It’s possible that I shall make an ass of myself. But in that case one can always get out of it with a little dialectic. I have, of course, so worded my proposition as to be right either way (K.Marx, Letter to F.Engels on the Indian Mutiny)
Tuesday, March 07, 2023
British Columbia exploration spending hits 10-year high in 2022
Staff Writer | March 7, 2023 | Northwest British Columbia. Stock image.
Exploration for copper was the driving force behind a record-setting year for provincial spending in British Columbia, according to a new report from EY.
Fueled by favourable market conditions and demand, copper exploration spending jumped 84% year over year in 2022, rising from C$128 million in 2021 to C$235 million, EY’s Insights from the BC Mineral and Coal Exploration Survey revealed. 2022 Similarly, critical metals exploration in BC jumped 77% year-over-year, while precious metals spend saw a 91% increase from 2020.
Gold spending retained the record-high levels seen in 2021, decreasing by a marginal 2% year over year from C$431 million in 2021 to C$422 million in 2022. Despite this downturn, survey responses indicate interest in gold has not dwindled. Approximately 46% of survey respondents indicated gold as the primary commodity of exploration.
The survey found that exploration in BC is shifting towards discovery after years of focus on advancing economics of existing projects. Grassroots and early-stage exploration accounted for 39% of total exploration spending in 2022, receiving 78% more funding year over year, while later stage-projects – those in the advanced, mine evaluation and mine lease stages – received 10% less funding.
Of the C$740 million invested into the exploration and evaluation of mineral deposits, C$42 million was spent on First Nations community consultation and exploration agreements. Additionally, survey respondents indicated a 32% increase in employment within the sector.
Rio Tinto keeps working to build Indigenous support for Resolution mine
CAREFUL THEY BLEW UP AN ABORIGINAL SITE IN AUSTRALIA
Reuters | March 7, 2023 | Credit: Resolution Copper
Rio Tinto Plc said it remains committed to building more support from an Indigenous group that opposes its Resolution mine project in Arizona, which could supply a quarter of America’s copper needs depending on the outcome of a court case.
Resolution is key to the Anglo-Australian mining giant’s future as the project would produce more than 40 billion pounds of copper for the green energy transition. But that copper sits below the federally owned Oak Flat Campground, a place some Apache consider home to deities
The mine would create a crater 2 miles (3 km) wide and 1,000 feet (304 m) deep that would destroy that worship site, which the San Carlos Apache tribe strongly opposes.
The tribe has refused to meet with Rio, saying it prefers to negotiate directly with the US government, which in 2014 approved a complex process to give Rio the land containing the copper in exchange for acreage that Rio owns nearby. President Joe Biden put that land swap on hold in 2021.
Some other Apache tribes in the area support Rio’s project, but the San Carlos Apache have vowed to block it. Rio said it will continue to try to win the San Carlos Apache’s approval.
“We have to have broad-based support, for sure,” Bold Baatar, Rio’s chief executive of copper, told Reuters on the sidelines of the CERAWeek energy conference in Houston this week. “If there are going to be opposing voices, we’re going to continue trying to engage.”
Several courts have ruled against the San Carlos Apache and their allies, which have appealed to the full 9th US Circuit Court of Appeals. That court plans to hold a hearing to consider the case on March 21.
Rio does not plan to attend the court hearing in Pasadena, California. US government attorneys have defended the land swap in court.
The company said it may be able to prevent the large crater, but will not know if that is possible until it controls the land. “When you get through mine planning and start touching rock, we will looking for areas of improvement to try to mitigate the impact as much as possible,” Baatar said.
US Representative Raul Grijalva, an Arizona Democrat, introduced legislation on Monday to reverse the 2014 legislation approving the land swap.
“Turning Oak Flat into a political bargaining chip was an assault against tribal sovereignty that never should have happened,” said Grijalva, the ranking member of the US House Natural Resources Committee.
The project would involve digging into a new rock deposit using a mine shaft that closed in the 1990s and related electrical infrastructure. Rio has begun positioning the project as the expansion of an old mine, which tend to be more palatable for regulators and local communities.
“Resolution is not a greenfield mine,” said Baatar. “It’s a revival of old, proud US copper history and an old mine that was there. It’s just deeper.”
(By Ernest Scheyder; Editing by David Gregorio)
Canada’s crackdown on Chinese funding is hurting miners, Friedland says
Bloomberg News | March 5, 2023 | Robert Friedland speaks to attendees at the PDAC convention in Toronto. Credit: PDAC.
Canada’s crackdown on Chinese investment in critical minerals will make it harder for miners to produce the metals needed for the global energy transition, according to Ivanhoe Mines Ltd. founder Robert Friedland.
