Another supercycle is coming. Anticipation of future demand growth has generated palpable excitement, driving commodity prices to post-pandemic highs.
But this time, as the saying goes, it’s different. While previous cycles lavished windfalls on the entire natural resource sector, the forces shaping this nascent boom are unlike any other. For the first time hydrocarbons will be bystanders, while those metals critical to the energy transition will take centre stage with a sustained period of extraordinary demand growth. Even for those stepping into the limelight, however, decarbonisation creates as many risks as opportunities.
Three potential developments could challenge how this supercycle unfolds:
HORIZONS
Champagne supercycle:
Taking the fizz out of the commodities price boom
July 2021
Simon Morris, Vice President Research, Metals & Mining Global Metals
Contents
Taking the fizz out of the commodities price boom
History may teach us little
A copper-bottomed story for metals
1.
2.
3.
Simon Morris
Vice President Research, Metals & Mining Global Metals
Simon Morris joined Wood Mackenzie as head of metals research in April 2019. He leads a global team of analysts who provide data and insight of relevance for any stakeholder involved in the extraction or consumption of aluminium, copper, gold, lead, nickel and zinc.
Prior to this Simon spent 12 years working for Rio Tinto in London, Mozambique and South Africa. His career there encompassed a wide range of roles – including M&A due diligence and transaction execution, investment modelling and analysis, corporate relations – with a particular focus on sovereign risk management, and strategy and financial planning.
Simon started his career working for Shell Exploration and Production, with assignments in Aberdeen, Lagos and The Hague. His work centred on Shell’s upstream assets, with a focus on business improvement and strategy-related projects.
Join the debate.
Get in touch with Simon
History may teach us little
The natural resources sector, embracing the gamut of metals, coal, oil and gas, has witnessed two commodity supercycles since the end of World War II. Both were decades long and, while their geneses were different, in essence, they resulted from rapid and unforeseen growth in demand that could not be quickly met by adequate supply.
The most recent boom, which began in the early 2000s, was driven by China’s rapid and unwavering focus on industrialisation and urbanisation. The resulting consumption of raw materials left almost no commodity untouched. Twenty years ago, China was only consuming 20% of the world’s iron ore and 12% of its copper. Today, China relies on coal, oil and natural gas for more than 80% of its energy mix, while it consumes around half of the world’s iron-ore and base metals production.
At the forefront of Wood Mackenzie’s analysis today is a multi-faceted assessment as to whether this next supercycle will transform the commodities landscape to a similar extent.
Get this insight as a PDF
Here today and gone tomorrow?
This will be the first commodities supercycle in history without hydrocarbons in the vanguard. That’s not to say that oil, gas and coal will not play an important role in the transition. The global economy will rely on fossil fuels for years to come.
In our base case, fossil fuels still deliver 75% of total primary energy demand by 2050. Oil demand continues to grow, peaking at 108 million b/d in the mid-2030s, gas demand a few years later. Even demand for thermal coal rises throughout this decade as the last coal plants under construction are completed. But growth for all will slow as the pace of decarbonisation picks up, making the chances of supercycle-led transformational demand growth remote.
The risks for fossil fuels lie squarely to the downside. Their share of energy demand falls to 50% in our AET-2 scenario as low-carbon energy captures market share. Rapid, aggressive electric vehicle (EV) penetration leads oil demand to collapse to 35 million b/d by 2050 - 70% below today’s levels - and the oil price to slump below US$20/bbl. Thermal coal demand, like oil, will also enter a steep decline.
Gas demand, in contrast, remains resilient. Methane’s lower carbon intensity, the large-scale development of carbon capture and storage (CCS) and carbon capture, utilisation and storage (CCUS) in the industrial and power sectors, and the deployment of blue hydrogen will all help gas demand remain flat from current levels.
Oil, gas and coal demand will not vanish in a puff of carbon-laden smoke; they will be around for decades and exposed to cycles and price swings as before. But the energy transition results in only one outcome for fossil fuels: demand destruction. It’s just a question of time.
Source: Wood Mackenzie, Energy Transition Outlook, H2 2020
Conclusion:
Less fizz will mean a smaller hangover
The impending supercycle will be driven by the energy transition, but it will not affect all commodities equally. While some will see no upside, if the boom is not carefully stewarded, even those that should benefit could face structural challenges to future demand.
