Commodity Strategy - Commodities: Will India Be The Next China? - FEB 2018

  • The pace of China's commodities demand growth will slow in the coming decade, particularly for coal and construction-related commodities such as industrial metals and cement. Nonetheless, China will comfortably remain the largest consumer of most commodities

  • India will emerge as the new bright-spot for commodities demand growth, driven by a robust expansion in the country's underlying economy. India will come closest to replicating the impact of China on energy demand, and we forecast especially large tonnage increases in the consumption of refined fuels and coal.

  • In contrast, the demand boost for industrial metals from India will be just a fraction of the size of the China's demand surge over the past decade. This will result in global metals demand growth slowing over the coming decade.

  • In agriculture, India's impact will be far more substantial than China's has been in some small markets including sugar and palm oil. India will also eclipse China as the largest consumer of cotton over the next ten years. However, India will have a much smaller impact than China has had on global demand for the major agricultural markets of grains and meat.

With China's economy set to gradually slow over the coming decade, India will become an increasingly important centre of global commodities demand growth. We are often asked by our clients whether India will be able to offset the slowdown in China's commodities demand. As the following charts illustrate, the answer is generally 'No', but India comes closest for energy.

India Won't Replicate China's Economic Boom
Select Countries - Economic Growth
Source: National Statictics, BMI

China Is A Hard Act To Follow

Comparisons between India's current economic status and China's a decade ago are common, leading to speculation that India could become 'the next China'. There is indeed a similarity between the size of India's nominal GDP in 2016 (USD2.3bn) and China's a decade earlier (USD2.8bn in 2006). Moreover, we are positive towards India's economic growth prospects and forecast average annual real GDP growth of 6.5% over 2018-2026. This compares favourably to our forecasts for global, Asian and China's annual growth rates of 3.0%, 4.6% and 5.7% over the period, respectively.

India Growth To Start Outperforming China
China and India - Real GDP Growth, %
f = BMI forecast. Source: National sources, BMI

However, the accompanying charts illustrate that India's economy in 2026 will remain significantly smaller than China's was in 2016. As impressive as India's annual real GDP growth of 6.5% will be over the coming decade, it will pale in comparison to China's 9.0% annual expansion over 2007-2016. Moreover, a more substantial increase in India's population over 2018-2026 (10.6%) than in China over the past ten years (5.6%) means that India's per capita GDP in 2026 (USD4,029) will lag China's 2016 level (USD8,068) by an even greater magnitude.

Less Commodities Intensive Growth In India

Not only will India's economic growth over the coming decade be slower than China's over the past ten years, but India's economic development will be less commodities-intensive. China's economic growth model over the past decade has seen the energy and commodities-intensive construction and manufacturing sectors dominate the economy. For instance, China's manufacturing sector accounted for 32.9% of the economy in 2006 and gross fixed capital formation (GFCF) accounted for 39.4% of total expenditure.

By contrast, manufacturing accounted for just 16.5% of India's economy in 2016 and GFCF was just 27.1% of total expenditure. Despite the current BJP administration's drive to boost domestic manufacturing and increase infrastructure investment, we do not forecast these two measures of commodities intensity to come close to China's over the next decade ( see below chart)

Different Economies, Different Structures
Select Countries - Components Of GVA And GDP
Note: f = BMI forecast. GVA = Gross Value Added, GDP = Gross Domestic Product. Source: National Bureau Of Statistics, Central Statistics Organisation, BMI

India To Have Major Impact On Oil Market

Of the major commodities markets, India will have the most dramatic impact on the energy market, with oil demand particularly affected. A rising population and per capita income combined with currently low vehicle penetration will underpin rapid vehicle sales. For instance, we forecast new vehicle sales to grow at an annual average rate of 9.8% over the next five years, driving an increase of 16.5mn in the domestic vehicle fleet.

India A Major New Oil Demand Driver
Select Countries - Change In Annual Consumption Of Refined Oil Products Over Select Periods, '000 b/d
Note: f = BMI forecast. Source: EIA, National Bureau of Statistics, BMI

We forecast India's refined fuels demand to grow by an annual average of 5.7% out to 2026, which would add 2.8mn barrels of demand per day (b/d). This compares to the 4.2mn b/d increase in China's consumption over the past decade.

India To Follow Steep Ascent
Select Countries - Refined Fuel Consumption And GDP Per Capita
Note: f=BMI forecast. Source: National Bureau Of Statistics, EIA, BMI

Although India will remain the third-largest oil consumer behind the US and China, such strong demand growth will see the country's share of global fuels consumption grow from 4.7% in 2016 to 6.9% in 2026.