“We’re going to be deprived of all this Chinese capital in all these junior mining companies,” the billionaire mining magnate told a packed auditorium in Toronto on Sunday. “It’s really getting harder out there to be a miner.”
The Canadian government tightened its foreign investment laws in November to clamp down on foreign state-owned enterprises pursuing takeovers or investing in the mining industry. That same month, the government ordered three Chinese firms to divest from a trio of junior lithium explorers.
The new rules create a financial quandary for Canadian miners who’ve relied on China as a reliable source of funding. China has built up stakes in more than two dozen Canadian mining companies, including some of the industry’s biggest names, according to a Bloomberg analysis.
Citic Metal Africa and Zijin Mining Group, two firms closely linked to the Chinese government, hold a combined 39.5% stake in Friedland’s Ivanhoe Mines. Jiangxi Copper Co. owns 18.3% of Vancouver-based copper producer First Quantum Minerals Ltd.
Friedland, speaking at an industry conference hosted by the Prospectors & Developers Association of Canada, said the rules make it “even harder” to produce metals like lithium, copper and nickel when demand for the metals is set to soar.
“We’re going to need a lot more money coming to junior mining. I mean, orders of magnitude more,” he said.
Canada’s new rules don’t identify countries, but the updates are part of a new policy approach toward China, which Prime Minister Justin Trudeau’s government has described as an “increasingly disruptive global power” that disregards international rules and norms.
(By Jacob Lorinc)
Tesla, GM follow own shareholders with push into lithium miners
As automakers seek stakes in lithium miners to lock in supplies for electric-vehicle batteries, they’re following a path already forged by their shareholders.
Take Tesla Inc., which is reportedly interested in buying Toronto-listed Sigma Lithium Corp. If Tesla succeeds, it would follow prominent funds including Manulife Financial Corp., 1832 Asset Management, Maven Securities, DZ Bank and several others that have been snapping up Sigma shares, even as they cut exposure to the electric-vehicle maker.
It’s not hard to see the attraction. Policymakers and governments around the globe have ratcheted up calls to move toward cleaner transportation and poured billions into developing EV infrastructure, which has caused the price of lithium — used in the batteries that power electric cars, buses and trucks — to skyrocket. In fact, lithium has been the top performing commodity in the past two years.
“Lithium offers investors an opportunity to get an exposure to the EV expansion at much lower valuations, and without ancillary exposure to a CEO selling billions of dollars in stock,” said Will McDonough, the chief executive officer of EMG Advisors, which runs the Element EV & Solar Battery Materials Futures ETF (ticker: CHRG) that invests in the futures of lithium, cobalt, copper, and nickel.
“The underlying technology of all EV batteries requires lithium,” he said. “There is yet to be a prominent player that does not require lithium as the cornerstone metal.”
General Motors Co. sent Lithium Americas Corp. shares flying when it became the Canadian headquartered miner’s largest investor, which helped the company break ground on a new mine this week. Other car makers stalk mining conferences in an effort to secure supply.
“You’re only as strong as the weak point in your supply chain, which is lithium,” Sprott Asset Management CEO John Ciampaglia said in an interview, adding that a supply crunch has led investors playing the electric vehicle transition to move their capital upstream, buying up undervalued lithium producers. Sprott launched a lithium miners ETF in February in an effort to capitalize on investor interest.
Despite the surging price of the metal, the stock prices don’t necessarily reflect the booming demand. Albemarle Corp. — the largest producer of the metal — has seen sales and income surge. Still, the stock trades at a roughly 11-times price to earnings multiple — below the 14.8-times multiple of the S&P 500 Materials Index and just a fraction of Tesla’s 56-times multiple.
In addition to their cheap valuations, fund managers and analysts see a catalyst for the stocks as new buyers for the equities emerge, including US auto giants. “These are probably not the last deals that we’re going to see in the space,” Pedro Palandrani, head of research for Global X ETFs, said in an interview, referring to carmakers buying lithium-mining stocks.
Palandrani anticipates that more auto companies will take stakes in miners because the market for lithium is expected to quintuple to 3.7 million metric tons per year over the next decade from the current 800,000 metric tons.
“Lithium miners have margins of a software as a service company,” Palandrani said, adding that EV investors are taking notice as the outlook for most EV-making startups flounder, and the legacy carmakers’ gas-fueled auto businesses make the opportunity from battery-driven cars murky.
Even so, investing in early-stage mining companies is fraught with a different type of risk than car manufacturers — and their shareholders — generally face, including the potential that a proposed mine doesn’t produce at the expected rate or mineral grade. Goldman Sachs Group Inc.’s commodities research head, Jeff Currie, recently warned carmakers against buying lithium miners by saying “it always ends in tears” when commodity consumers move upstream.
