Industry Trend Analysis - Commodities Of The Future: Long-term Changing Consumption Patterns - MAY 2017
BMI View: Demand patterns for various commodities will change over the coming decades. Coal, iron ore, steel and fertiliser demand will slow over the years to 2050 while tin and copper demand will hold up. Lithium and cobalt demand will outperform, driven by the battery revolution, setting their place as the commodities of the future.
Demand patterns for commodities will change over the next few decades compared to historical trends, driven by structural macroeconomic and industry shifts. We believe demand for commodities such as coal, iron ore, steel and fertilisers will slow over the years to 2050 while that for copper and tin will hold up. Some commodities of the future will emerge, including lithium and cobalt, as demand for these commodities will rise on a multi-decade horizon. In this article, we group these commodities according to their demand patterns over the years to 2050.
|Asian Economies Set The Pace For Coal Expansion|
|Global - Coal Power Generation (TWh)|
|BMI, EIA, IRENA|
Slower Growth Or Decline Ahead: Coal, Iron Ore, Steel, Fertilisers
Coal Demand To Shift East Before Peaking - Coal as a commodity will lose dominance over the years due to tougher global environmental rhetoric and the ratification of the UNCOP21 climate change framework, as well as the growth in cheap alternative energy (see our Power research ' Coal Power Dominating, But Role To Lessen ' , March 23 ). We expect the growth of coal use in electricity generation to slow past 2025 and reach a peak over 2030-2050. During this time there will be a geographic shift of coal use from the West to the East, where it will peak. While overall coal will lose its dominance over the years, it will still be the largest source of power globally in 2025. In developed markets, a stronger emphasis on environmental protection will see the decline in coal usage, while attractive price competitiveness will ensure coal power usage remains elevated in China and India, as well as in second-tier markets such as Indonesia, Vietnam, Pakistan and Egypt.
|Coal To Slowly Lose Dominance After 2025|
|Global - Electricity Generation By Type (% of total)|
|e/f = BMI estimate/forecast. Source: BMI|
Chinese Fall Out To Hurt Iron Ore And Steel Demand - We expect steel and iron ore demand to slow over the years mainly due to two reasons. First, China will record more subdued growth looking forward, and second, a rise in efficiency in the steel sector will reduce consumption. Similar to the past several years, China will remain the main driver of growth for iron ore and steel in the decades to come. The ongoing re-centralisation of power that will culminate at the National Party Congress in fall 2017 will allow President Xi to refocus his efforts on a more sustainable economic growth model away from heavy industry and construction to services from 2018 onwards. This will include a shift away from a heavy SOE influence on the economy to greater private sector participation and mixed ownership structures in key strategic companies. Our Country Risk team forecasts China's economic growth in the coming decade to be much slower than in the last, as the savings rate declines, the economic liberalisation process slows, and population growth falls. These dynamics will result in real GDP growth averaging 5.6% over the next decade, as opposed to much faster average annual growth of 8.3% in the previous decade. Globally, steel consumption growth has stagnated outside China since 2014, and the acceleration of Chinese economic rebalancing in the coming years will ensure the overall picture turns less positive looking forward.
|Global Steel Consumption Growth To Slow With China|
|Global - Steel Consumption (000' tonnes)|
|e/f = BMI estimate/forecast. Source: BMI, World Steel Association|
Besides, stricter environmental regulation and improved technology will increase recycling and the use of steel-substitutes, such as in the automotive industry which has seen rising use of aluminium and plastics in replacement of steel in the last 30 years ( see 'Autos Megatrends To 2050: Autonomy, Sustainability & Digital Tech Revolutionising Mobility', March 9 2016). As Chinese steel production growth slows down, iron ore consumption growth will follow suit. The negative impact on global iron ore demand will be amplified by the fact that most of the blast furnaces that are used in the production of steel are found in China, whereas other countries mostly use electric arc furnaces. Blast furnaces require more iron ore than electric arc furnaces that recycle steel.
