by Maria Bertzeletou
The world changed dramatically in January 2020 with the realization of the seriousness of the coronavirus outbreak and its impact on lives worldwide. On January 23, China locked down Wuhan, a city of 11 million, to contain the spread of the highly contagious and deadly "novel coronavirus," as it was then called (it was not until March that the World Health Organization declared a global pandemic). Beijing's timely and robust steps to contain the outbreak, coupled with massive government financial support, allowed the Chinese economy to lead the global recovery from the damage caused by the pandemic.
Over the past 120 years, there have been four extended commodity price booms, according to Capital Economics. Each had a unique driving force — two from war recoveries, one due to the Opec shock and the last from China’s rapid industrialization. Supercycle adherents believe a combination of rising industrial demand and lack of investment in mines and oil exploration will lead to a reflationary boom in the 2020s.
Metals, agricultural and oil commodity indices have surged up to 40 per cent since last July. This partly follows a surge in green energy projects. The EU, US and China have all promised to spend big. Hydrogen projects alone could receive €30bn from the EU. Copper has rallied to eight-year highs, around $8,375 per ton, as electric vehicles grow more popular. Glencore expects world copper demand will double by 2050 and that mine investment is insufficient.
Much depends on China. The country represents half or more of demand for many commodities. But Beijing has already begun to wind back some of the stimulus used to restart its post-pandemic economy. This year the central bank has begun withdrawing liquidity from local markets. Already, the $4tn Chinese corporate bond market looks wobbly following record defaults last year. An enforced slowdown should temper commodities demand.
Even the uncertainty about hen lockdowns will end and new questions about the efficacy of vaccines, commodity markets continue to give all the appearance of great confidence in the future. Last week, some of the key building blocks of economic growth – like copper and nickel – traded at or close to multi-year highs, while oil finally recovered to pre-pandemic levels to over US$60 per barrel.
While the demand for commodities worldwide has been depressed by the pandemic, so has supply. Miners as well as oil companies curbed spending on new projects last year, in response to low prices and falling demand. Since commodities are mostly priced in US dollars, the American currency’s recent decline has also acted to lift prices.
Today, each commodity has its own story, but supply constraints versus rising demand in Asia feature in many of them. Copper, for instance, is in a squeeze, with uncertainty over forthcoming spring elections and labor negotiations in Chile and Peru – the world’s largest copper producing nations – adding to existing concerns over pandemic-inspired mine closures. Demand, on the other hand, is only expected to increase, both from China and a growing electric vehicles industry.
Iron ore climbed a mountain last November and remains close to its 2020 peak. Concerns about supply grew last month after Brazil’s Vale – one of the world’s largest producers of ore and pellets – lowered its production forecasts. China, meanwhile, is importing iron ore at record rates of around 100 million tons per month, as it pursues an infrastructure-led recovery requiring vast quantities of steel.
Government stimulus programs outside China – most notably in the US – could be set to further raise the demand for commodities. High on President Biden’s agenda are infrastructure building programs and the speeding up of America’s transition to environmental sustainability. Roads, bridges, rail links, solar parks and wind farms will be heavy consumers of industrial commodities, along with some precious metals like silver.
The question is whether something like the commodities “supercycle” in the 2000s, which saw commodities ratchet higher over a period of years, is about to be repeated. Back then, the main driver was the Chinese economy. An extended period of rapid expansion – during which annual economic growth sometimes exceeded 10% per annum – caught the world short of basic commodities and it took a long time for the world’s major producers to catch up.
China is expected to be the only major economy in the world to post growth in 2020, with the fourth quarter growth rate in line with that of a year earlier, before the pandemic. Coupled with the contraction in the US economy in 2020, China's rebound meant its economy was that much closer to becoming the largest in the world. But many challenges remain.
Overcoming the US restrictions on technology has become a major policy priority for 2021. The recovery remains unbalanced, with consumer spending, especially on services, remaining weak due to the lingering effects of the economy. And unemployment remains a problem despite the decline in the official jobless rate. And a year after the initial coronavirus outbreak, authorities locked down cities in northern China this January, raising questions about the outlook for growth in the first quarter. Chinese consumers still spent around 821 billion yuan (US$127 billion) on shopping and dining during this year’s Spring Festival holiday, an increase from 2020 but still below the amount in 2019, which was over 1 trillion yuan.
