INSIGHT
Commodities face green wave in 2020
Increasing global demand for cleaner energy is set to impact commodity prices in 2020, according to ANZ Research, with some markets set for a boost and others facing new pressures.
In crude oil, tighter global emission rules are likely to weigh on trading, particularly with the implementation of new International Maritime Organisation fuel regulations in January.
The shift to low-sulphur fuel in shipping should see crude consumption increase, while stronger demand for liquefied natural gas (LNG) should also emerge.
Elsewhere, increased spending on renewable energy is also boosting demand for value-added minerals such as copper. Renewed clean-air campaigns in China should increase demand for higher-grade iron ore.
More broadly, capital for use in the energy and mining industry will be harder to come by as companies look for alternative sources and focus on survival rather than expansion.
“ANZ Research estimates LNG use in shipping could rise by over 70 per cent in 2020.”
-Daniel Hynes & Soni Kumari
Banned
The ban on the use of high sulphur fuel oil (HSFO) in the shipping industry will displace nearly 2.7 million barrels per day in 2020. Shippers without scrubbers (that can process the HSFO) will have to use very low-sulphur fuel oil (VLSFO) or dilute HSFO with marine gas oil (MGO).
Refineries will need to substantially increase crude throughputs to produce enough distillate for the shipping industry. The other option is using LNG. ANZ Research estimates LNG use in shipping could rise by over 70 per cent in 2020.
Elsewhere, there has been a notable increase in wind and solar investment in China in 2019. This is important for both fossil fuel consumption and boosting demand for value-added minerals.
For each megawatt of capacity, wind generators use five times more copper in their construction than coal-fired or hydro generators.
ANZ Research calculates copper demand from this sector is up 20 per cent year on year in 2019. This trend is expected to accelerate in 2020, with growth in China’s copper consumption forecast to rise to 4 per cent - despite slowing economic growth.
China’s renewed clear-air campaign will see the steel industry under the microscope. This has played out in a shift towards higher grade iron ore, amid constraints on steel output.
The demand for high-grade ore appears to be abating; the premium of 65 per cent over the benchmark index has completely evaporated, having been as high as 50 per cent in late 2018. However, ANZ Research believes this is a short-term interruption in a longer-term structural shift.
The re-emergence of tough environmental policies and larger blast furnaces should lead to stronger demand for high-grade ore. Tougher environmental regulations are also boosting palladium demand.
Pick 6
The China 6 emissions standards, the latest stage in China’s long-term plan to curb carbon emissions, are another short to medium term factor.
The latest legislation will have two tranches: China 6a from July 2020; and China 6b (including RDE testing) from July 2023. As the average loading of palladium in autocatalysts increases, we expect to see an ongoing surge in demand for palladium-rich autocatalysts.
New emmissions regualtions in China
| Adoption | Type 1 standards (g.km) | ||||||
| Early adaptors | All China | CO | HC | NMHC | Nox | PM | |
| China 1 | Jan-99 | Jul-00 | 2.7 | ||||
| China 2 | Jan-03 | Jul-05 | 2.2 | ||||
| China 3 | Dec-05 | Jul-07 | 2.3 | 0.20 | 0.150 | ||
| China 4 | Dec-08 | Jul-11 | 1.0 | 0.10 | 0.080 | ||
| China 5 | Feb-13 | Jan-18 | 1.0 | 0.10 | 0.068 | 0.060 | 0.0045 |
| China 6a | Jul-20 | 0.7 | 0.10 | 0.068 | 0.060 | 0.0045 | |
| China 6b | Jul-23 | 0.5 | 0.05 | 0.035 | 0.035 | 0.0030 | |
CO = carbon monoxide; HC = hydrocarbons; NMHC = non-methane hydrocarbons
NOx = nitrogen oxides; PM = particulate matter; PN = particulate number
Source: ICCT, China MEP, WPIC, ANZ Research
Separately, a new railway line in China should see thermal coal import demand weaken in 2020. The north-south line was constructed to shift the transport of coal from trucks to rail, thus reducing coal-dust emissions. This is likely to boost the coal consumed by the world’s biggest complex of coal-fired power plants.
Redirect
Outside the commodity specific issues, climate change issues are likely to have an increasing impact on investment in new capacity. Energy companies are already redirecting capital away from the fossil-fuel industry into markets more aligned with the renewable energy sector.
In Australia alone, ANZ Research estimates investment in the sector has reached a record high of $A8.3 billion, with a strong pipeline expected to see this reach $A10 billion in 2020.
Renewable projects now make up 16 per cent of Australia’s major projects database, up from almost nothing three years ago.
ANZ Research also expects growth investment in oil, gas and coal markets to remain subdued, although the impact will broaden to the wider resources industry.
Capital for use in energy and mining capacity expansion will be ever harder to come by. The issuance of debt to fossil fuel companies is running at its lowest share of the non-Chinese corporate bond market since 2005, according to Bloomberg data.
Daniel Hynes is a Senior Commodity Strategist and Soni Kumari is a Commodity Strategist at ANZ
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