Still, investors and car makers continue to bet on lithium miners, wagering that a shift toward EVs will become a permanent trend that will boost demand for the metal. “Lithium is today the common denominator across all battery technology and it’s likely going to stay that way for the next 10 to 15 years,” Global X’s Palandrani said, adding that he expects lithium producers to outperform.
(By Geoffrey Morgan and Esha Dey)
Battery metals projects catch eye of pension funds and carmakers
Critical minerals projects are attracting newfound interest from pension funds and automakers to help tackle a looming shortage of battery metals, say some of Canada’s top investment bankers.
The rush for metals like lithium, copper and nickel needed to power electric vehicles has “clearly brought the sector into a spotlight that it wasn’t in a few years ago,” Ilan Bahar, global mining co-head at BMO Capital Markets, said during a Monday panel discussion at a mining conference in Toronto.
Bank of Montreal’s investment banking business has seen more interest from the auto industry wanting to buy stakes in miners as the US Inflation Reduction Act encourages manufacturers to source material on North American soil, according to Bahar.
Governments worldwide pushing for EVs “really, really quickly” to meet emissions targets are discovering supply constraints for key metals, Bahar said. “What everybody quickly realized is, one, that the supply is not fully available here, and two, that it’s controlled by a certain country that has a 15-year head start.”
Governments and companies around the world have been pushing to accelerate a shift from fossil fuels into cleaner energy sources, with battery metals like lithium, cobalt and nickel underpinning the transition. The issue has gained more urgency in recent months due to rising competition among automakers for the metals and wild swings in raw material costs.
Pension funds are starting to consider investing in the battery metals industry, though some have expressed concerns tied to environmental, social and governance issues and bureaucracy, said Navdeep Bains, vice-chair of global investment banking at Canadian Imperial Bank of Commerce.
“I’ve talked to pension funds, and they’ve been like: ‘We’ll invest in this space, we’ve heard of the OEMs investing directly, but we have to see Indigenous issues resolved and permitting issues resolved’,” Bains said.
BMO’s Bahar said the sector will need more outside investment to meet future demand.
“We need a certain amount of supply that doesn’t yet exist, and we need investment beyond the amount of dollars in institutional investment funds,” he said.
(By Jacob Lorinc)
Shortage of metals for EVs is rising up the agenda in automakers’ C-suites
Bloomberg News | March 5, 2023 | Credit: BMO Metals and Mining
The merry-go-round of private meetings at an annual mining industry conference at Florida’s Hollywood Beach had a cast of new faces this year: auto sector executives increasingly anxious about surging prices and tighter supply of metals used in electric vehicle batteries.
Tesla Inc., Ford Motor Co. and Mercedes-Benz Group AG were among automakers which sent senior staff to mingle with about 1,500 delegates at the BMO Global Metals & Mining Conference, an event normally attended mainly by iron ore and aluminum producers. Their presence underscores the growing popularity of battery-powered cars, helped by a global push toward clean energy, which is estimated to require $10 trillion worth of metals through 2050, according to BloombergNEF.
Car producers “had room-to-room meetings with a lot of companies, like ourselves, trying to understand how to address their own supply chain,” said Trent Mell, an attendee and chief executive officer of Electra Battery Materials Corp., a Toronto-based developer of mining and refining projects. Auto companies have recently expanded their teams and are now filling rooms with specialists in metals like lithium — the metal that’s ubiquitous in electric car batteries — and manganese, or in battery recycling, he said. “Once you might have had one or two people dealing with raw materials procurement.”
Availability and costs of crucial battery materials like lithium, cobalt and nickel have been key concerns for years among EV makers trying to build out their electric lineups. The issue has gained more urgency in recent months due to rising competition to strike supply pacts with miners and project developers and by wild swings in raw material costs. The spot value of lithium consumption alone surged to about $35 billion in 2022, from $3 billion in 2020, according to Bloomberg calculations.
Lithium “was a meaningful source of cost increase,” for Tesla in the final quarter of 2022, CFO Zachary Kirkhorn said in January. While a key lithium benchmark has tumbled almost a third this year, prices remain 590% higher than at the start of 2021.
Volvo Car AB, Nio Inc. and Jeep-maker Stellantis NV have also said they’re being affected by the impact of higher raw material prices, and some are looking for new deals with suppliers to tie-up potential sources of metals. Like others, EV maker Rivian Automotive Inc. is spending a lot of time examining potential new deal structures with suppliers, and this “could involve ownership positions” in mining assets, CEO RJ Scaringe said on a Feb. 28 earnings call.
