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Next Five Years Will Bring Huge Changes To China’s Commodity Demand

Remember the commodity super-cycle? It was pedaled by the Chinese. It made smart investors like Jim Rogers filthy rich. That story is over, as everyone now knows. And the next five years are going to bring huge changes to the country’s demand for raw materials, especially coal and oil.

China’s commodity demand is in transition, says Barclays Capital’s commodity research team led by Kevin Norrish in London. What’s taking place of China’s raw materials appetite is “a less investment driven, more consumer-led economy that is not as competitive in global manufacturing, but less polluting.”

Those changes will lead to a slowing of demand for almost all commodities, but there is still the chance for China to be a price-driver for copper, iron ore, soy and surely oil and coal.

China’s impact on global energy markets will be due to the necessity to reduce pollution in China’s largest cities. Pollution has become China’s “Inconvenient Truth”, with most Chinese citing air quality as their number one concern in a recent poll this month. China is already a major solar panel producer. So investment in renewables is likely to surge and China will surely become much more important in global natural gas markets. This is indicative of China’s ongoing deals with Russian gas giant Gazprom .

Barclays analysts said in a report last week that China’s influence in global industrial metals markets will “greatly diminish” as domestic growth rates slow sharply. Unless other developing countries take up the slack, global metals demand growth rates over the next five years will decline. This is bad news for copper exporting nations like Chile, and for the big iron ore producers like Vale , BHP Billiton and Rio Tinto.

Winners & Losers

With GDP slowing to 6.2% over the next five years, China’s average rates of fixed asset investment in things like roads and bridges, plus industrial production growth are all on the wane. How substantial of a fall is anybody’s guess, but most economists put it at around 30%. Growth in manufacturing exports will fall even worse, by around 40%. That’s not exactly horrible for China. Living standards will improve — reaching the equivalent of $20,000 per capita by 2020. That’s nearly double where it is now. Car sales and consumer durables will rise. Yes, the Chinese will be eating more chicken and fried pork, but don’t bet your farm on it this time around.

China has made great strides over the years in terms of food consumption and food quality. Both have reached similar levels to those in more developed East Asian countries, notes Barclays researchers. But without significant population growth, demand for staple grains in China is likely to stop rising altogether over the next five years. Demand for protein is likely to see relatively slow growth as well, which will mean a marked slowdown in demand for animal feed derived from corn and soybeans. This will hurt commodity exporters like Brazil and Argentina particularly hard. The U.S. will only be spared because local demand takes up a good amount of local supply.

Some of the soft commodities are likely to be the biggest beneficiaries of rising living standards, urbanization and changing tastes. Coffee is expected to lead the demand. China is less than 5% of the world’s coffee consumption. But demand is seen growing by more than 15 a year%, according to the China Coffee Association.

Energy demand is undergoing a rapid slowdown and at just 3% annual growth to 2020, China’s demand for power will be only half that of the previous five years. China’s thirst for oil was once a reason for crude to be priced over $100 a barrel. Not it will be a reason for crude to be priced below $100.

Coal will be the biggest loser. BarCap expects demand growth falling by more than half to an average of just 2% annually as it loses share to natural gas, nukes and renewables. U.S. coal exports to China will face major obstacles going forward. Exports to China, which represent the top destination for U.S. coal, are already in decline, according to the U.S. Energy Information Administration. In the not so distant future, coal exporters will have to find other markets.

Alternative energy sources will see their combined share of total Chinese energy consumption double to 15% while the share of coal is expected to go from 65% of the energy matrix today to 60% within five years. By then, China could account for almost 40% of total global energy generation from renewables.

Meanwhile, as evidenced by its Russian gas deals, China is set to become a much more important player in global gas markets. China’s share of global gas demand will likely double to 10% over the next five years.

Barclays analysts forecast China’s five year oil demand rising to almost 11.9 million barrels per day compared to 2014s 9.9 million. It’s up. But at a much slower pace than the average 2.5 million barrel a day gain recorded over the previous five years.

China’s share of global oil demand is now close to peaking and will rise by around 1% to total of 12% of world oil demand by 2020.