A global economy caught in the Gates of Hell

Each day the conflict in the Middle East drags on, a new supply crisis pops up. Clearly, oil and gas supply remains the most immediate threat.

This previously unloved sector is now offering enormous comfort to investors who recognised its deep value and geopolitical hedge.

And that’s exactly what I detailed for Livewire readers last month:

“Oil: Only One Trade Matters.”

Right now, the global economy is choking under the Strait of Hormuz closure. While equity markets have held up reasonably well, systemic flow-on effects could persist for months.

You see, refining O&G yields a vast array of secondary ‘chemical’ products critical to modern economies, across manufacturing, mining and food production.

And it highlights just how dependent we are on the oil and gas sector. In fact, secondary products are arguably just as important as the energy itself.

Take urea and ammonia; they’re derived from the separation of natural gas and are critical components for nitrogen fertilisers.

Almost half of all seaborne supply comes from the Middle East, meaning it has to pass through the dreaded Hormuz Strait.

Prolonged closure could have a lasting impact on food security, as modern industrial-scale cropping cannot function without large fertiliser inputs.

Another example: sulphur

Sulphur is the primary raw material for producing sulphuric acid. Around HALF of all seaborne sulphur funnels out of this 33-kilometre-wide Strait.

This is another critical byproduct of oil and gas refining, which means massive quantities of sulphur are produced in the Middle East (Saudi Arabia, UAE, Qatar, Kuwait, and Iran).

So, why does sulphur matter?

Sulfuric acid is a leaching agent, meaning it dissolves valuable metals (copper, nickel, zinc, uranium) from rock, a process critical to modern mining and processing.

The acid is used to dissolve certain minerals (usually oxides) in a process called ‘In Situ Leaching.’ Essentially, it dissolves the metal from its host rock.

This is how the world’s largest producing region, Kazakhstan, taps into its vast uranium reserves. But unrelated global shortages of sulphuric acid have already had a major impact on this mining jurisdiction. 

In early 2024, the state-owned uranium miner, Kazatomprom, lowered its production guidance due to a global shortage of the acid. That was driven by competing demand from fertiliser and chemical processing.

Events from two years ago highlight why shortages for sulphuric acid could have severe consequences under a prolonged closure of the Hormuz Strait.

Stuck in the Gates of Hell

Over the coming days, it's likely we’ll see more examples of unseen threats arising from the closure of this Strait.

But in terms of sulphuric acid, this alone has the potential to create additional layers of supply problems for the global economy.

Without access to sulphur, many mining operations face the prospect of closure. And that could lead to further impacts, like declining metal production.

But as in any situation, there are always winners and losers.

Let’s take uranium mining…

Kazakhstan is the world’s largest producer, accounting for around 40% of global production. But it NEEDS sulphur to make that happen.

And that could create opportunities among operators that don’t need sulphur (as much), like uranium mines in Canada’s Athabasca Basin.

These operations tend to use traditional underground and open-pit extraction. Although they’re not entirely immune, sulphuric acid is still required for milling and processing.

Broadly, though, they’re going to be impacted less.

But an even better strategy might be to look at mining firms that have become entirely ‘self-sufficient.’ In other words, they produce their own sulphuric acid.

How can they do that?

Well, some deposits (particularly those in Western Australia) are naturally high in a mineral called pyrite, which is concentrated in the compound sulphide.

The ingredient for making sulphuric acid.

Some operators have already closed the loop.

Operators with the infrastructure to separate and treat pyritic ‘waste’ rock can use it as feedstock to make their own sulphuric acid.

Now, assuming demand remains constant, mine closures should, theoretically, lead to structurally higher metal prices.

Put two-and-two together, and you have an intriguing set-up for a small group of miners.