Worsening geopolitical risk demands adoption of new business model

Canada’s order that China divest from Toronto-listed mining firms is a world-changing message: geopolitical risk is real, worsening and will force a new business model.

A few weeks into 2020, I counselled a client that their global geographic footprint demanded urgent attention. Like many multinationals it is listed, has shareholders, owns operations and sells its products internationally.

An animated graph we designed illustrated how fastwidening geopolitical fault lines intersected with its business model, with countries key to its portfolio experiencing rising nationalism, challenging each other for regional dominance, engaging in escalating trade wars, imposing targeted sanctions on select firms, or experiencing mounting fragility.

My argument was that postCold War globalisation was over and we had entered a “great delinking”, with a strong possibility of major regional wars. As a result, I stated that global risk is paramount and demands urgent dedicated analysis, anticipation and management.

A month later, Covid struck and governments shut down the world economy. In an instant, the sovereign state reaffirmed its pre-eminence. But the pandemic simply accelerated and amplified a process begun by the US’s Middle East follies which the global recession irrigated: the return of great power competition.

Russia’s bitter experience of imperial collapse and the trauma of unchecked liberalisation turned it into a nuclear-armed petromonarchy. China used the global market to become a potent counter-hegemon; seemingly erasing the belief that economic liberalisation is a precursor to democratisation (seemingly because China did not truly liberalise its economy).

The US struggled to wake up to this new reality, torn by systemic inequality feeding extremism and its faith in globalisation shaken by its new challengers. Europe deluded itself that its social-democratic model made it a postgeopolitical haven for all.

With the pandemic barely controlled, Russia has thrown down the gauntlet by invading Ukraine, thus evicting itself from “Western globalisation” and saving Nato from French President Emmanuel Macron’s feared “brain death”. China has wedded itself to Xi Jinping’s Orwellian techno-state and is biding”its time towards forceful “reunification” with Taiwan. The US is shifting its divided attention and quixotic “war on terror to confronting these pacing threats to the teetering domestic and world order.

Since my client meeting in early 2020 the great delinking has accelerated at astounding speed and in a dangerous direction, including nuclear threats issued by a Kremlin fast running out of military options. What was true of my advice then is still truer now.

Last Thursday evening WhatsApp messages came in soon after I had shared with colleagues, clients and professional acquaintances a seemingly obscure news story: the previous day the Canadian government had ordered that three Chinese companies sell their shareholdings in three Canadian mining companies. None of those who contacted me was directly affected by this order, bar one.

“Huge,” said two former CEOs. “The world has changed,” went a former SA government official. “Massive ...” opined a leading news editor. “Africa the ham in the sandwich?” pondered an investment adviser. Two clients stated that they were going to evaluate the implications for their businesses.

Canada is respected for its business-friendly, non-intrusive brand of social-democratic capitalism. During the heyday of globalisation, Toronto competed hard against Johannesburg, London and Sydney to attract Chinese investment and feed China’s enormous appetite for natural resources. It won big: most mining and natural resource companies are listed on the Toronto Stock Exchange; the world’s largest mining conference takes place in Toronto; and Canadian mining companies are leaders across all continents. Boosted by the commodity supercycle, the Canadian dollar even briefly overtook its southern colleague.

What prompted this “UnCanadian”, according to one acquaintance, action is a rush to secure the minerals that are key to national security and the energy transition. China has acquired control of the majority of either the ore bodies containing these minerals or the companies mining them. It sends them for refining, beneficiation and incorporation to manufacturers in China.

Where few in the West cared when “Chinamerica” was a thing, Xi shedding Deng Xiaoping’s injunction to “hide your strength, bide your time” has changed that. Rising barriers to its vast market, intellectual property theft and spying through firms such as Huawei, the fast militarisation of the South China Sea and threats to withhold the supply of rare earths, have rung belated alarm bells. Then came the pandemic and its supply chain disruption. Then the war in Ukraine.

Like Germany, Canada was initially reluctant to enter the fray. That it is the first country to order Chinese disinvestment in critical minerals firms is thus arresting stuff. Two SA-based Canadian analysts (no, Peter Major isn’t one of them) messaged me selfcongratulatory messages upon hearing the news; an uncommon breach of Canadian exquisite politeness.

The great delinking is allencompassing and irreversible. What Canada has started others will continue. China will retaliate. A global scramble for critical minerals has begun (not incidentally, Eunomix recently held a conference with the Heritage Foundation and is engaged with the Wilson Center on the subject).

SA and its mining industry won’t dodge that cruise missile, no matter how seemingly unfair (a sentiment expressed to me by the one caller who is directly affected by Canada’s move). SA has trapped itself in an implausible contradiction between economic dependency on the West and what some see as de facto alignment with Russia and China.

SA mining companies internationalised to offset their small domestic market, with listings, shareholders, operations and clients implausibly striding the divide. And Africa, as the astute investment adviser questioned, has with Latin America become the ham in the global strategic minerals competition sandwich.

Mining companies everywhere find themselves front and centre in the scramble. Few are configured to deal with a new world where they are either forced to choose now or will be forced to soon. It is time to carry out that geopolitical risk assessment and reconfiguration — or become lunch to more powerful forces.

CANADA IS THE FIRST ... TO ORDER CHINESE DISINVESTMENT IN CRITICAL MINERALS COMPANIES