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Commodity risk “as big as the planet”

When it comes to commodities, risk is always as big as the planet.” That statement from insurance broker and risk advisor Marsh in its recent Risk Outlook speaks to the many and varied risks that global commodities face today, risks that shipping inherently shares.

Climate change, adhesion to environmental, social and governance (ESG) standards, and policy developments “increase the risk environment for commodities”, according to Marsh, with these factors interlinking political risk at all levels.

In its report, Marsh cites “sudden and arbitrary changes” in tax and operational regulation, expropriation, transfer and convertibility, and political violence as the main political risks facing commodities in the short- and mid-term. These risks could lead to an escalation of personal violence, flash mobs and riots into internal conflict, institutional crisis, or conflict.

Trade bottlenecks and cyberattacks on infrastructure also skew the risk profile for commodities, with the former leading to an increase in credit risks, including non-payment.

“The probability and global impact of these developments levels the playing field when it comes to risks,” said Marsh. “When it comes to commodities, the potential butterfly effect from unexpected disruption in distant countries is worth covering at an accessible price.”

Prices and people

There are other risks vying for attention when it comes to commodities. Price rallies, fragile supply chains, shortages of workers in some industries and layoffs in others, and pandemic-related state spending programs are, according to Marsh, fuelling political instability. These factors could stall economic growth, leading to unrest in emerging markets and threatening investor participation in those regions.

The oil market faces its own unique troubles in managing both internal and external pressure to transition to renewables and clean energy, which will have an impact on national economies dependent on fossil fuels. In particular, this move will place a question-mark over the viability of strategic trade routes, which may leave some countries “in a vulnerable position”. Threats here include interstate war, contract alteration, expropriation and non-payment.

Marsh highlights developments in Southeast Asia here, where growing government and investor interest in climate change could mean that borrowers, whose green credentials are lacking, “may be challenged by greenhouse gas policies and constraints on credit availability”.

Additionally, Asia-Pacific countries are also undergoing change which could fundamentally alter global commodity prospects. “The region is moving away from a resource-based governance model – whereby resource owners are permitted to leverage their own tools in extraction – to a model where infrastructure takes centre stage.”

Mining worries

Mining faces its own challenges, with ESG risks particularly prominent. In the face of the rising climate agenda, the mining sector is facing down controversial measures by national governments, increased sensitivity among the public, and demands from local communities. The threats of strikes, riots, and civil commotion, contract repudiation, and creeping expropriation can be added to that list, said Marsh. The insurer points out that most of the geographies with large-scale mining production, such as copper, share high susceptibility to the risk of strikes, riots, and civil commotion.

Meanwhile, soft commodities, such as food and water, are being hit by price hikes, which “may affect the macroeconomic environment,” according to Marsh. “A reduction in purchasing power is feeding anti-establishment discontentment, with some governments taking steps backwards, in terms of economic diversification, and diplomatic relations.”

Geographical hotspots in the risk outlook include Argentina, Ukraine, India and Central Asia. In the first, policy developments are said to be putting the maritime sector and trade at risk. Key to this is the government’s decision to sub-contract the dredging of the Parana River – the country’s key grain export superhighway – for one year, while it prepares a longer-term concession. Private grain industry leaders are unhappy at the decision, which increases the role of the state in the country’s main logistics system. “Several strikes started in March, May, June, and July, paralysing exports, which brought into question the capabilities of the government to properly respond to these demands,” said Marsh.

In Ukraine, political decisions are said to be shaping the trading environment. A free trade agreement between Ukraine and the EU – in place for five years – has shifted export markets, just as China has developed a hunger for Ukrainian crops. Ukraine is now China’s top supplier of wheat, sunflower oil, and sunflower meal, which have overtaken metals and ores, as the main export products.

In India, a move to increase ethanol blending in gasoline – to reduce pollution and decrease oil import costs – looks set to shakeup global sugar production and increase global pricing volatility. Then in Central Asia, arguments over the demarcation of borders between Uzbekistan, Tajikistan, and Kyrgyzstan threaten to destabilise the region. The three nations are disputing key resources and access to rivers and canals. “Water related disputes have the potential to threaten long-term stability in the region,” warned Marsh.
Source: The Baltic Briefing

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