Energy Insecurity and Geopolitical Risk: Reshaping Industrial Investments in Emerging Markets

South32's decision to place its Mozal aluminum smelter into care and maintenance by 2026 is a stark illustration of how energy insecurity and geopolitical risk are redefining long-term industrial investments in emerging markets. The smelter, once a cornerstone of Mozambique's industrial economy, now faces existential threats due to a combination of unreliable power supply, climate vulnerability, and stalled negotiations with its primary energy provider, Hidroeléctrica de Cahora Bassa (HCB). This case underscores a broader shift in global capital allocation, where energy-dependent industries must now factor in not just market dynamics but also the fragility of infrastructure, regulatory uncertainty, and the accelerating pace of climate-driven disruptions.

The Energy-Industrial Nexus: A Delicate Balance

Aluminum production is among the most energy-intensive industries, with electricity accounting for 30–40% of total costs. Mozal's reliance on hydroelectric power from the Cahora Bassa Dam—historically its competitive advantage—has become a vulnerability. Droughts in the Zambezi River basin, coupled with stalled negotiations for a new power agreement, have left the smelter exposed to both price volatility and operational risks. A single power outage can trigger a “pot freeze,” a catastrophic failure that halts production for months and costs millions in repairs. For investors, this highlights a critical lesson: in energy-dependent industries, the cost of energy is not just a line item but a systemic risk that can unravel entire value chains.

The situation in Mozambique is emblematic of a global trend. Emerging markets, which host some of the world's largest industrial projects, are increasingly constrained by underdeveloped energy infrastructure, regulatory complexity, and climate-related disruptions. The World Economic Forum's 2025 report on energy transitions notes that geopolitical risks—ranging from regional conflicts to supply chain bottlenecks—are forcing companies to rethink their exposure to energy-intensive assets. For miners and manufacturers, the imperative is clear: diversify energy sources, hedge against climate risks, and adopt scenario-based capital allocation strategies.

Geopolitical Risk and the New Energy Order

The Mozal case also reflects the growing influence of geopolitical risk on industrial investments. Mozambique's LNG projects, for instance, have been delayed by security threats in Cabo Delgado and international hesitancy to fund infrastructure in conflict-prone regions. Similarly, South32's struggles with HCB underscore how energy security is no longer a technical issue but a political one. Governments in emerging markets are increasingly prioritizing domestic energy control, as seen in Mozambique's plan to redirect Cahora Bassa's power to local consumers rather than exporting it to South Africa. Such shifts complicate long-term planning for foreign investors, who must now navigate not only market forces but also the evolving priorities of host nations.

The World Economic Forum's Geopolitical Risk Index further contextualizes these challenges. Applied to green energy trade, the index reveals that high-risk partners can increase import costs by 1.7% while significantly elevating supply risks. For industries like aluminum, where energy costs dominate, such risks are existential. The index also correlates with Moody's sovereign ratings, suggesting that geopolitical stability is increasingly intertwined with economic credibility. Investors must now weigh not just the profitability of an asset but its resilience to geopolitical shocks—a factor that is reshaping capital flows into energy transition technologies and regional diversification strategies.

Energy Diversification: A Strategic Imperative

South32's response to Mozal's crisis—exploring renewable energy alternatives and energy efficiency upgrades—points to a broader trend: the need for industrial firms to decouple from single-source energy dependencies. The company's efforts to integrate solar and wind power into its operations, while still in early stages, align with global shifts toward decentralized energy systems. However, such transitions require upfront capital and long-term planning, which are difficult in environments where energy security is uncertain.

For investors, the lesson is to prioritize companies that are proactively diversifying their energy portfolios. The World Economic Forum highlights that energy efficiency improvements could reduce global energy consumption by 31%, saving $2 trillion annually. Similarly, investments in small modular reactors (SMRs) and energy storage are gaining traction as solutions for baseload power in regions with unreliable grids. These technologies are not just environmental playbooks but risk-mitigation tools for industries exposed to energy volatility.

Scenario-Based Capital Allocation: The New Normal

The Mozal case also underscores the importance of scenario-based capital allocation. Traditional capital budgeting models, which assume stable energy prices and infrastructure, are increasingly obsolete. Instead, companies must stress-test their operations against multiple energy scenarios—ranging from prolonged droughts to geopolitical disruptions. For example, Mozal's potential shift to seasonal production or higher-value products reflects a strategic pivot to manage energy constraints.

Investors should look for firms that embed scenario planning into their capital strategies. This includes hedging against energy price swings through futures contracts, investing in modular infrastructure that can adapt to changing conditions, and prioritizing projects with shorter payback periods in volatile markets. The rise of AI-driven energy analytics further enables real-time monitoring and optimization, reducing exposure to operational shocks.

Conclusion: Navigating the Energy-Industrial Transition

South32's Mozal withdrawal is a cautionary tale for industrial investors: energy insecurity and geopolitical risk are no longer peripheral concerns but central to long-term viability. As emerging markets grapple with climate shocks, infrastructure gaps, and shifting political priorities, the winners will be those who embrace energy diversification, technological agility, and strategic flexibility. For miners, manufacturers, and infrastructure-dependent industries, the path forward lies in reimagining energy as a strategic asset rather than a cost—transforming vulnerability into opportunity in an era of unprecedented uncertainty.