|Less Iron Ore Will Be Required For Steel Production|
|Global - Tonnes Of Iron Ore Required Per Tonne Of Steel Produced|
|Source: USGS, World Steel Association, BMI|
Precision Agriculture To Cause Stagnation In Fertiliser Demand -Demand for fertiliser such as nitrogen, potash and phosphate will continue to expand in the coming years, driven by agricultural growth, government subsidies and increasing farming revenues in developing markets. However, demand for these fertilisers will stagnate on a multi decade horizon, as we see a broad move towards 'Smart Farming', 'Precision Agriculture' and the fight against in land degradation, which will all limit the need for fertiliser use. Excessive application of fertilisers in both developed and developing markets and its negative impact on crop yields is well documented, and precision agriculture will allow this issue to be addressed. The ensuing decline in fertiliser application rates, coupled with limited potential to expand acreage globally, will lead to stagnating if not decreasing global demand in the long term ( see ' IoT & Big Data In Agribusiness: Driving Future Sector Growth ' , October 21 2016).
|More Precision Agriculture Adoption Ahead|
|US - Adoption of Precision Agriculture Technologies On Corn (2010) And Soybean (2012) Farms|
|Source: USDA ERS estimates using data from the Agricultural Resource Management Survey|
Steady Demand Ahead: Copper And Tin
No Near Term Threats To Copper Demand - We believe copper demand and prices will be supported by strong power grid investment and falling mine ore grades in the coming years. Primarily used in power grid construction, the outlook for this sector remains strong ( see ' Global T&D: Key Projects And The Competitive Landscape ' , March 31). China accounts for approximately 50% of copper consumption, and although we expect demand to slow in the coming years compared to the boom years of 2000-2012, consumption growth will be faster than that of pure-construction metals like steel and iron ore. Moreover, supply constraints such as falling ore grades are more apparent for copper than iron ore or coal.
|Copper To Hold Up Compared To Steel|
|Global - Steel & Copper Consumption Growth (% y-o-y)|
|2017-2021 = BMI forecasts. Source: USGS, BMI|
Multiple Uses To Sustain Tin Demand - Tin's versatility and its use in multiple arenas will sustain demand for the metal on a multi-decade horizon. Tin is used in the manufacture of electronics, soldering, and chemicals. We expect consumption growth of tin globally to outpace production growth over the years with demand from consumer electronics being the main driver. On the supply side, ore reserves are depleting and there is a very sparse tin project pipeline globally. Over the years, major countries such as China, US, Japan and the EU will see increasing tin deficits.
|Strong Consumer Demand To Support Tin Consumption|
|Global - Sales Of Consumer Electronic Devices (usdmn)|
|e/f = BMI estimate/forecast. Source: BMI|
Lithium And Cobalt To Be Commodities Of The Future
The battery revolution will support lithium and cobalt demand in the coming decades. We anticipate solid global lithium demand growth over the coming years, underpinned by the growing role of lithium-ion batteries in key markets such as the US, EU and China. Our Power Team expects the lithium-ion battery storage market to see demand growth from various segments including portable electronics, residential and utility-scale electricity storage, and electric and hybrid vehicles (see 'Battery Storage: Lithium-ion To Make Market Spotlight', September 16 2016). We believe the ability of lithium-ion battery technology to perform a variety of battery storage tasks will be a key facet of why the technology will register strong investor interest over the coming decades. A lithium-ion battery can charge and discharge power over long and short timeframes, has relatively high energy density and boasts good cycle-efficiency. As such, the technology will enable developers to make inroads into an increasingly lucrative market that encompasses multiple sectors.
|High Prices To Support Strong Production|
|Select Countries - Lithium Production Forecasts (000' tonnes)|
|e/f = BMI estimate/forecast. Source: USGS, BMI|
The production of lithium-ion batteries has been surging, underpinned by demand from the consumer electronics, renewables and electric vehicle sectors. Cobalt is also required in the production of lithium-ion batteries. Currently lithium and cobalt reserves are located in concentrated areas where they are produced, such as the 'lithium triangle' in South America for lithium and the Democratic Republic of Congo for Cobalt, but global miner interest is growing. Cobalt prices have increased by over 300% in the last 18 months due to supply fears ( see ' Growing Lithium Market, New Entrants To Increase Transparency ' March 30 and ' Despite Hurdles, Cobalt Production To Take Off ' , October 17 2016).