The structure of global economic growth is once again undergoing a fundamental transition, shifting away from the prevailing model of China as the world’s factory and advanced economies as the drivers of consumer demand. In its place, a more heterogeneous, multipolar framework is emerging with both manufacturing and final consumption more broadly spread across the globe.
Whereas the Commodities Supercycle was characterized by rapid, synchronized global demand growth centered on the rise of China, we expect the coming decade to feature slower, more geographically diverse, less synchronized demand growth. The drivers of natural resources demand are spreading across the globe in new ways. For oil, demand growth should increasingly come from the Middle East. For coal, the same is true of India. Only in base metals does China’s predominance look to remain unchallenged. As a result, the traditional practice of analyzing commodities demand based on the US, China and Europe will become less relevant as the drivers of incremental demand come increasingly from the “Emerging 5”: India, ASEAN, the Middle East, Latin America and Africa.
However, no large emerging market is likely to rise up to the point where China has now come to a landing. The most cited potential successors, India and Brazil, are based on democratic institutions unlikely to provide the consensus required to sustain high fixed asset investment levels. Japan and Europe could do this from the 1950s through the 1970s due to the imperative of post-WWII reconstruction. The “Asian tigers” also succeeded, but under what were initially authoritarian systems.
Here is the Citi report.
I particularly agree with the first and last paragraph of this opening summary by Citi’s distinguished team of commodity analysts.
I discussed part of this subject on 9th March, in response to my opening article by Andrew Critchlow of The Telegraph: Miners Pray the Commodities Collapse Has Hit Rock-Bottom.
Taking a somewhat longer-term view than Citi above, here is my initial reply from the 9th:
Mining has always been the most cyclical of industries. Nevertheless, this cycle has been longer for two main reasons: 1) The 2008 credit crisis has lengthened the global economic slowdown; 2) Accelerating technological innovation has made mining much more efficient.
Consequently, the closest parallel for mining is with the oil and natural gas extraction industries. However, they will learn more from mining because its bear market started earlier. Fifteen to twenty years ago, and earlier still, the main fear was that the world was running out of these resources. What we have learned is that technology can locate additional resources much more easily and enable us to extract them far more efficiently. There is also a third factor in addition to the two mentioned in the paragraph above: 3) Technology has created new materials which will reduce demand for industrial resources.
Demand for crude oil and eventually natural gas will decline in decades ahead, as the efficiency with which solar energy is produced continues to increase. Similarly, demand for industrial metals will decline as they are replaced by graphene, ceramics and plastics.
As for agricultural commodities, particularly staple foods, supply is always the key variable as demand generally maintains a gradual upward trend in line with the global population and economic GDP growth.
The main risks are adverse weather conditions, followed by diseases and voracious insects. However, biotechnology continues to produce hardier and more productive strains, further helped by fertilizers and improved pesticides. Farming efficiency continues to improve. Consequently, downward pressure on agricultural commodities is the general norm, occasionally interrupted by spectacular but temporary price spikes in response to mainly adverse weather conditions.
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