I remain skeptical about the suddenly very fashionable commodities super-cycle thesis. Even more so as others lose their heads. Such as Chanticleer after yesterday’s BHP release:
Mike Henry is a cautious type.
[His] “fundamentally positive” outlook that could last as long as 30 years.
He says two key drivers will underpin demand.
The first is the pandemic, which has led to governments and central banks flooding the world with stimulus measures that BHP expects will remain in place for a long time, helping lift economic growth, inflation and demand for commodities.
…The growing momentum around the world to tackle climate change – from China, Japan, South Korea, Europe and now the Biden administration in the United States – will ironically be commodity-intensive.
In a world aligned with the Paris climate agreement that aims to limit global warming to 1.5 degrees, BHP expects copper demand to double over the next 30 years and nickel demand to quadruple.
Henry emphasised forcefully on Tuesday that even demand for steel – which requires BHP’s iron ore and coking coal – is likely to double as infrastructure such as wind turbines are needed as part of the energy transition.
That would be amusing if it were not printed in the national business daily.
Steel and coking coal output is going to double? Steel consumption more than doubled in the last twenty years but 90% of it was driven by the rise of China and that tide will go out as Chinese urbanisation ramps down. The following chart assumes China reaches 70% urbanisation in 2030 and 80% in 2040:
In short, the iron ore intensive Chinese build-out is on the downslope already and will stay on it. A large portion of that build-out has also happened in advance with gleaming and under-utilised infrastructure everywhere plus 70m empty apartments.
For comparison, here’s Japan post-development period in steel production:
Output has fallen roughly 20% since the peak. When that happens in China, and domestic demand drops, turning output to exports, the volumes will be far too big to be absorbed in the global economy. So the risk is a greater, not lesser fall. Even if it is only 20%, that will displace 350mt of current iron ore demand.
But wait, there’s more! When we add the environmental trend towards scrap usage rising from 20% today to 40% in 20 years then the volume of displaced iron ore demand becomes an astonishing 600mt. Equivalent to most of Australia’s mined volumes today.
Yes, global steel consumption in some jurisdictions will rise, in India especially and other developing economies, but it will be fighting a Chinese demand downdraft of immense proportions in aggregate.
Turning to base metals, the World Bank has previously examined the implications for commodities from various climate change mitigation scenarios:
Figure 2.11 provides a very preliminary glimpse of how overall demand for metals by 2050 might be affected by an increase in demand for the technologies identified in this report.
This figure is intended to begin a story with respect to the links between metals and a carbon-constrained future, namely, that technologies supporting a carbon-constrained future will cause demand for a wide range of base metals, as well as for rare earth metals, to increase. It is important to keep in mind that this initial study does not include a number of key technologies and modalities that would have further impacts on overall demand for key metals. For instance, this study’s scope (and budget) did not include an examination of the implications of electric motors for vehicles; where, a recent study claims that the future electric vehicle market could create a huge increase in demand for copper and cobalt (Economist 2014).
The charts are hard to read but they represent the aggregate extra tonnages of each metal needed for the entire period to 2050. For copper, it is bugger all. For lithium, it is a boom. But it’s abundent. Silver is a little more bullish.
The question about EVs is interesting. That could lift copper demand some more except that there is also a revolution coming to vehicle manufacturing. The economics of autonomous vehicles are compelling. That will lead to the death of the personal motor car, replaced by a fleet of robotic Ubers that are summoned on demand.
As an example, this will lift the average utilisation of cars from, say, 15,000 kms/year for personal ownership to 200,000 kms/year for autonomous. This vast increase in resource utilisation will collapse the volume of cars needed.
Hence, EV demand for base metals is also very likely heavily exaggerated.
Don’t get me wrong. There will be periods when in these commodity markets when demand outstrips supply and prices rise to trigger investment. But, given the demand growth is so manageable, new mines will collapse prices just as quickly.
In short, the commodity super-cycle thesis being shopped around all over is overblown. It is not a rerun of the China super-cycle. Nothing like it.
The lesson for BHP investors is that, just like we saw in 2015, the booms and busts will continue and the dividend will be just as cyclical as it has always been.