Industrial And Consumer Oil Demand Drivers
India Refined Fuels Consumption Forecast (000b/d)
f = BMI forecast. Source: BMI, Ministry of Petroleum & Natural Gas

Coal: India To Drive Global Demand Growth

India's aggressive pipeline of coal fired power plants means that thermal coal demand in the country will surge over the coming decade. We forecast thermal coal demand will grow by an annual rate of 5.8% so that consumption in 2026 is 540mn tonnes larger than in 2017. This compares to the 639mn tonne increase in China's coal consumption over the past decade. For context, this additional annual consumption in India will be more than the total combined consumption of the fourth (Germany) and fifth (Russia) largest coal consumers in 2017.

India Coal Demand Boom Ahead
Select Countries - Electricity Power Generation From Coal
Note: e/f = BMI estimate/forecast. Source: EIA, BMI

Gas: Bottlenecks To Limit India's Impact

India will be one of the global bright spots for gas demand as the government looks to both grow and diversify the country's power generation mix. City gas, industrial demand and rising power generation will all feed into average annual gas demand growth of 5.6% over 2018-2026, which will swell consumption by 3.4bn cubic metres. This would make India the 10 th largest consumer of natural gas by 2026, compared to its current rank of 13 th. Nonetheless, India's gas demand growth will not match the growth in China's gas consumption over the past decade due to India's reliance on LNG imports, limited cost competitiveness of imported LNG with domestic coal and infrastructure bottlenecks.

Infrastructure To Limit India Gas Demand
Select Countries - Change In Annual Natural Gas Consumption Over Select Periods, Bcm
Note: f = BMI forecast. Source: EIA, National Bureau of Statistics, BMI

Metals: China Boom Won't Be Repeated

It is in the metals market that India will fall farthest short of replicating the impact of China over the past decade. This is certainly not due to a lack of growth in India's metals demand, but rather due to the unprecedented scale of China's metals demand boom. We do not have ten-year forecasts for metals demand, but our five-year projections illustrate the point. For instance, we forecast India will see annual steel consumption swell by 27.7 million tonnes (mnt) between 2017 and 2021, a significant increase comparable to the current annual consumption of Mexico. However, the growth of India's consumption will pale in comparison to the increase in China's steel consumption of 188mnt over 2002-2006 and 232mnt over 2007-2011.

China Metals Boom Was A Unique Event
Select Regions - Change In Annual Steel Consumption Over Select Periods, '000 tonnes
Note: f=BMI forecast. Source: World Steel Association, BMI

Agriculture: Largest Impact On Smaller Markets

India will have a far smaller impact on global grain and meat demand than China has had over the past decade. These two markets traditionally account for the largest shares of agricultural commodity demand by value. We only forecast demand for agricultural commodities out five years and thus use this time scale for comparison:

  • Grains consumption in China over the past decade has been driven by a burgeoning livestock sector. Animal feed in the form of corn (primarily for poultry) and soybean (primarily for pork) has accounted for the vast majority of grain consumption growth. Although we forecast a 30.6% increase in India's poultry production over 2017-2021, the far smaller size of India's livestock sector will limit the impact that the country will have on global feed demand. For instance in tonnage terms, India's livestock production of 8.8mn tonnes in 2017 was just over one-tenth of China's 72.7mn tonnes.

Fewer Grain Demand Drivers In India
Select Countries - Change In Annual Grain Consumption Over Select Periods, '000 tonnes
Note: Grains is the sum of corn, wheat, rice and soybean. f = BMI forecast. Source: USDA, BMI

India will have a more significant impact on softs markets including sugar, palm oil, milk and cotton:

  • Sugar: India is already the world's largest sugar consumer, accounting for 19.8% of the total in 2017, compared to 12.0% for second-placed China. Consumption in India will continue to grow robustly over the coming years as the country's population swells and per capita consumption remains steady. We forecast annual sugar consumption to be 3.8mn tonnes larger in 2021 compared to 2017, which would be equivalent to sum of the next three largest increases (China, Indonesia, Brazil). The country's volatile output growth and therefore production balance will keep it a swing participant in the global sugar import market.

  • Palm Oil: India is also already the world's largest consumer of palm oil, accounting for 15.1% of the total in 2017, compared to 8.5% for third-placed China. We forecast palm oil consumption growth in India to remain strong at around 6.0% per annum over the coming five years, compared to just 2.5% in China. India's weight on the international palm oil market will be all the more important in the coming years that traditional importers' demand will be lacklustre going forward.

