Century of Transformation in the Commodity Markets

#1 · October 17, 2023, 10:04 am

Quote from chief_editor on October 17, 2023, 10:04 am

Over the past century, global production and consumption of commodities have increased significantly, leading to continuous changes in the structure and prices of commodities. Among the major commodities, metal demand has grown tenfold, energy demand has increased sixfold, and food demand has quadrupled. Additionally, the relative importance of commodities within and among commodity groups has undergone significant changes. The primary driving force behind demand growth has shifted from developed economies to developing countries, with the consumption share of developed countries in energy and metals decreasing from around 50% and 75% in 1995 to 34% and less than 25%, respectively.

China has been the largest driver of commodity market growth in the past two decades. Major commodity supplies have become more diversified, international trade has expanded significantly, and pricing mechanisms have gradually shifted towards competitive pricing. Real commodity prices (adjusted for inflation) have generally shown a downward trend relative to manufactured goods and services. Among them, energy prices have been on the rise, agricultural product prices have been on the decline, and metal prices have remained relatively stable but with divergent trends among different metals.

Part 1 Energy

Over the past century, the energy market has undergone significant changes. Globally, energy consumption in 2020 was approximately three times that of 1970, with significant increases in proven reserves and production of crude oil and natural gas. After World War II, energy consumption growth accelerated, and from 1970 to 2020, consumption of natural gas, coal, and oil increased by about threefold, 1.5 times, and 1 times, respectively. In terms of structure, crude oil has become the most important commodity, largely replacing coal in transportation. Meanwhile, the role of coal in power generation and heating has been gradually replaced by natural gas. Clean energy sources, including nuclear, solar, wind, and hydropower, have increased their share in the global energy mix (Figure 1)

Figure 1: Global Energy Consumption and Major Energy Uses (Source: BP statistics, International Energy Agency, Our World in Data, United Nations Commodity Trade Statistics Database, World Bank)

Fossil fuels such as coal, oil, and natural gas are currently the most important sources of energy, accounting for 83% of the total energy consumption. This represents an 11% decrease compared to 50 years ago. Oil, known for its wide range of uses, easy accessibility, low production costs, and convenient transportation, currently constitutes two-thirds of the global fossil energy consumption value and 40% of global energy consumption. Over the course of a century, from 1920 to 2019, global crude oil production has increased from slightly over 1 million barrels per day to over 100 million barrels per day. Currently, about two-thirds of oil is used for transportation, with very few economically viable alternatives, while the remainder is primarily used in petrochemical product manufacturing.

Over the past century, crude oil production has shifted from the United States to regions such as the Middle East and the North Sea. Currently, it is concentrated in the Middle East, the North Sea, the Gulf of Mexico, and Alaska. The United States, Russia, and Saudi Arabia are the three largest oil-producing countries. Consumption, on the other hand, has shifted from developed countries to developing nations. The Asia-Pacific region, North America, and Europe are the major consumers of crude oil, accounting for approximately 80% of global consumption. The United States, China, and India are the three largest consumers of crude oil. Crude oil prices have risen in real terms over the past century, with increasing volatility. The main forces determining prices have gone through stages such as Standard Oil, the Seven Sisters, OPEC, and competitive pricing. Changes in crude oil production, consumption, and prices over the past century are illustrated in Figure 2.

Data sources: BP Statistics, International Energy Agency, Our World in Data, World Bank

Note: The Middle East includes Iran, Iraq, Kuwait, Qatar, and Saudi Arabia; the North Sea includes the United Kingdom and Norway.

Coal, known for its abundant reserves and low cost, has seen its share in global energy consumption decrease, but total consumption continues to grow. Currently, coal accounts for 30% of global primary energy consumption, and approximately 40% of global electricity is generated from coal. Coal is primarily used for electricity generation and metal smelting, with electricity generation accounting for 60% of its consumption. China is the largest consumer of coal, accounting for over half of global consumption, followed by India (10%), Indonesia (7%), the United States, and Australia (each approximately 6%). Transportation costs are a significant constraint on coal trade, and large-scale international coal trade began in the 1970s. Between 2000 and 2008, there were significant changes in the coal market, with consumption increasing by nearly 50%, and China contributing nearly two-thirds of the growth.