Commodity supercycles are no panacea for the metals sector, however. Indeed, post-boom hangovers in the form of stranded or impaired assets, disenfranchised investors and underwhelmed government coffers have done far more lasting damage to producers than the preceding upside.
For the first time in the industry’s history, a paradigm shift in demand has been clearly signposted before it materialises. With that comes the opportunity to act before supply chains are overwhelmed. And while this might ultimately limit the highs, it will certainly reduce the lows and, ultimately, drive a more sustainable market dynamic in the long run.
Given what the industry has had to endure since the last supercycle ended, this one should be different from all others – and that would really be worth a champagne toast.
That said, there is undoubtedly an impending structural change in demand for at least some commodities. We forecast a recovery built on the green transition and the associated infrastructure investment that will rapidly replace national emergency spending in response to the Covid-19 pandemic.
We base our analysis around a three-pronged view of the potential trajectory of decarbonisation:
Today’s supercycle market narrative has hinged, in part, on the strong demand and price rally seen in most commodities over the past six to nine months. These developments, however, are largely attributable to a ‘here-and-now’ post-pandemic bounce. They are not indicative of a structural change in demand or evidence of the start of a supercycle.
Indeed, many expect economic activity to cool quickly, with interventionist behaviour already in the offing. Cue OPEC+, lifting output this summer in an attempt to avoid sharp price increases; the US Federal Reserve, mooting rate hikes in 2023; and China, touting a crackdown on “excessive speculation” while releasing state reserves of key metals in an unambiguous signal of its intent to actively manage overheating commodity markets.
A spoonful (or three) of sugar
Renewables are not enough
Figure 1: Global energy-related CO2 emissions by scenario
We must think in terms of
carbon avoidance and carbon removal
joining forces with the competition.
‘Coopetition’ is the way forward -
can play a pivotal role in harnessing economies of scale
CCS
clusters
We can map sources with nearby sinks that have the requisite storage capacity and properties
Get this insight as a PDF
the rise of ‘consumption consciousness’, undermining the long-term use of primary metal
systemic supply uncertainty, forcing commodities into obsolescence
the narrowing control of metals’ supply chains, excluding many from the party
•
•
•
Crucially though, unlike previous cycles, this supercharged growth has been clearly signposted well in advance. With such forewarning, the mining sector now has the opportunity to act pre-emptively to achieve a more sustainable long-run market dynamic. Not acting will leave the industry at risk of perpetuating the boom-bust cycles that have plagued the sector since time immemorial.
Taking the fizz out of the commodities price boom
our base case, broadly consistent with 3˚C global warming;
our Accelerated Energy Transition 2 (AET-2) scenario, consistent with 2˚C global warming and global net zero carbon emissions by 2070;
and our AET-1.5 scenario, consistent with 1.5˚C global warming and global net zero carbon emissions by 2050
•
•
•
China’s record-breaking economic growth in Q1 2021 of 18.3% year on year and US President Joe Biden‘s headline-grabbing US$1.9 trillion stimulus package are fuelling a sugar rush for commodity demand. But this will ultimately be dwarfed as the world – led in many ways by China, once again – focuses on the mammoth task of decarbonising the global economy. Under our AET-1.5 scenario, we estimate that US$50 trillion must be invested over the next three decades to electrify infrastructure and engineer out the aspects of modern life that most significantly contribute to carbon emissions.
As the world grapples with the magnitude of the transition and metal producers dream of what might be, other commodities are waning in prominence. Indeed, the more the transition agenda gains traction, the greater the polarisation of the ‘winners and losers’ will be. Before considering who the winners may be and the challenges they may face, let’s look at the commodities that will lose out.
Fossilised losers
A copper-bottomed story for metals
The winning commodities from the energy transition are a set of industrial metals that will electrify society. Simply put, without a huge increase in the supply of the mined commodities used to create renewable energy, transmit electricity or build enabling technologies, there is currently no way to meet the world’s carbon-reduction targets. And so, if consumption patterns and the metal processing technologies used today endure over the coming decades, the disconnect between supply capability and demand will become almost inconceivably large under any scenario.
