Much has been written in recent months on what will come after the Assad regime in Syria.
From the perspective of the country’s internal dynamics, the potential for internecine conflict between Sunnis, Alawites, Druze and Christians looks severe, as does the threat of a carve-up of Kurdish-majority regions to the northeast or the risk of chemical and biological weapons falling into the wrong hands.
Externally, there has also been plenty of commentary about what Assad’s fall will mean for Iran, if Israel doesn’t get there first. Notwithstanding the on-and-off support received by great power allies Russia and China in the Security Council, Iran has been seen as the next domino to fall in the Arab (though this time Persian) Spring.
Indeed, as the jasmine revolutions have made their eastwards journey, from Tunisia to Libya to Egypt and now to the Arabian Peninsula (Bahrain, Yemen) and Syria, it’s not difficult to see Iran and Central Asia as the zeitgeist’s next likely destinations.
But political-economic contagion doesn’t always spread so logically. In Europe, only terms like periphery and PIIGS could unite an otherwise disparate series of events, where credit crunches hit some property markets (Ireland, Spain) and some indebted sovereigns (Greece, Italy), but not others (Belgium’s public debt is 99% of GDP and Finland’s 250% rise in house prices since the mid 1990s has been one of the world’s best kept secrets).
Taking the analogy of another contagion theory, Soviet influence didn’t just stop in Vietnam, it began to turn in on itself. Rather than another domino falling to Saigon’s south, as American strategists predicted, one fell to the north, but this time the other way, with China and the US reaching a rapprochement that would eventually lead to that country’s spectacular rise in the global economy.
Returning to the Middle East and North Africa, all this has been mentioned but surprisingly little has been said about one of the countries where the first tremors of uprising were felt and which, at the time of Tunisia’s uprising topped the Reuters uprising index. Nor has much been made of that same country’s exposure to the Eurozone, which risk analysis firm Maplecroft measures as twelfth-highest in the world; more indeed than that of Switzerland (21st) or Turkey (23rd).
That country, Morocco, is indeed better known as a sunny tourist destination, yet with widespread unemployment pushed higher by lower demand in Spain, and unrest still simmering despite the election of the moderate Islamist Justice and Development Party late last year, things remain tense. Moreover, with Al-Qaeda’s resurgence in the Sahara and Sahel, not to mention the continuing conflict with Polisario in Moroccan-occupied Western Sahara, strategic threats to the regime’s stability abound. And to top it all off, while the rest of the world has been rightly focussed on America’s heatwave and Russia’s floods, sending food prices sharply higher, Morocco’s wheat crop has fallen 40% to its lowest level in five years.
As North Africa’s third-largest grain importer after Algeria and Egypt – and a country that Nomura named last year as the second-most vulnerable to food inflation – this will put further pressure on food prices domestically, and no doubt rekindle memories of the 1984 Bread Intifada, but internationally it will have little impact. That isn’t too say, however, that Morocco is completely removed from the soft-commodity dynamic. Far from it.
Morocco is, by far, the world’s phosphate superpower, controlling 70% of global reserves. Its biggest mine, Bou Craa, which happens to also be located in Western Sahara, produces tonnes of feedstock for key fertiliser diammonium phosphate (DAP) plus monoammonium phosphate (MAP) and triple superphosphate (TSP). Production has indeed been so steady and strong throughout the global food crisis that where there were once fears of ‘peak phosphorous’, DAP and rock phosphate prices have tanked since last year and geologists now believe that Morocco, backed by smaller deposits in China, Jordan, the United States and places like Nauru and Christmas Island, could meet projected demand for another 300 years.
But just as such an outlook belies the obvious supply-side risk of instability or a cut to production in places like Bou Craa and newer mines that have recently come on-stream, it belies the emerging demand-side risk of far greater phosphate requirements in India – currently the biggest importer – and China.
Soil degradation in those two countries, due in part (ironically) to overuse of nitrogen fertilisers, is only just becoming apparent as expected rates of crop yield improvements decline and a rise in extreme weather events washes valuable topsoils into rivers and the sea. And as emerging market diets increase in caloric and protein quantity, further demands will only be placed in existing arable areas.
Related dynamics in potash and potassium were behind BHP’s $39 billion bid in 2010 for Potash Corporation of Saskatchewan and while that deal didn’t go through, the obviously attractive long-term fundamentals remain the same. As the hard commodity boom comes off steam and miners that have saved their cash look for new areas to deploy it, the stars are aligning for beaten-down potash and phosphate shares.
In next week’s edition of Macro Investor we will look at one such phosphate stock – usefully which does not have projects in North Africa – that is cheap no matter how you look at it. Just like the risks of instability in Morocco, the risks of a rebound in phosphate prices is counterintuitive at first glance, but so too are most good investments. As Lord Rothschild famously said, buy on the sound of cannons and sell on the sound of trumpets. To my mind, the cannons could any day sound for phosphate.
Michael Feller is an Investment Strategist at Macro Investor, Australia’s independent investment newsletter covering stocks, trades, property and fixed interest.