Natural gas is characterized by low pollution and emissions. Over the past century, its share in global energy consumption has grown from less than 5% to over 20%. Currently, it is primarily used for electricity generation, heating, cooking, and industrial production, with electricity generation accounting for around 40% of its total consumption. Natural gas can often serve as a substitute for oil and coal in electricity generation, but it typically requires retrofitting or new infrastructure. Due to the high costs associated with pipeline construction, storage, liquefaction, and regasification, the natural gas market is more regional compared to oil and coal. Asia, Europe, and North America represent three relatively independent markets:

In Asia, liquefied natural gas (LNG) is the primary trade form, with pricing mainly based on long-term contracts (Japan's natural gas prices are linked to oil).

In Europe, natural gas is transported via pipelines from Norway and Russia to other countries, with prices mainly linked to oil.

In North America, natural gas is transported via pipelines between the United States, Canada, and Mexico, with prices typically determined through open markets and negotiations.

With the increasing production and trade of liquefied petroleum gas (LPG), the global natural gas market is moving towards greater convergence. Price differences between the three regions have narrowed but still remain noticeable. In 2021, the United States became the world's largest natural gas exporter.

Low-carbon energy sources have developed rapidly over the past century. In 2020, low-carbon energy sources, including nuclear and renewable energy, accounted for approximately 17% of global total energy consumption, primarily used for electricity generation. Among them, nuclear energy accounted for about 7%, with the United States being the world's largest nuclear energy producer, accounting for approximately 30% of the global total. Renewable energy sources such as hydropower, wind energy, and solar energy accounted for about 10%, with China being the largest producer of renewable energy, representing approximately one-quarter of the global total.

Part 2 Metals

The global metals market has also undergone significant transformations. In terms of overall consumption, in 2020, global metal consumption was approximately four times that of 1970, closely mirroring the growth of the global GDP. From 1970 to 2020, consumption of aluminum, copper, and zinc increased by 5 times, 2.5 times, and 2 times, respectively, while steel consumption also experienced substantial growth. Currently, global iron metal reserves are estimated to be around 2.3 trillion tons. Bauxite reserves are estimated to be around 550 to 750 billion tons, and copper metal reserves are approximately 3.5 billion tons. Steel is the most consumed metal, followed by aluminum, copper, zinc, silver, and others. Aluminum consumption, for instance, is 2.5 times that of copper. Structurally, technological advancements and industrial revolutions have driven large-scale production of metals, commercial applications, and substitution of metals. Steel replaced cast iron, aluminum gradually replaced tin and steel in packaging, and became a substitute for steel in the automotive industry.

Overall, metal prices have remained relatively stable over the past century. In the 20th century, with technological advancements, improved production efficiency, and increased supply, metal prices generally decreased. However, since 2000, due to rapid growth in demand from developing countries, especially China, major metal prices rebounded. Changes in global major metal prices over the past century are illustrated in Figure 3.

Data sources: Federal Reserve Bank of Minneapolis, U.S. Bureau of Labor Statistics, World Bank

China has been a major driving force behind the growth in global metal consumption. From 1995 to 2020, global metal consumption more than doubled, with China accounting for 90% of the growth. China's share in global metal consumption increased from 10% in 2000 to over 50% in 2020, producing and consuming over half of the world's major base metals, iron ore, and steel. Changes in global major metal consumption over the past century are shown in Figure 4.