As with all commodities, the metals that are key to the transition will have to bring on replacement capacity to replace existing mines as they deplete and close. Under our base case, this requirement is manageable. However, under our AET-2 scenario, the new annual installed capacity required becomes eye-watering. By 2030, cobalt producers would need to have built 167% more supply than we currently have in our forecast, while copper would need to find 85% more mine supply than in our base-case forecasts. This will present a huge challenge for the sector.
Figure 2: The additional metal supply needed by 2030 under our base-case and AET-2 scenarios
Source: Wood Mackenzie
While this should be unequivocally positive, as metal producers and investors gear up for a period of robust demand growth, their enthusiasm should be tempered. There are broad – and unprecedented – themes that could challenge their outlook and need to be considered now.
The dawn of consumption consciousness?
Those with a vested interest in metals are already enthusiastic cheerleaders for an intoxicating narrative about the energy transition and the quantum of metal that will be needed to achieve it. Producers are being courted by politicians, entrepreneurs, consumers and investors alike. However, whipping up a frenzy over the dizzying levels of additional metal that will feed the energy transition over the next 20 years – 360 million tonnes (Mt) of aluminium, 90 Mt of copper and 30 Mt of nickel under our AET-2 scenario – could prove a Pyrrhic victory.
Figure 3: Metal usage in energy transition technologies by 2030
Source: Wood Mackenzie
Increasingly, society, investors and governments are linking consumption to the raw materials used in everyday life or, more specifically, to the issues arising from the extraction and production of those materials. Over the last decade, two realisations have emerged that are starting to transform consumption habits – the prevalence of single-use plastic in our ecosystems, which has increasingly pushed consumers to look for alternatives, be it recycling or substitution, and the fact that very few discussions on economic activity today can’t be held without some thread back to carbon.
If metals producers are too successful in drawing attention to how much of their primary (that is, non-recycled) metal will go into cars, phones, telecoms and energy transition infrastructure, they may find themselves the new target of consumers’ ire. And if they with government policy force manufacturers to reduce their use of primary metals, the supercycle story may lack a happily ever after. Taking this one step further, consumers might conceivably switch off more fully from some types of consumption. For instance, if the ‘Uberfication’ of private transport drove a switch to pooled rather than individual vehicle ownership, cutting car consumption, metals demand will suffer.
The era of consumption consciousness could well be the next chapter in society’s awakening - and it would undoubtedly be uncomfortable for those banking on unfettered demand for metals.
Systemic cyclicality may prove untenable for the next generation of consumers
The components that will come together to deliver the energy transition will be many and varied. Of all those currently known, the single most impactful for metals demand will be EVs. This will pose a new challenge for those considering future industry dynamics.
Figure 4: Drivers of energy transition-related metal demand to 2040
Source: Wood Mackenzie
Future investment in infrastructure – be it power, housing or transport – was once all that mattered. This was a broadly predictable and well-understood font of demand, albeit beholden to macroeconomic trends and political agendas. Critically, there was relatively limited substitution risk – when demand was high, consumers had little option but to pay the prevailing commodity price. However, with EVs emerging as a critical source of demand, producers will have to consider how they supply a consumer with a different mindset.
Inherently cyclical, the only predictable thing about metals prices is that they will fluctuate. If EV manufacturers, operating with inelastic retail prices and tight inventories, cannot guarantee access to critical metals at an affordable – and predictable – price, they will look to innovate or thrift them out to the greatest extent possible.
And there are a plethora of emerging technologies – such as next-generation electrofuels, polymeric energy storage and low/zero nickel- and cobalt-free, high-energy-density batteries – that could dramatically alter the clean-energy landscape. In doing so, they may push those metals expecting to benefit from the impending supercycle into obscurity.
As the supply challenge materialises, the inexorable rise in prices will surely incentivise alternatives. The metals and the technologies they enable, seen as the platform for the first stage of decarbonisation, may not last the course as other, cheaper, more reliable alternatives break through.
Will cash flow to the few, rather than the many?
The previous China-led supercycle consumed enormous quantities of commodities. With limited domestic production, China became uncomfortably reliant on others to supply the key materials it needed. In response, over the past two decades, China has sought – with reasonable success – to gain greater control of these supply chains, either through acquisition or soft power.
