaller suppliers have gone bankrupt and are exposed to shutdowns in the countries where they operate. It is likely to take months for the supply chain behind the roughly 30,000 individual components in the car to be fully functional again.
The political rhetoric to reduce trade dependencies of critical industries has increased, as countries have struggled to secure medical supplies and protective gear for their population. The trade war between the two largest world economies is casting further doubt that the world will return to the pre-coronavirus system that was characterized by liberalization and free trade. These political factors will accelerate a trend of vertical integration and ‘reshoring’ of supply chains that have been observed in recent years as automation of industrial processes erode the competitive advantage of cheap labor.
Within mineral supply chains, special focus in the EU, USA and Japan has been placed on minerals of strategic importance to the respective economies with high supply risks. Lithium, a mineral of particular abundance in Latin America, was recently added as a critical mineral to the EU list. Many of these minerals are key inputs to drive forward the energy transition that is needed to address the second crisis the world is facing – climate change. The current pandemic is a cautionary tale for climate change. Although health advocates warned for years that a pandemic was inevitable, the world did not do enough to prepare and is now scrambling to make up for lost time at the cost of human lives. Apart from ‘green’ components in economic stimulus packages announced by governments to address both crises, big finance is the new ally in the fight to combat climate change. Investors such as BlackRock are forcing corporations take action on emissions and engage across their supply chains to reduce carbon asset risks.
As Latin American countries such as Chile, Colombia, Ecuador and Peru are placing great hopes on the mining sector helping to drive the post-pandemic recovery, it is key to understand how value chains are going to evolve in order for the region to position itself to supply much needed responsibly sourced minerals.