Data sources: British Geological Survey, U.S. Geological Survey, World Bank, World Metal Statistics, World Steel Association

The global market for metal and mineral reserves and production is highly concentrated. Exporting countries of metals tend to be less dependent on metals than oil-exporting countries are on oil, but metal production is more concentrated. Global mineral reserves, ore production, and refined metal production are concentrated in a few countries. China is the world's largest producer of refined metals, with production accounting for 29% to 57% of different refined metals. Refined aluminum accounts for 57% of global production, while refined tin accounts for 29%. From 2000 to 2020, in upstream mining, China doubled its share of global bauxite and lead ore production, and production of copper and zinc ores also doubled. In midstream refined metals, China's share of global silver production increased sixfold, while refined copper and refined aluminum production shares grew fivefold, and refined lead production shares tripled. Changes in global major metal production over the past century are illustrated in Figure 5. The major metal market situation is summarized in Table 2.

Figure 5: Major Metal Production Over the Past Century. (Data sources: British Geological Survey, U.S. Geological Survey, World Bank, World Metal Statistics, World Steel Association)

Part 3 Characteristics of China's Commodity Market Development

China's commodity market has experienced rapid growth over the past two decades, making it the largest consumer and producer of many commodities. Currently, China accounts for over half of global demand for coal, metals, and iron ore, and it has been a major contributor to the growth in demand for commodities in recent years. China is the largest consumer of coal and the second-largest consumer of oil after the United States, accounting for 15% of global oil consumption (compared to approximately 20% for the United States). From 1995 to 2020, China's share of global energy consumption doubled. Additionally, China is both the largest consumer and producer of all refined metals, representing approximately 50% of global metal consumption, including aluminum, copper, zinc, nickel, tin, lead, and more. From 1995 to 2020, China's incremental metal consumption accounted for nearly 90% of global growth. As China's economic growth slows and its economic structure shifts from investment to consumption and services, it is expected that China's demand for commodities will slow down, and its share in the global commodity market will gradually be replaced by other developing countries. Changes in China's major commodity demand shares are shown in Table 3.

Table 3: Changes in China's Major Commodity Demand Shares

Data sources: BP World Energy Statistics, British Geological Survey, International Historical Statistics, U.S. Geological Survey, World Bank, World Metal Statistics, World Steel Association

China's resource intensity in extraction is high, and its external dependence on resources continues to rise. The global production share of China's major energy and mineral resources is much higher than its share of resource reserves. Its reserves of bauxite, copper, and nickel represent only about 3% of the world's known reserves, yet China's resource extraction intensity far exceeds that of other countries. China heavily relies on imports for many resources, including bauxite, copper, and nickel, which account for approximately 70%, 30%, and 20% of global imports, respectively. Dependence on external sources for resources such as crude oil, iron ore, copper, aluminum, and nickel is all above 60%.

China's resource consumption intensity exhibits "Chinese characteristics." Energy consumption intensity has decreased, and per capita coal consumption peaked at a lower level compared to the UK and the United States. Similar to the development experience of developed countries, China's energy intensity (i.e., energy consumption per unit of GDP) has been continuously decreasing in recent years. Coal is the primary source of energy, and from 1995 to 2020, about 85% of China's energy consumption growth came from coal. Currently, China's per capita coal consumption is similar to that of developed economies with similar per capita income. However, the peak per capita coal consumption in China is much lower than that of the United States (less than one-third) and the UK (half).

Iron ore and steel consumption are high, with growth rates far exceeding those of developed countries during the same period. China's peak per capita steel consumption and consumption intensity are much higher than those of developed countries, approximately three times that of the UK and two times that of the United States. The high growth rate of consumption and high market share reflect China's rapid industrialization and export-oriented economy, with construction, infrastructure, and manufacturing being the major industries driving steel consumption. Copper consumption intensity has continued to rise in China since the 1990s, while it has declined in other countries. Currently, China's share of global copper consumption is roughly similar to the peak shares of the UK and the United States, but consumption continues to grow. Since 1990, China's "copper intensity," which measures copper consumption per unit of GDP, has increased significantly and stands in stark contrast to other countries.