General Motors Co. last year struck a prepayment deal for lithium, while Ford Motor Co. offered a loan to help fund a mine project.
“Investing in these raw materials provides a way for automakers to control margins along the supply chain and ensure they remain competitive,” said Andrew Miller, chief operating officer at Benchmark Mineral Intelligence, an industry data provider. “Raw materials are now the largest cost driver for a battery.”
Automakers are also getting involved in the development of new mining projects.
GM added a $650 million stake in Lithium Americas Corp. to help deliver a mine in Nevada, and has considered buying an interest in Brazilian giant Vale SA’s base metals unit. Tesla, which is constructing a metal refinery in Corpus Cristi, Texas, has studied a takeover of miner Sigma Lithium Corp. The world’s No. 2 miner Rio Tinto Group is hunting for lithium deals, but expects to be outbid by car producers, CEO Jakob Stausholm said last month.
Car manufacturers are also putting more senior managers, rather than junior procurement executives, in charge of discussions over metals, according to Kent Masters, CEO of Charlotte, North Carolina-based Albemarle Corp., one of the world’s top lithium suppliers.
“It’s obviously become a more critical issue for OEMs,” Masters told the Florida conference, organized by Bank of Montreal. “We’ve been able to change the level at which we interact with those customers, and they’re investing significant amounts of money in electric vehicles.”
Volkswagen AG has pledged to boost cooperation with Canada’s mining sector, formed a joint venture with Belgium-based materials supplier Umicore SA and has a deal with would-be lithium supplier Vulcan Energy Resources Ltd. which aims to develop an operation in Germany.
VW is “sounding out the market” and is in talks with “many potential partners” on strategic raw materials, according to a spokesperson. “Various instruments are possible, from long-term agreements to streaming deals and equity investments,” the person said. Hedging of commodities prices is likely an important tool to cope with rising raw material costs, according to the group’s CFO Arno Antlitz.
About $265.5 billion has been invested in developing EVs since 2018 but only $40 billion on raw materials, according to Battery Materials Review, which tracks investment in the sector.
Even so, some said moves by car manufacturers to buy directly into metals could be doomed by their lack of expertise in mining and dismal record on acquisitions, according to Jeff Currie, Goldman Sachs Group Inc.’s head of commodities.
“It always ends in tears,” he told Bloomberg Radio. “It requires an expertise that is very different than producing cars.”
(By Danny Lee, David Stringer and Jacob Lorinc, with assistance from Yvonne Yue Li, Monica Raymunt, Annie Lee, Mark Burton and Keith Naughton)
CRIMINAL CAPITALI$M
LME faces further legal action in London court
Reuters | March 7, 2023 | Court in London. Credit: Adobe Stock
The London Metal Exchange (LME) faces further legal action in London, court filings showed on Tuesday, without giving further details of the move by a company called Double Eight Ltd.
The LME faced two fresh lawsuits, filings showed on Monday, from ten hedge funds and asset managers after it enraged investors last year by cancelling nickel trades.
The world’s largest and oldest metals market annulled billions of dollars of trades after chaotic price action, and suspended trading for the first time since 1988.
The nickel cancellations took place on March 8, 2022 and the wave of legal filings was due to a one-year time limit approaching for claims that allege the LME violated the Human Rights Act, a source close to the situation told Reuters.
Double Eight is a private financial company based in England that deals in securities, according to UK company filings.
No court documents were immediately available showing why Double Eight was taking action against the LME, which is owned by Hong Kong Exchanges and Clearing Ltd.
There was no immediate comment from the LME.
(By Eric Onstad; Editing by Louise Heavens and Alexander Smith)
Bloomberg News | March 6, 2023 | The London Metal Exchange floor (Image: HM Treasury – Flickr)
AQR Capital Management formally filed a London lawsuit against the London Metal Exchange, joining nine other hedge funds in a series of claims targeting the exchange’s decision to cancel billions of dollars in nickel trades last year.
AQR and DRW Commodities previously sought key documents from the exchange in court and alongside Flow Traders BV, Capstone Investment Advisors LLC and Winton Capital Management Ltd. are seeking around £80 million ($96.3 million), according to the LME.
The fresh legal action adds to troubles for the world’s biggest metals exchange flowing from its move on March 8 last year to suspend nickel trading and cancel contracts amid a runaway short squeeze. The LME has argued the action was necessary to avoid a $20 billion margin call that could have threatened the bourse’s own survival.
Pala Investments Ltd. and other funds including Commodity Asset Management LLC also filed a suit in London on Monday.
