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‘Clean’ commodity supercycle risks

A commodities super cycle is looming, but don’t pop the champagne corks just yet, says Wood Mackenzie’s Simon Morris.

While the transition from hydrocarbons to the metals necessary for green growth is already underway, there are potential risks to how this supercycle evolves.

Morris, WoodMac’s vice president research in the metals and mining, global metals section, lists three:

  • The rise of ‘consumption consciousness’, undermining the long-term use of primary metal.
  • Systemic supply uncertainty, forcing commodities into obsolescence.
  • The narrowing control of metals’ supply chains, excluding many from the party.

On the first, the interest in metals to support an energy transition is much more in the public eye than the need for hydrocarbons ever was. “Those with a vested interest in metals are already enthusiastic cheerleaders for an intoxicating narrative about the energy transition and the quantum of metal that will be needed to achieve it. Producers are being courted by politicians, entrepreneurs, consumers and investors alike.” However, this feeding frenzy may prove to be a “Pyrrhic victory”, Morris says.

On the first, the interest in metals to support an energy transition is much more in the public eye than the need for hydrocarbons ever was. “Those with a vested interest in metals are already enthusiastic cheerleaders for an intoxicating narrative about the energy transition and the quantum of metal that will be needed to achieve it. Producers are being courted by politicians, entrepreneurs, consumers and investors alike.” However, this feeding frenzy may prove to be a “Pyrrhic victory”, Morris says.

Price bubble

Indeed, an “unsustainable price bubble” is already building for some commodities, a bubble that WoodMac puts down to the “exuberant, but premature” desire to capture profits from future demand growth. While the world will need supplies of the key metals, it will not be immediate and many of these metals are already facing supply surpluses over the next three to five years.

Also, not all commodities are equal when it comes to the impending supercycle. “While some will see no upside, if the boom is not carefully stewarded, even those that should benefit could face structural challenges to future demand,” says WoodMac.

But that is no excuse for inaction. With this supercycle clearly signposted, both the mining and logistics sectors have the opportunity to act pre-emptively to achieve a more sustainable long-term market dynamic. “Not acting will leave the industry at risk of perpetuating the boom-bust cycles that have plagued the sector since time immemorial,” Morris warns.

If industry succeeds, the potential is vast. Industrial metals are needed to electrify society; without them in large quantities, WoodMac says that there is currently no way to meet the world’s carbon-reduction targets. If consumption patterns and the metal processing technologies used today continue to grow, there will be an inevitable disconnect between supply capability and demand, without any intervention.

New approach

This commodities supercycle is without precedent and must be approached anew. The natural resources sector has enjoyed two commodity supercycles since the end of World War II. “Both were decades long and, while their geneses were different, in essence, they resulted from rapid and unforeseen growth in demand that could not be quickly met by adequate supply,” says WoodMac. The most recent boom, beginning in the early 2000s, was driven by China’s industrialisation and urbanisation. Twenty years ago, WoodMac calculates that China was consuming 20% of the world’s iron ore and 12% of its copper. Today, China relies on coal, oil and natural gas for more than 80% of its energy mix, while it consumes around half of the world’s iron-ore and base metals production.

What also makes this supercycle different is that it is the first without hydrocarbons taking point.

But that’s not to say that oil, gas and coal will not play an important role in the transition. “The global economy will rely on fossil fuels for years to come,” states Morris.

In WoodMac’s base case, fossil fuels still deliver 75% of total primary energy demand by 2050. Oil demand continues to grow, peaking at 108 million barrels per day in the mid-2030s, with gas demand peaking a few years later. Demand for thermal coal also rises throughout the 2020s, but growth will slow across the board as the drive to decarbonise intensifies.

“Oil, gas and coal demand will not vanish in a puff of carbon-laden smoke; they will be around for decades and exposed to cycles and price swings as before,” Morris says. “But the energy transition results in only one outcome for fossil fuels: demand destruction. It’s just a question of time.”
Source: The Baltic Briefing

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