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Keeping your head above the ground:

Geopolitical risk in the mining industry

Keeping your head above the ground: geopolitical risk in the mining industry

Introduction: boards take notice!
More than ever, geopolitical risk is being recognised by company boards and executives as a primary concern. Data vindicates this: research from the Cambridge Centre for Risk Studies shows a 40% increase in risk to cities’ GDP from geopolitics and security over the past four years, totalling almost US$140 billion in 2019, the biggest growth of any risk factor.¹ For the mining industry in particular, areas such as the Fennoscandian Arctic are “geopolitically sandwiched between NATO members in the west and Russia in the east”², and many other metal- and mineral-rich regions are situated in similar locations, sensitive to shifts in the global geopolitical arena. This year is likely to be one where nascent trends of geopolitical instability continue to foster uncertainty and hazards in the mining market landscape.Mining industry particularly affected
More than many other industries, mining companies have traditionally been particularly sensitive to geopolitical fluctuations. With assets and people spread across the globe, often in locations with tenuous political and security situations, mining companies have been required to grapple with associated risks to investments and operations.There is no shortage of examples of geopolitical risk that uniquely affects mining companies. A pertinent issue towards the end of the 20th century was that of “conflict diamonds”, which entwined political, social, economic, and military strife in Africa with mining companies’ global operations. The public attention this garnered, partly through representation in popular media such as the Leonardo di Caprio film Blood Diamond, gave the ethical considerations very real consequences in terms of market appetites. In the 21st century, equivalent consequences are perhaps more likely to come from public awareness of climate change and the demand to limit the environmental impact of current mining practices.Big issues, distant time horizons
It’s vital to recognise that the kinds of geopolitical risks outlined above did not arise out of the blue. Conflicts in Africa, for instance, often had roots in ethnic divides exacerbated by the tumult of colonial power withdrawal, which were processes that were decades in the making. Similarly, scientific recognition of human contributions to climate change first occurred back in the 1960s but is now gaining significant social and political momentum. The big geopolitical issues likely to face mining companies therefore come with distant time horizons; just as the causes of present risk can be traced to underlying historical drivers, so can present drivers point to future risk. In the wider natural resources sector, the Shell Scenarios team is perhaps the most well-known practitioner of forward thinking, putting together models exploring the state of the world out to the year 2100.Four key geopolitical drivers for 2019
To understand what the future may be like, it is imperative to understand the present. One of the most effective uses of scenarios is to take an envisioned future state and work backwards to establish signposts that are indicative of that future state. If one of these signposts can be seen today, it means the envisaged future is a possibility. Presented here are four geopolitical drivers of risk seen today which can serve as signposts, although the future they point to is for the reader to deduce according to their own scenario analysis.Driver one: geopolitical instability
The risks associated with interstate and intrastate conflict remain high. A list of 10 conflicts to watch in 2019, published by Foreign Policy³, contains some of the usual suspects, but also some entries which may not have been on everyone’s radar:

Yemen

Afghanistan

US-China tensions

Saudi Arabia, US, Israel and Iran

Syria

Nigeria

South Sudan

Cameroon

Ukraine

Venezuela

Although the list can be debated (for example, tensions in South China Sea is not just a US-China issue and Libya should make the list), it is noteworthy from two perspectives:

Firstly, the geographical spread of conflict is not confined to one area but covers multiple continents.

Secondly, from a mining industry perspective, many of these countries are prime locations for metals, minerals, and rare earths extraction.

This does not just introduce direct risks to assets and people in and around these areas but may impact the wider industry if competition for mines in safer geographies increases or end products are tainted with ethical concerns.

Driver two: climate change
The physical risks associated with climate change are well documented (rising sea levels, increased severe weather events) yet the geopolitical processes which underpin these risks are less understood. Driven by bodies like the United Nations Framework Convention on Climate Change (UNFCCC), international agreements on emissions limits are not based just on science, but also on political and economic imperatives.
For example, President Trump’s decision to withdraw the US from the Paris Agreement reflected less on a concern with the empirical data and more on the perceived impact on the domestic US economy and political situation. The mining sector is not merely a passenger in these processes; instead, it can leverage its position as a technology leader to advise decision-makers whose actions are liable to shape the industry in both the near and far future.Driver three: cyber
As the world enters the fourth industrial revolution, there is an exponential growth in connected devices. This is not limited to consumer devices such as phones and laptops; indeed, the majority of new devices are in industrial settings, used for remote measurement and control of operational systems. This Industrial Internet of Things (IIoT) creates greater efficiency and allows the implementation of automated, AI-driven processes. At the same time, more devices and more connections introduce new attack vectors on a larger attack surface. The inability of industry to control these and apply sufficient security standards generates impetus for governments to introduce regulations and legislation, such as the Network Information Systems Directive 2016 (NISD), which carries stiff penalties for infringements. Driver four: trade
The success of populist political movements, exemplified by President Trump in the US and Brexit in the UK, suggest that globalisation is losing momentum. In its place are more conservative trade relationships and protectionism, inviting a close scrutiny of the trade policies of some of the world’s largest economies. Among these uncertainties and shifts, business opportunities will realign as some markets open up to participation while others become more restrictive. For the mining industry in particular, the on-again off-again trade war between US and China is likely to be impactful, especially given China’s willingness to use rare earths as a bargaining chip⁴.What risks do these drivers manifest?
These drivers have directly-linked risks; consider, for example, the risk to business operations through improperly secured cyber systems. Importantly however, the linkages between the drivers create second and third order effects which introduce additional risks to companies and organisations.Regulatory landscape
The mining industry is susceptible to new regulation, largely driven by climate change imperatives. The general public has woken up to the threat of climate change and is demanding action from policymakers. Already, several countries have committed to restricting sales of new road vehicles powered by internal combustion – for example full bans in Norway by 2025, the UK by 2040 and China at an unspecified near-future date – and as electric vehicle technology improves, it is likely this will extend to machinery crucial to mining operations. Volvo, for example, has revealed a range of all-electric excavator and wheel loader machines, perhaps prescient of the future character of operations in the mining industry.⁵ The mining industry is not ignorant of these trends, but governmental action, which has until recently been half-hearted, is increasingly likely to be committed to change that will fundamentally impact the industry.