The LME said in a Hong Kong Stock Exhange filing that the AQR lawsuit is “without merit.” The statement didn’t refer to the Pala claim.
The move effectively bailed out top nickel producer Tsingshan Holding Group Co., which had positioned itself for a fall in prices, as well several LME brokers who were facing huge margin calls. On the other side of the trade were hedge funds and algorithmic investors, many of whom reacted with fury as their hugely profitable contracts were torn up.
The new claim follows judicial review proceedings brought by Elliott Investment Management and Jane Street last year. LME said in the filing in its statement that the AQR claims will be on hold pending the outcome of those.
The UK’s market regulator last week opened a rare enforcement investigation into the LME’s conduct during the crisis, in a move that could potentially lead to large fines and formal criticism. The Bank of England also said it will appoint an independent monitor to oversee an overhaul of the LME’s clearinghouse.
A year on from the squeeze, the LME nickel market remains plagued by low liquidity that’s contributing to erratic price swings and undermining confidence in its role as a global benchmark. The bourse is planning to finally reopen the market during Asian trading hours later this month, which it hopes will provide a significant boost to liquidity.
Commodity Asset Management, Pala Investments Ltd., Welton Investment Partners and Sunrise Capital Partners were all contacted for comment. Pentimon Ltd. couldn’t be reached for comment.
(By Upmanyu Trivedi and Mark Burton, with assistance from Jonathan Browning and Eddie Spence)
CRIMINAL CAPITALI$M
Rio Tinto settles US bribery case linked to Simandou mine
Bloomberg News | March 6, 2023 | Rio Tinto held the licence for the entire Simandou deposit since the early 1990s, but was stripped of the northern blocks in 2008 by a Guinean former dictator. (Image courtesy of Rio Tinto Simandou)
Rio Tinto Group has agreed to pay a $15 million penalty to settle US claims of bribery in Guinea, more than six years after a payment connected to a vast iron ore deposit in the West African nation prompted the mining giant to fire two of its top executives.
The Securities and Exchange Commission said a political consultant working for Rio had tried to bribe a Guinean government official. Additionally, the miner didn’t properly record its payments to the person, the SEC said on Monday, adding that the company had inadequate accounting controls.
Rio Tinto agreed to the penalty without admitting or denying the violations, according to the SEC. The regulator said the conduct was in violation of the Foreign Corrupt Practices Act.
The allegations form part of Rio’s long and turbulent history in Guinea as it tried to get access to the rich iron ore reserves of the Simandou region. Two executives — Alan Davies and Debra Valentine — were terminated in 2016 under then-chief executive officer Jean-Sebastien Jacques, when Rio reported questions over a consultant to the SEC and other watchdogs.
Davies was Rio’s CEO of energy and minerals, while Valentine was group executive of legal and regulatory affairs. Both denied claims of wrongdoing.
Production is yet to begin at Simandou, where Rio now holds a majority stake in two of the four tenements in a joint venture with China’s Chalco Iron Ore Holdings and the Guinean government. The shareholders continue to negotiate details of the project, which Rio describes as the “largest and richest untapped high-grade iron ore deposit in the world”.
Monday’s resolution stems from an investigation into conduct from 2011, when Rio Tinto hired a French investment banker to help with the mining rights issue in Guinea, the SEC said.
The banker, according to the SEC, offered more than $800,000 to a Guinean government official in an attempt to retain the mining rights. Rio Tinto, which was able to keep them, paid the consultant $10.5 million for the work.
The bribery allegations were also investigated by the Australian Securities and Investment Commission, which did not take action, and the UK Serious Fraud Office, which has not reported its findings.
(By Tom Schoenberg and James Fernyhough, with assistance from Clara Ferreira Marques)
CRIMINAL CAPITALI$M
Three British Columbia residents fined $700,000 for role in gold mining Ponzi scheme Staff Writer | March 5, 2023 | Stock image.
The BC Securities Commission (BCSC) has handed out C$956,000 (about $700,000) in penalties to three local residents for their involvement in what it calls “an elaborate fraud” that promised investors large returns on non-existent gold mining operations in Africa and Brazil.
In a ruling issued on March 2, 2023, a BCSC panel ordered Sabrina Ling Huei Wei to pay a C$500,000 administrative penalty, plus a C$90,000 fine, representing the amount she obtained from the scheme. Justin Colin Villarin was ordered to pay a C$200,000 penalty plus the C$15,718 he obtained from the scheme, and James Bernard Law was issued a C$150,000 penalty.
The BCSC also banned the trio from participating in BC’s capital market for varying amounts of time: Wei’s ban is permanent, while Villarin was banned for 25 years and Law for 20 years.