The upcoming decades are in front of new trends in major dry bulk commodities that will reshape the freight market and investment decisions of shipping players. As climate change rises up the global political agenda and many governments commit to ambitious environmental targets, a race against time is on to develop low-carbon versions of this strong and versatile material.
China wants to be carbon neutral by 2060 and some provincial-level authorities have taken steps towards the government’s goals, while others’ actions have been slow or vague. For China, the new goal reflects several ambitions. Following through will put it in a leadership position among major countries. China’s decarbonization initiatives provide major opportunities to accelerate technology innovation and industrial upgrading, further strengthening its economy.
Zhang Xiliang, the director of the Institute of Energy, Environment, and Economy at China’s Tsinghua University, expects his country’s carbon emissions to peak around 2025, followed by a plateau and then a sharp decline. By 2035, he predicted, China will see a 20 percent decline in CO2 emissions relative to that peak. By 2050, it could witness more than a 70 percent decline, leading to carbon neutrality by 2060.
Furthermore, Chinese coal use will taper off after 2025, with usage of natural gas also peaking at that time and oil consumption peaking around 2030, according to Zhang. He predicted that the contribution of renewables and nuclear to China’s energy mix will reach 25 percent by 2030 and exceed 80 percent by 2060. Within a decade, China will have around 800 gigawatts of installed solar- and wind-generated capacity, which will help lower the country’s reliance on coal (currently at 57 percent of China’s energy mix, compared with the world average of 25 percent).
In the steel industry, emissions must fall by at least half by the middle of the century to meet global climate and energy goals, according to the International Energy Agency, with declines to zero pursued thereafter. For now, the most advanced initiatives to decarbonize steel production are in the EU — a reflection of its stricter environmental rules. Europe’s biggest steelmaker, ArcelorMittal has estimated that decarbonizing its facilities on the continent in line with the EU’s drive to eliminate net greenhouse gas emissions by 2050 will cost between €15bn and €40bn.
Along with rejoining the Paris climate accord, which commits to limiting global temperature rises to well below 2C, US president Joe Biden has proposed creating a climate research agency with goals that include “decarbonizing industrial heat needed to make steel, concrete, and chemicals”.
China’s Baowu Group, along with ArcelorMittal, Thyssenkrupp and other big steelmakers are at various stages of turning laboratory concepts into an industrial reality. A number have even announced targets for so-called “net zero” emissions. China unveiled a target to achieve “carbon neutrality” by 2060. That will require major upgrades to its steel mills, which are responsible for about one-third of the country’s industrial emissions. As the source of half the world’s steel, the Asian superpower exerts a pivotal influence on global market dynamics. “China today generates about 2 tons of CO2 for each ton of steel it produces, while in Europe you usually only generate one ton,” says Michele Della Vigna, an investment analyst at Goldman Sachs. “Longer term, it becomes important for China to show that its exports are not more carbon intensive than the goods produced in other countries.”
Under the new goals of carbon neutrality, China’s top diplomat says Beijing seeks to US to join forces on new energy and new technologies. Analysts say groundbreaking technologies and global cooperation are needed to achieve Xi Jinping’s ambitious targets on emissions and carbon neutrality.
Overall, Chinese strong economic indications amid COVID-19 crisis will be the pillar of demand recovery for the dry bulk freight markets. The Chinese economy continues its fast recovery from the pandemic, helped by a strong containment effort and swift policy actions to mitigate the impact of the crisis. After a record contraction in the first three months last year due to unprecedented lockdowns and factory closures, the world's number-two economy has since bounced back. The International Monetary Fund projects growth forecast for China to 7.9 percent. As a stronger sign, twenty-nine of 31 provinces, autonomous regions and municipalities on the Chinese mainland have set their GDP growth rate higher than 6 percent in 2021, according to the released work reports from the local governments.
2021 has already provoked strong upturn in commodities’ demand that will alleviate the pain that shipping players faced in the dry bulk market last year!