Over the past century, global production and consumption of commodities have increased significantly, leading to continuous changes in the structure and prices of commodities. Among the major commodities, metal demand has grown tenfold, energy demand has increased sixfold, and food demand has quadrupled. Additionally, the relative importance of commodities within and among commodity groups has undergone significant changes. The primary driving force behind demand growth has shifted from developed economies to developing countries, with the consumption share of developed countries in energy and metals decreasing from around 50% and 75% in 1995 to 34% and less than 25%, respectively.

China has been the largest driver of commodity market growth in the past two decades. Major commodity supplies have become more diversified, international trade has expanded significantly, and pricing mechanisms have gradually shifted towards competitive pricing. Real commodity prices (adjusted for inflation) have generally shown a downward trend relative to manufactured goods and services. Among them, energy prices have been on the rise, agricultural product prices have been on the decline, and metal prices have remained relatively stable but with divergent trends among different metals.

Part 1 Energy

Over the past century, the energy market has undergone significant changes. Globally, energy consumption in 2020 was approximately three times that of 1970, with significant increases in proven reserves and production of crude oil and natural gas. After World War II, energy consumption growth accelerated, and from 1970 to 2020, consumption of natural gas, coal, and oil increased by about threefold, 1.5 times, and 1 times, respectively. In terms of structure, crude oil has become the most important commodity, largely replacing coal in transportation. Meanwhile, the role of coal in power generation and heating has been gradually replaced by natural gas. Clean energy sources, including nuclear, solar, wind, and hydropower, have increased their share in the global energy mix (Figure 1)

Figure 1: Global Energy Consumption and Major Energy Uses (Source: BP statistics, International Energy Agency, Our World in Data, United Nations Commodity Trade Statistics Database, World Bank)

Fossil fuels such as coal, oil, and natural gas are currently the most important sources of energy, accounting for 83% of the total energy consumption. This represents an 11% decrease compared to 50 years ago. Oil, known for its wide range of uses, easy accessibility, low production costs, and convenient transportation, currently constitutes two-thirds of the global fossil energy consumption value and 40% of global energy consumption. Over the course of a century, from 1920 to 2019, global crude oil production has increased from slightly over 1 million barrels per day to over 100 million barrels per day. Currently, about two-thirds of oil is used for transportation, with very few economically viable alternatives, while the remainder is primarily used in petrochemical product manufacturing.

Over the past century, crude oil production has shifted from the United States to regions such as the Middle East and the North Sea. Currently, it is concentrated in the Middle East, the North Sea, the Gulf of Mexico, and Alaska. The United States, Russia, and Saudi Arabia are the three largest oil-producing countries. Consumption, on the other hand, has shifted from developed countries to developing nations. The Asia-Pacific region, North America, and Europe are the major consumers of crude oil, accounting for approximately 80% of global consumption. The United States, China, and India are the three largest consumers of crude oil. Crude oil prices have risen in real terms over the past century, with increasing volatility. The main forces determining prices have gone through stages such as Standard Oil, the Seven Sisters, OPEC, and competitive pricing. Changes in crude oil production, consumption, and prices over the past century are illustrated in Figure 2.

Data sources: BP Statistics, International Energy Agency, Our World in Data, World Bank

Note: The Middle East includes Iran, Iraq, Kuwait, Qatar, and Saudi Arabia; the North Sea includes the United Kingdom and Norway.

Coal, known for its abundant reserves and low cost, has seen its share in global energy consumption decrease, but total consumption continues to grow. Currently, coal accounts for 30% of global primary energy consumption, and approximately 40% of global electricity is generated from coal. Coal is primarily used for electricity generation and metal smelting, with electricity generation accounting for 60% of its consumption. China is the largest consumer of coal, accounting for over half of global consumption, followed by India (10%), Indonesia (7%), the United States, and Australia (each approximately 6%). Transportation costs are a significant constraint on coal trade, and large-scale international coal trade began in the 1970s. Between 2000 and 2008, there were significant changes in the coal market, with consumption increasing by nearly 50%, and China contributing nearly two-thirds of the growth.