The panel previously found that all three solicited investors, organized events and sold membership units to two US-based companies (Massachusetts-based DFRF Enterprises LLC and Florida-based DFRF Enterprises LLC) between 2014 and 2015. Investors were promised “extraordinarily high, no-risk returns” on supposedly lucrative gold mining operations in Mali and Brazil held by these entities.
“In reality, none of the investments were used for gold mining, DFRF received no proceeds from gold mining, and DFRF’s only source of money was investors,” the BCSC investigation revealed.
The scheme raised over $15 million from more than 1,400 investors, according to the US Securities and Exchange Commission (SEC). The BCSC found that 137 BC residents or people connected to the province lost a total of C$1.5 million.
The fraud, described by the SEC as a Ponzi and pyramid scheme, was orchestrated out of the US by Daniel Fernandes Rojo Filho, a Brazilian national who was living in Florida at the time of the scheme, along with other associates, according to BCSC findings.
“None of the funds raised by investors were used for gold mining, and bank records show no proof that DFRF had other legitimate business activities. Filho used more than $6 million of investors’ money for personal expenses and luxury cars,” the BCSC stated.
In 2019, in civil actions brought by the SEC, federal courts entered final judgments against Filho and several others – including Heriberto C. Perez Valdes, a former Florida resident – for fraud and selling securities without being registered. Filho was ordered to pay more than $11 million, and Valdes was ordered to pay $1.2 million.
The enforcement action began in 2015 when BCSC investigators – acting on a tip – posed as investors to attend a presentation for DFRF at a downtown Vancouver hotel. Attendees were told to “expect a monthly return of up to 15% on their membership in interest, and that their principal was guaranteed by insurance,” the investigators noted.
Several days after investigators witnessed the event, the Commission issued an investor alert about DFRF, warning that several claims it was making were “characteristic of investment fraud.”
In October 2022, following several days of hearings, a BCSC panel ruled that Wei, Villarin and Law chose to “enable” Filho’s deceitful acts, and knew – or should have known – that Filho’s claims, and theirs, were fraudulent.
Although they became increasingly aware of red flags surrounding DFRF, including the promise of unreasonably high returns, the lack of details about its finances or mines, and the BCSC’s investor alert, Wei, Law and Villarin continued to promote it to unwitting investors, the BCSC ruled.
Prior to the ruling against the trio, a panel found on April 20, 2021, that two Lower Mainland-based individuals were also involved in the scheme, defrauding 52 BC investors for $331,400 in total proceeds.
Korea Begins Process to Set Strategy to Privatize HMM
South Korea's government is seeking advisors to set the privatization strategy for HMM
South Korea’s state-owned financial institutions are beginning the process toward the privatization of the country’s largest shipping company, HMM. There has been broad speculation for more than two years that the government was seeking an exit strategy based on the improved financial health of the carrier.
Korea Development Bank and the Korea Ocean Business Corporation, both government institutions and the two largest shareholders in HMM, placed a request for proposals to launch an advisor group for the sale of their HMM shares. The process is open till March 20 with the institutions saying the committee would be selected by March 22. The declared objective is to provide comprehensive advice on the overall sale process, including consulting to establish the sale strategy.
Then known as Hyundai Merchant Marine, the company’s financial troubles began in 2013 during a severe downturn in the shipping markets. KDB and the other government institutions stepped in and in 2016 a voluntary agreement was reached under which the institutions began a series of debt-to-equity swaps to restore the financial stability of the shipping company. KDB currently holds just over 20 percent of HMM’s stock while KOBC holds just under 20 percent. Other entities including the National Pension Service and Korea Credit Guarantee Fund hold smaller positions collectively bringing the government’s interest to 52 percent of HMM’s stock.
Driven in part by the strength of the shipping industry, HMM was able to restore its financial health by renegotiating charter agreements while moving forward with a fleet modernization and expansion program. The carrier was a leader in the introduction of ultra large container vessels launching a class of 24,000 TEU ships, followed by a class of 18,000 TEU vessels. This year, HMM announced an order for nine methanol-fueled 9,000 TEU container vessels as part of an $11 billion expansion strategy mapped out in July 2022.
HMM reported strong financial results for 2022 with a record-high profit of $7.8 billion representing a better than 88 percent year-over-year increase. Revenues topped $14 billion. The strength of the container market and the emerging rebound for crude oil tankers also helped the company to dramatically reduce its debt with the debt-to-equity ratio dropping from over 72 percent to 25.6 percent.