Supply chains
A diversified international supply chain presents significant risk. With regards to the IIoT, which is becoming as entrenched in the mining industry as it is almost every other industry, the cyber security shortcomings of many devices have left companies operationally exposed. Even if a company has comprehensive oversight of their own systems, there are few frameworks to determine if suppliers and subcontractors maintain equivalent standards. Unless identified and mitigated, a vulnerability in a suppliers’ device introduces the vulnerability to a company’s own systems. Moreover, geopolitical tensions can affect supply chain capacity. Recently, several western countries invoked national security as grounds to ban Chinese networking equipment manufacturer Huawei from supplying products to critical national infrastructure. Such bans, fuelled by geopolitical considerations, are liable to affect the mining industry supply chain.Workforce availability
The mining industry requires access to a highly skilled workforce. The core of mining industry workers comes from engineers and scientists who are in increasingly high demand. This is partly a problem of supply, with insufficient people being educated in the subjects and trained in the skills to meet the needs of the industry, especially as these needs shift away from digging holes. However, workforce availability is also affected by geopolitical exigencies: security turmoil creates unsafe areas, the political will to embrace migration is decreasing, and we will soon begin to see the first ‘climate refugees’ displaced by environmental changes caused by climate change. These factors may impact industry’s ability to hire local talent, transfer personnel to international locations, or ship workers to operational field sites.

How should mining companies manage geopolitical risk?
Taking a holistic approach
The key to managing geopolitical risk is to take a holistic approach and understand the linkages between risk drivers. Drivers and risks are in a ‘many-to-many’ relationship, where one driver can cause multiple risks, and one risk is caused by multiple drivers. Sometimes these causalities are not direct, but manifest as second - or third - order effects, and some risks only manifest through a particular combination of drivers. Making sense of such a complex picture is not easy, as the US military’s infamous spaghetti diagram of the Afghanistan insurgency illustrated in Figure 1.

Distinct lenses
A more useful method to think about these issues is through distinct lenses. Lenses can help isolate risks to view them more clearly, to then be recombined into a holistic picture. For the mining industry, six particularly useful lenses might be: investment and return, people, business resilience, climate and environment, reputation, and cyber (see Figure 2 above). These capture the core geopolitical drivers, some of which have been elucidated above, and can be expanded into a mesh of interconnected risks.Useful analytical tools
In order to evaluate the potential impact of these risks, it is also possible to utilise analytical tools such as VAPOR, jointly developed by Oxford Analytica and Willis Towers Watson, which turn qualitative findings into quantitative assessments. By assigning monetary value to risk percentages (likelihood multiplied by consequence), these tools turn the risk from intangible problems to tangible opportunities that can be understood in business terms, without deep geopolitical expertise.No one credibly claims to be able to predict the future, but by employing lenses to observe geopolitical signposts, it is possible to illuminate potential futures and manage the risks contained therein.

Andreas Haggman is an emerging risk analyst heading up our newly-established Emerging Risks research hub at the Willis Research Network.

1 https://www.jbs.cam.ac.uk/fileadmin/user_upload/research/centres/risk/downloads/crs-global-risk-index-exec-summary-2019.pdf

² Annika E. Nilsson et al, ‘Regional futures nested in global structures’, in E. Carina and H. Keskitalo, The Politics of Arctic Resources: Change and Continuity in the “Old North” of Northern Europe (Routledge)

³ https://foreignpolicy.com/2018/12/28/10-conflicts-to-watch-in-2019-yemen-syria-afghanistan-south-sudan-venezuela-ukraine-nigeria-cameroon-iran-israel-saudi-arabia-united-states-china-kurds-ypg/

⁴ https://www.economist.com/china/2019/06/15/rare-earths-give-china-leverage-in-the-trade-war-at-a-cost

⁵ https://www.khl.com/international-construction/volvos-electric-excavator-and-wheeled-loader/137925.article