Natural gas is characterized by low pollution and emissions. Over the past century, its share in global energy consumption has grown from less than 5% to over 20%. Currently, it is primarily used for electricity generation, heating, cooking, and industrial production, with electricity generation accounting for around 40% of its total consumption. Natural gas can often serve as a substitute for oil and coal in electricity generation, but it typically requires retrofitting or new infrastructure. Due to the high costs associated with pipeline construction, storage, liquefaction, and regasification, the natural gas market is more regional compared to oil and coal. Asia, Europe, and North America represent three relatively independent markets:

In Asia, liquefied natural gas (LNG) is the primary trade form, with pricing mainly based on long-term contracts (Japan's natural gas prices are linked to oil).
In Europe, natural gas is transported via pipelines from Norway and Russia to other countries, with prices mainly linked to oil.
In North America, natural gas is transported via pipelines between the United States, Canada, and Mexico, with prices typically determined through open markets and negotiations.

With the increasing production and trade of liquefied petroleum gas (LPG), the global natural gas market is moving towards greater convergence. Price differences between the three regions have narrowed but still remain noticeable. In 2021, the United States became the world's largest natural gas exporter.

Low-carbon energy sources have developed rapidly over the past century. In 2020, low-carbon energy sources, including nuclear and renewable energy, accounted for approximately 17% of global total energy consumption, primarily used for electricity generation. Among them, nuclear energy accounted for about 7%, with the United States being the world's largest nuclear energy producer, accounting for approximately 30% of the global total. Renewable energy sources such as hydropower, wind energy, and solar energy accounted for about 10%, with China being the largest producer of renewable energy, representing approximately one-quarter of the global total.

Part 2 Metals

The global metals market has also undergone significant transformations. In terms of overall consumption, in 2020, global metal consumption was approximately four times that of 1970, closely mirroring the growth of the global GDP. From 1970 to 2020, consumption of aluminum, copper, and zinc increased by 5 times, 2.5 times, and 2 times, respectively, while steel consumption also experienced substantial growth. Currently, global iron metal reserves are estimated to be around 2.3 trillion tons. Bauxite reserves are estimated to be around 550 to 750 billion tons, and copper metal reserves are approximately 3.5 billion tons. Steel is the most consumed metal, followed by aluminum, copper, zinc, silver, and others. Aluminum consumption, for instance, is 2.5 times that of copper. Structurally, technological advancements and industrial revolutions have driven large-scale production of metals, commercial applications, and substitution of metals. Steel replaced cast iron, aluminum gradually replaced tin and steel in packaging, and became a substitute for steel in the automotive industry.

Overall, metal prices have remained relatively stable over the past century. In the 20th century, with technological advancements, improved production efficiency, and increased supply, metal prices generally decreased. However, since 2000, due to rapid growth in demand from developing countries, especially China, major metal prices rebounded. Changes in global major metal prices over the past century are illustrated in Figure 3.

Data sources: Federal Reserve Bank of Minneapolis, U.S. Bureau of Labor Statistics, World Bank

China has been a major driving force behind the growth in global metal consumption. From 1995 to 2020, global metal consumption more than doubled, with China accounting for 90% of the growth. China's share in global metal consumption increased from 10% in 2000 to over 50% in 2020, producing and consuming over half of the world's major base metals, iron ore, and steel. Changes in global major metal consumption over the past century are shown in Figure 4.