Analysts believe the government is anxious to commence the sale because of the softening in the freight markets as well as looming deadlines regarding additional debt and the shipping line’s bonds. HMM issued convertible bonds between 2018 and 2020 to KDB and KOBC. The interest rate on the bonds is due to double in October 2023 while if they were converted the financial institutions’ stake would increase to nearly three-quarters of HMM’s equity.
Korea’s Ministry of Oceans and Fisheries had previously suggested that the strategy might be a phased sale reducing the government's position either by selling the stock or the bonds. Speculation has centered on Korea’s other shipping companies including Hyundai Glovis and SM Merchant Marine as well as various logistics companies as the possible acquirer.
Banking officials told BusinessKorea “Once the advisory group is formed, we will discuss overall strategies and then set a practical schedule for the sale of HMM through consultations with related organizations.”
KDB and KOBC said in their statement that they have continued discussions of various methods for sustaining the growth of HMM and are forming a consensus on the process of selling the management rights for the company. Last year, Korea Development Bank undertook a similar process deciding to sell management control of shipbuilder Daewoo Shipbuilding & Marine Engineering through a partial sale to Hanwha Group along with a recapitalization of the financially troubled company.
Since 2018, U.S. Attempts at Reshoring Have Had Limited Impact
Busy as ever: Port of Shanghai's Yangshan complex, a hub for exports to the U.S. (SIPG file image)
With the onset of supply chain disruptions during the pandemic, many Western countries launched a reshoring and nearshoring campaign. In the US particularly, reshoring rhetoric has emphasized accelerated investment in domestic manufacturing of semi-conductors, electric vehicles (EVs) and clean energy.
Primarily, the reshoring drive has been driven with a focus on China as the strategic competitor, hence the need to reduce dependence on its supplies. This has seen large capital investments by the U.S government in an attempt to strengthen North American supply chains.
For instance, the Inflation Reduction Act (IRA) includes almost $400 billion in federal funding for clean energy and special tax credits for EVs manufactured in the region. The Chips and Science Act includes over $50 billion in funding domestic chip manufacturing.
In addition, U.S reshoring plans also hinged on the success of the United States-Mexico- Canada Agreement (USMCA), which entered into force on July 1, 2020. USMCA lays the foundation of expanding investments in the complex and capital-intensive manufacturing and supply chains across North America.
However, with all these subsidies and the North American trade alignment, is it possible to replace fully the supply chains located in China?
While it is still in the early days, David Dollar, a Senior Fellow of the Brookings Institution, in a new report titled USMCA Forward 2023, underscores some evidence to bear the claim that resurgence of manufacturing in the U.S is still not yet visible. Indeed, it is possible to track the effect as reshoring policies have been in place since 2018.
“While generalized reshoring is unlikely, it is still possible to subsidize the expansion of particular industries such as semi-conductors or electric vehicles. But without a change in the macroeconomic stance, it is unlikely that these policies will crowd out other manufacturing sectors, with the result that overall size of U.S manufacturing is unaffected. There is no free lunch, so subsidizing the expansion of say, semiconductors will reduce other consumption and hence lead to some contraction of other manufacturing industries,” noted David Dollar.
In terms of nearshoring to Mexico and Canada as envisaged in the USMCA trade agreement, Dollar adds there is also no evidence of such. The reason is that Canada (being a high-wage economy) is not well suited to producing the kind of products that the U.S imports from Asia. Mexico is a low-wage developing country, but has a lot of weakness in its investment climate.
Additionally, although 25 percent tariffs on Chinese products have been in place for four years, only a modest impact has been achieved on both the volume and value of U.S- China trade. Between 2018 and 2021, China’s share of U.S manufactured imports declined from 24 percent to 20 percent.
But it is important to highlight that the greatest variation occurred by product category, with U.S imports from China of telecommunication equipment now down 50-60 percent. Imports of other products such as computers, agricultural machinery, exercise equipment and furniture have all held up.
Trade figures for 2022 released by the U.S Census Bureau show that U.S- China goods trade hit a record high of $690 billion last year. U.S imports from China grew 6.3 percent to $537 billion, while exports rose 1.6 percent to $154 billion. As David Dollar observes, the economic shift between the U.S and China is more of a tech war than a trade war.
Wendy Cutler, Vice-President of the Asia Society Policy Institute (ASPI), observes that while the untangling efforts between the U.S and China are largely focused on strategic and emerging high-technology goods, the lines are increasingly blurred between what is and what is not strategic.
UN Adopts High Seas Treaty with Protected Zones and Shipping Limits
UN agreed to the first ever high seas treaty which would protect up to a third of the world's oceans
United Nations delegates completed the first-ever high seas treaty after a non-stop two-day marathon session going beyond the declared end for the fifth round of negotiations. The agreement is being hailed by world leaders, scientists, and environmental groups as it sets in place the first framework for managing the use of the oceans beyond national jurisdiction covering the areas beyond the 200 nautical miles boundaries for countries' territorial waters.
