October 31, 2011
The recent signing of Germany’s first raw materials partnership agreement heralds a new era in the country’s raw materials policy. In the last few years competition has intensified significantly at the international level. The new strategy opens up business opportunities and promises a more stable supply of raw materials.
That one day Mongolia would symbolise a new era in Germany’s raw materials policy was by no means to be expected just a short time ago. Nevertheless, the new source makes sense for many kinds of reasons and shows how seriously the topic of raw materials is currently being taken once again in the industrial location of Germany.
The history of German raw materials is characterised by extreme variability and disruptions. Just a brief look back illustrates this: it was largely in the 18th and 19th centuries that international raw materials activities began to be established. In 1945 there was of course a serious setback with the confiscation of Germany’s foreign assets. It subsequently took many years for Germany’s raw materials firms – driven by the rest of German industry – to wholeheartedly implement the strategy of backward integration in foreign mining activities. The changeover picked up momentum particularly in the early 1970s in the light of the first oil price shock and the Club of Rome report called “The Limits to Growth”. As a result there were political raw materials production programmes like DEMINEX (to improve the supply of petroleum), several uranium initiatives (for safeguarding nuclear power generation) and exploration incentive programmes for other (import-dependent) minerals.
In the early 1990s came yet another sea-change. One reason was the surprising demise of a major German raw materials group specialising in industrial metals. On top of this came the assessment that there had been a significant improvement in the situation in the raw materials markets. The first argument supporting this was the opening-up of eastern Europe, including the raw materials giant Russia; this enabled more stable and larger supply volumes and thus an easing of the supply situation. The second argument in favour, however, was the way prices had developed; the oil price slumped in the late 1990s to less than USD 10 per barrel at times. For many decision-makers the end of the dependency on expensive commodities seemed to have arrived.
There are several reasons why a new chapter in Germany’s raw materials annals is just commencing, that is must commence: not least, the rise of Asia’s populous nations and thus their growing thirst for raw materials was underestimated for a long time because it was regarded as more of a temporary phenomenon. China in particular has been pursuing a more aggressive raw materials policy since the middle of the past decade at the latest. This was motivated by severe setbacks in its efforts to sign international agreements – for example, in the oil and natural gas business – with countries such as Russia. Today, China ensures its supply of raw materials (not only of energy) by procuring large deposits all over the world (not only in Africa) and thereby permanently removing them from the world market. Moreover, exorbitant prices are being charged for its own abundant supplies of raw materials such as rare earths, and supply quotas (have been) set. The strict ruling declared by the World Trade Organization (WTO) in mid-2011 is already being called into question again; this is shown by the current (politically motivated) one-month suspension of production. All in all, this means that the contest for resources that are set to become increasingly scarce is already in full swing worldwide.
It is a good sign that German policymakers are now responding resolutely and providing the necessary backing for companies to enter countries that are new suppliers of raw materials. Of course there will continue to be a division of labour. Politicians will create the right regulatory framework, remove stumbling blocks and offer highly promising joint ventures to raw materials countries. In turn, it is the companies that are responsible for the operating side of the raw materials business: from exploitation and transportation through to integration into the various industrial production chains in the areas of automaking, mechanical engineering and electrical engineering products.
Mongolia, which is rich in minerals such as copper, coal, gold and rare earths, is of course an ideal place to start, being sandwiched between Russia and China. This provides, on the one hand, major sales opportunities. And, on the other hand, the sparsely populated country is also seeking to gain more independence from its all-powerful neighbours. Germany’s newly signed first intergovernmental agreement on cooperation in the raw material, industrial and technological areas provides both countries with major opportunities. German coal-to-liquid and gasification technologies may thus enable Mongolia to significantly reduce its dependence on Russia going forward.
The first raw materials partnership is intended to be followed by many more. Without closer cooperation between business and politics there is a danger that Germany will lose out in the intensifying international competition for increasingly scarce resources in future. Of course, Germany’s raw materials policy always has to be integrated into European initiatives, since the countries of Europe must join forces to succeed in a contest with the growth and power centres in North America and Asia.
© Copyright 2013. Deutsche Bank AG, DB Research, D-60262 Frankfurt am Main, Germany. All rights reserved. When quoting please cite “Deutsche Bank Research”.
The above information does not constitute the provision of investment, legal or tax advice. Any views expressed reflect the current views of the author, which do not necessarily correspond to the opinions of Deutsche Bank AG or its affiliates. Opinions expressed may change without notice. Opinions expressed may differ from views set out in other documents, including research, published by Deutsche Bank. The above information is provided for informational purposes only and without any obligation, whether contractual or otherwise. No warranty or representation is made as to the correctness, completeness and accuracy of the information given or the assessments made.
In Germany this information is approved and/or communicated by Deutsche Bank AG Frankfurt, authorised by Bundesanstalt für Finanzdienstleistungsaufsicht. In the United Kingdom this information is approved and/or communicated by Deutsche Bank AG London, a member of the London Stock Exchange regulated by the Financial Services Authority for the conduct of investment business in the UK. This information is distributed in Hong Kong by Deutsche Bank AG, Hong Kong Branch, in Korea by Deutsche Securities Korea Co. and in Singapore by Deutsche Bank AG, Singapore Branch. In Japan this information is approved and/or distributed by Deutsche Securities Limited, Tokyo Branch. In Australia, retail clients should obtain a copy of a Product Disclosure Statement (PDS) relating to any financial product referred to in this report and consider the PDS before making any decision about whether to acquire the product.