Figure 5: The origins of mine/metal owners, 2000 versus 2020
Source: Wood Mackenzie
China’s 14th five-year plan confirmed that its focus on supply security will shift to the energy transition. Its move to secure rare earth and battery raw materials is well documented, but its self-sufficiency is also extending downstream. 75% of global lithium-ion batteries, 70% of all solar panels and 60% of EVs are made in China. But its aspirations have not yet been satisfied and we expect its control to continue to grow.
With China dominant in its control of energy transition value chains, non-Chinese entities face an ever-diminishing share of any commodity windfall. With greater cash comes greater investment capability, enabling China to realise a strategy of supply security at any cost. Those who choose to participate too late in the cycle – be they nations seeking to secure supply for themselves, customers wanting to protect their production lines or investors wanting to cash in on supernormal profits – are likely to find that they either can’t afford to participate or are precluded altogether.
Bubble trouble
We are concerned that an unsustainable price bubble is already building for some commodities due to the exuberant, but premature, desire to capture profits from future demand growth. The world will undoubtedly need new supplies of key metals – but not yet. Many of those metals are facing considerable supply surpluses over the next three to five years.
This oversupply should cool prices, but could also delay investment in new exploration campaigns and projects, both of which are typically only approved once prices are on an upward trajectory ‒ and usually about five years too late.
However, there is a unique opportunity for the sector to act pre-emptively to ensure supply is available when it is most needed. The pre-supercycle price spike triggered by the post-pandemic bounce is incentivising an uptick in investment now, meaning new supply should start to arrive at just the right time. Board members and investors must, therefore, remain focused on future possibilities should prices come off the boil in the coming years.
Simon Morris Vice President Research, Metals & Mining Global Metals
Contents
1.
2.
3.
Taking the fizz out of the commodities price boom
History may teach us little
A copper-bottomed story for metals
Another supercycle is coming. Anticipation of future demand growth has generated palpable excitement, driving commodity prices to post-pandemic highs.
But this time, as the saying goes, it’s different. While previous cycles lavished windfalls on the entire natural resource sector, the forces shaping this nascent boom are unlike any other. For the first time hydrocarbons will be bystanders, while those metals critical to the energy transition will take centre stage with a sustained period of extraordinary demand growth. Even for those stepping into the limelight, however, decarbonisation creates as many risks as opportunities.
Three potential developments could challenge how this supercycle unfolds:
Another supercycle is coming. Anticipation of future demand growth has generated palpable excitement, driving commodity prices to post-pandemic highs.
Join the debate.
Get in touch with Simon
Simon Morris
Vice President Research, Metals & Mining Global Metals
Simon Morris joined Wood Mackenzie as head of metals research in April 2019. He leads a global team of analysts who provide data and insight of relevance for any stakeholder involved in the extraction or consumption of aluminium, copper, gold, lead, nickel and zinc.
Prior to this Simon spent 12 years working for Rio Tinto in London, Mozambique and South Africa. His career there encompassed a wide range of roles – including M&A due diligence and transaction execution, investment modelling and analysis, corporate relations – with a particular focus on sovereign risk management, and strategy and financial planning.
Simon started his career working for Shell Exploration and Production, with assignments in Aberdeen, Lagos and The Hague. His work centred on Shell’s upstream assets, with a focus on business improvement and strategy-related projects.
Back to top
Back to top
Back to top
Back to top
there is undoubtedly an
impending structural change in demand
for at least some commodities
to electrify infrastructure and engineer out the aspects of modern life that most significantly contribute to carbon emissions.
US$50 trillion must be invested over the next three decades
The risks for fossil fuels lie
squarely to the downside
+29%
Aluminium
+65%
Nickel
+85%
Copper
+130%
Lithium
+167%
Cobalt
= 2030 base supply
= replacement supply needed, 3°C scenario
= additional supply needed, 2°C scenario
EVs + charging
AI
Cu
LCE
Ni
Co
236kg/ unit
140kg/ unit
36kg/ unit
13kg/ unit
5kg/ unit
Photovoltaic
AI
Zn
Cu
22kg/ Kw
5kg/ Kw
4kg/ Kw
Offshore
Cu
AI
Zn
8kg/ Kw
3kg/ Kw
0.7kg/ Kw
AI = Aluminium; Co = Cobalt; Cu = Copper; LCE = Lithium; Ni = Nickel; Zn = Zinc
Figure 5: The origins of mine/metal owners, 2000 versus 2020
Source: Wood Mackenzie