The UN’s Secretary-General issued a statement commending the delegates for finalizing the text to ensure the conservation and sustainable use of the oceans. He called the agreement a breakthrough noting that it impacts two-thirds of the oceans, and laying out specific rules for about a third of the world’s oceans.
Agreement among the UN members however was long in coming. Talks toward the treaty began nearly 20 years ago and stem from a 2017 resolution that moves to follow up on a UN recommendation to develop an agreement on the use of global marine resources. The mandate was to extend the United Nations Convention on the Law of Sea, which came into force in 1994, with four prior rounds of negotiations in 2018, 2019, and 2022 before this weekend’s agreement.
Historically, very little of the high seas has been subject to any direct protection. The waters had been open for fishing, shipping, and research with scientists increasingly expressing concern about the impact of these activities and the role the oceans play in combating global warming. They note that the oceans absorb up to 90 percent of excess warming, while environmentalists have also expressed fears that nearly 10 percent of marine species are at risk of near-term extinction.
“Two-thirds of the ocean has just been exposed to the will and want of all,” said Rebecca Hubbard, the director of the High Seas Alliance consortium of nongovernmental organizations during an interview with The Washington Post on Sunday. “We have never been able to protect and manage marine life in the ocean beyond countries’ jurisdictions,” she said. “This is absolutely world-changing.”
Late on Saturday, Rena Lee of Singapore who was president for the session rose and announced “the ship has reached the shore,” receiving a standing ovation from the delegates on news that the agreement had been reached. The draft text calls for placing 30 percent of the world’s oceans into protected areas and putting more money into marine conservation. It includes sections that cover access to these areas and the use of marine resources.
Environmentalists immediately reacted positively to the news saying that the agreement builds on the initiatives launched last December at the UN Biodiversity Conference that called for protecting a third of the world’s oceans by 2030. Greenpeace says that 4.2 million square miles of oceans need to be put under protection in each of the next seven years to meet the 2030 target.
“With the agreement on the UN High Seas Treaty, we take a crucial step forward to preserve the marine life and biodiversity that are essential,” said Virginijus Sinkevicius, the European commissioner for the environment, oceans, and fisheries.
A coalition that included the United States, the United Kingdom, the European Union, and China helped to bring the final agreement together overcoming issues including economic concerns, especially for emerging nations. The EU pledged $42 million to facilitate the ratification of the treaty and its early implementation. Nearly 200 nations approved the final text but to go into force the nations must adopt the treaty, which is expected to take years.
The agreement provides a legal framework along with the establishment of a conference that will finalize details, meet periodically, and enable member states to be held accountable on issues such as biodiversity and governance. It provides for strict limits on fishing activity as well as addressing mineralization and shipping lanes and provides for nations to coordinate on issues such as environmental impact assessments and share resources.
“What happens on the high seas will no longer be ‘out of sight, out of mind,” said Jessica Battle of WWF in a statement. “We can now look at the cumulative impacts on our ocean in a way that reflects the interconnected blue economy and the ecosystems that support it.”
The IMO highlighted that it had been present throughout the negotiations and potentially seeking to calm some of the fears highlighted that “ships plying their trade across the world’s oceans are subject to stringent environmental, safety and security rules, which apply throughout their voyage.” The IMO pointed to more than 50 globally binding treaties and recent efforts at enhancing those efforts such as MARPOL and the ballast water management convention. The IMO also highlighted its efforts at keeping shipping away from whales’ breeding grounds, the Polar Code for the Arctic and Antarctic, and the guidance on protecting marine life from underwater ship noise.
It will take time for some of the impacts of the treaty to become fully apparent to the shipping community. While the treaty provides the tools to create and manage marine protected areas it falls to the newly created commission to complete the definitions and determine elements such as if ships will be excluded from operating entirely in the zones.
Environmentalists are also seeking to use the framework to pursue additional elements such as water pollution from ships and further restrictions on ballast water management. With more elements of discharges even in the deep sea coming under regulation some have suggested that the new treaty can be leveraged to stop the use of open-loop scrubbers.
Another of the areas that the threat seeks to restrict is deep-sea mining. The International Seabed Authority which oversees this emerging area said the treaty means that stringent environmental regulations and oversight would now govern any future efforts at extracting minerals from the ocean floor.
Environmentalists and conservation groups are calling the agreement the first step to protecting ocean life and bringing the oceans into the fight against climate change. They are vowing to keep up the pressure to ensure the treaty is adopted and enforced.