India In A Different League For Sugar And Palm Oil
Select Countries - Sugar And Palm Oil Consumption
Note: e/f = BMI estimate/forecast. Source: USDA, BMI
  • Cotton: India will increasingly dominate global cotton demand as the country's textile sector continues a multi-year expansion. India accounted for 21.0% of global cotton demand compared to 31.2% for top consumer China in 2017. As textiles production continues to shift out of China and into other countries including India, Bangladesh and Vietnam, India will become the largest cotton consumer over the next decade. The 5.8mn bale increase in India's annual cotton consumption in 2021 compared to 2017 will be the largest addition by any country and compares to a 5.9mn bale decrease in China's consumption over the past decade. Looking further back than ten years, China had an even larger impact on cotton demand than that which we forecast from India, namely an 18.1mn bale increase in annual consumption between 2003 and 2006.

India To Offset China's Cotton Decline
Select Countries - Change In Annual Cotton Consumption Over Select Periods, '000 bales
Note: f= BMI forecast. Source: USDA, BMI
China And India - Commodities Consumption Forecasts
Geography Indicator 2005 2010 2015e 2020f 2025f
Note: n/a = unavailable. e/f = BMI estimate/forecast. Source: National Bureau Of Statistics, EIA, USDA, USGS, BMI
China Nominal GDP, USDbn 2,309.0 6,067.5 11,076.4 15,746.9 23,493.3
India Nominal GDP, USDbn 757.3 1,596.2 2,243.7 3,488.2 5,505.6
China Real GDP growth, % y-o-y 11.4 10.6 6.9 5.8 5.4
India Real GDP growth, % y-o-y 9.5 9.0 8.0 6.5 6.4
China GDP per capita, USD 1,747 4,462 7,928 11,053 16,328
India GDP per capita, USD 661 1,296 1,713 2,521 3,792
China Wheat consumption, '000 tonnes 102,000.0 107,000.0 117,000.0 121,307.8 n/a
India Wheat consumption, '000 tonnes 72,838.0 78,149.0 93,122.0 98,924.7 n/a
China Corn consumption, '000 tonnes 131,000.0 165,000.0 210,483.0 245,605.2 n/a
India Corn consumption, '000 tonnes 13,900.0 15,100.0 22,000.0 26,751.7 n/a
China Rice consumption, '000 tonnes 130,300.0 134,320.0 144,500.0 146,462.7 n/a
India Rice consumption, '000 tonnes 80,743.0 86,000.0 98,690.0 101,615.5 n/a
China Sugar consumption, '000 tonnes 11,400.0 14,300.0 15,600.0 16,822.1 n/a
India Sugar consumption, '000 tonnes 19,590.0 22,500.0 26,500.0 28,265.2 n/a
China Poultry consumption, '000 tonnes 10,088.0 12,450.0 13,250.0 14,095.5 n/a
India Poultry consumption, '000 tonnes 1,899.0 2,648.0 3,911.0 5,373.5 n/a
China Beef & veal consumption, '000 tonnes 5,607.0 6,500.0 7,358.0 8,404.8 n/a
India Beef & veal consumption, '000 tonnes 1,650.0 2,150.0 2,200.0 2,748.4 n/a
China Soybean consumption, '000 tonnes 40,213.0 59,380.0 87,200.0 119,342.1 n/a
India Soybean consumption, '000 tonnes 5,430.0 9,200.0 8,700.0 11,350.3 n/a
China Palm oil consumption, '000 tonnes 4,363.0 5,930.0 5,720.0 5,572.5 n/a
India Palm oil consumption, '000 tonnes 3,406.0 6,440.0 9,100.0 11,132.8 n/a
China Cotton consumption '000 480 lb. Bales 37,250.0 50,000.0 34,100.0 33,951.8 n/a
India Cotton consumption '000 480 lb. Bales 14,800.0 19,750.0 24,400.0 27,732.5 n/a
China Crude steel consumption, '000 tonnes 361,950.00 612,060.00 700,350.00 757,544.94 n/a
India Crude steel consumption, '000 tonnes 43,140.00 69,082.00 89,353.00 123,104.03 n/a
China Aluminium consumption, '000 tonnes 7,118.35 15,810.65 26,085.00 31,152.07 n/a
India Aluminium consumption, '000 tonnes 924.92 1,377.96 1,820.97 2,236.24 n/a
China Copper consumption, '000 tonnes 3,758.14 7,629.27 10,325.16 12,923.60 n/a
India Copper consumption, '000 tonnes 384.49 464.09 434.01 656.08 n/a
China Refined products consumption, 000b/d 6,795.4 8,889.5 10,988.0 14,077.9 15,389.3
India Refined products consumption, 000b/d 2,550.3 3,083.7 3,937.5 5,329.1 6,879.4
China Dry natural gas consumption, bcm 46.9 106.7 193.4 307.0 380.5
India Dry natural gas consumption, bcm 35.9 64.5 52.3 61.9 82.4
China Generation, Coal, TWh 1,853.357 2,987.881 3,736.480 4,045.455 4,144.294
India Generation, Coal, TWh 452.015 613.825 911.820 1,192.415 1,586.041