Data sources: British Geological Survey, U.S. Geological Survey, World Bank, World Metal Statistics, World Steel Association

The global market for metal and mineral reserves and production is highly concentrated. Exporting countries of metals tend to be less dependent on metals than oil-exporting countries are on oil, but metal production is more concentrated. Global mineral reserves, ore production, and refined metal production are concentrated in a few countries. China is the world's largest producer of refined metals, with production accounting for 29% to 57% of different refined metals. Refined aluminum accounts for 57% of global production, while refined tin accounts for 29%. From 2000 to 2020, in upstream mining, China doubled its share of global bauxite and lead ore production, and production of copper and zinc ores also doubled. In midstream refined metals, China's share of global silver production increased sixfold, while refined copper and refined aluminum production shares grew fivefold, and refined lead production shares tripled. Changes in global major metal production over the past century are illustrated in Figure 5. The major metal market situation is summarized in Table 2.

Figure 5: Major Metal Production Over the Past Century. (Data sources: British Geological Survey, U.S. Geological Survey, World Bank, World Metal Statistics, World Steel Association)

Part 3 Characteristics of China's Commodity Market Development

China's commodity market has experienced rapid growth over the past two decades, making it the largest consumer and producer of many commodities. Currently, China accounts for over half of global demand for coal, metals, and iron ore, and it has been a major contributor to the growth in demand for commodities in recent years. China is the largest consumer of coal and the second-largest consumer of oil after the United States, accounting for 15% of global oil consumption (compared to approximately 20% for the United States). From 1995 to 2020, China's share of global energy consumption doubled. Additionally, China is both the largest consumer and producer of all refined metals, representing approximately 50% of global metal consumption, including aluminum, copper, zinc, nickel, tin, lead, and more. From 1995 to 2020, China's incremental metal consumption accounted for nearly 90% of global growth. As China's economic growth slows and its economic structure shifts from investment to consumption and services, it is expected that China's demand for commodities will slow down, and its share in the global commodity market will gradually be replaced by other developing countries. Changes in China's major commodity demand shares are shown in Table 3.

Table 3: Changes in China's Major Commodity Demand Shares

Data sources: BP World Energy Statistics, British Geological Survey, International Historical Statistics, U.S. Geological Survey, World Bank, World Metal Statistics, World Steel Association

China's resource intensity in extraction is high, and its external dependence on resources continues to rise. The global production share of China's major energy and mineral resources is much higher than its share of resource reserves. Its reserves of bauxite, copper, and nickel represent only about 3% of the world's known reserves, yet China's resource extraction intensity far exceeds that of other countries. China heavily relies on imports for many resources, including bauxite, copper, and nickel, which account for approximately 70%, 30%, and 20% of global imports, respectively. Dependence on external sources for resources such as crude oil, iron ore, copper, aluminum, and nickel is all above 60%.

China's resource consumption intensity exhibits "Chinese characteristics." Energy consumption intensity has decreased, and per capita coal consumption peaked at a lower level compared to the UK and the United States. Similar to the development experience of developed countries, China's energy intensity (i.e., energy consumption per unit of GDP) has been continuously decreasing in recent years. Coal is the primary source of energy, and from 1995 to 2020, about 85% of China's energy consumption growth came from coal. Currently, China's per capita coal consumption is similar to that of developed economies with similar per capita income. However, the peak per capita coal consumption in China is much lower than that of the United States (less than one-third) and the UK (half).

Iron ore and steel consumption are high, with growth rates far exceeding those of developed countries during the same period. China's peak per capita steel consumption and consumption intensity are much higher than those of developed countries, approximately three times that of the UK and two times that of the United States. The high growth rate of consumption and high market share reflect China's rapid industrialization and export-oriented economy, with construction, infrastructure, and manufacturing being the major industries driving steel consumption. Copper consumption intensity has continued to rise in China since the 1990s, while it has declined in other countries. Currently, China's share of global copper consumption is roughly similar to the peak shares of the UK and the United States, but consumption continues to grow. Since 1990, China's "copper intensity," which measures copper consumption per unit of GDP, has increased significantly and stands in stark contrast to other countries.