Year 2019 proved a tug of war between geopolitical tensions and macroeconomic concerns, rangebound commodity prices and — perhaps most importantly — rising consumer awareness of climate change. Looking to 2020, we think the year will bring some of these themes into even sharper focus.
The upcoming U.S. presidential election, a decelerating Chinese economy and rapidly evolving technology will once again keep commodity markets unpredictable, even for the most seasoned observer.
My personal five commodity themes to watch during the coming year:
Energy transition will remain ever-present, driving discussions and strategic planning in 2020. World leaders in politics and industry are under mounting pressure — evidence including the Extinction Rebellion movement and activist Greta Thunberg — to deliver more energy produced with sharply lower emissions and in more sustainable ways. And importantly, to keep the global average temperature rise at no more than 2 degrees Celsius.
Huge investment will be required, and no one single approach will likely win out. Numerous technology solutions are vying for the same investment dollars that are already shifting away from traditional higher-carbon-intensity industries. Expect a heavy reliance on subsidies, which in turn are dependent on policy.
In transportation, the predominant focus has been electric vehicles — also, increased investment and research into the use of hydrogen for long-distance transportation. Expect biofuels to take center stage in 2020, as favorable economics and the consumer-led call for immediate action have revitalized support, particularly in Europe.
Biofuel blending appears to be the fastest route to cutting emissions and adding renewed pressure on oil refiners.
With more than 1 billion conventional cars globally, road transport accounts for 20 percent of global carbon emissions. Thus, global oil output must rise to meet the rising demand from road transport.
The United States is more complex, with upped tensions between federal and regional policies. Simultaneously, natural gas is cheap, putting pressure on coal use for electricity, but also on cleaner nuclear, renewables and energy storage.
To meet aggressive carbon-reduction targets, every type of energy and product needs to reduce its carbon intensity. Carbon capture and storage will be required as well as greater energy efficiency by consumers.
Economic slowdown in China
Tariffs and trade wars will continue to dictate global pricing and trade flows in commodities in 2020. Already, consequences of the ongoing dispute between China and the United States are rippling into the economy, sparking fears of another recession.
Exacerbated is a change in local Chinese policy that aims to wean state-owned enterprises and banks off stimulus packages. The effects: slowed economic pace in China — not seen since 1992 — with weaker fuel demand growth and resulting upped gasoil, gasoline and jet fuel exports. Under pressure are Asian commodity prices and refinery margins.
Platts Analytics expects exports of gasoline, gasoil and kerosene in 2019 to reach 54.5 million mt (1.17 million barrels per day), sans any new export quotas by year’s end. This is nearly a tenth of the country’s crude imports, which is roughly equivalent to Saudi Arabia or India’s refined exports — both regions where refineries also cater heavily to export markets.
This figure is set to rise in 2020, with the marked growth in new refineries resulting in total capacity reaching 18.71 million b/d, with another 320,000 b/d still under construction. China’s crude imports have remained robust, up 17 percent annually in 2019 as of October.
The rise of new markets
Despite strong EV production, the slowing of China demand — after the government’s July decision to cut state subsidies on EVs — is weighing heavily (with sales down 50 percent year on year).
While hopes of a 2020 EV sales rebound abound, significant costs of buying an EV and limited infrastructure remain barriers to entry. Despite better financials at companies such as Tesla, sector-wide costs are unlikely to reach parity until 2022-23; 2025 is the widely touted year when sales may take off globally.
In petrochemicals, the transition from virgin to recycled plastics is under way, especially amid European policy changes. However, virgin polymers and feedstock monomers are to remain more competitively priced into the mid-2020s, challenging traditional discounts for recycled material. Truly scalable and commoditized markets take time to develop.
Weather-driven market events
Weather-related demand swings are traditional to commodity markets, natural gas and electricity, but the cycle of significant climate events is increasing.
In spring 2019, U.S. farmers were unable to plant crops on 19.4 million acres in the Midwest – the largest number of so-called “prevent plant” acres since the United States began tracking such data in 2007. In 2018, the number was 1.9 million acres.
The result: flooding due to an accelerated snow-melt in the spring, which was caused by record rainfall. Over 14 million acres — intended for corn, soybeans and wheat — went unplanted, sending corn and soybean prices to multi-year highs.
As agriculture and biofuel demand grows, such swings in demand will get larger, as well as the demand for heating fuels, especially as growing populations get access to domestic gas or liquefied petroleum gas, making the demand for these commodities increasingly vulnerable to weather conditions.
2020 could be the year of the centralized ledger, but potentially without blockchain technology itself.
Blockchain has huge advantages for security and encryption, with some early adopters using the software in North Sea oil contracts. But speed, cost and energy intensity mean it is currently difficult to scale for many players in the commodity markets.
Smart contracts offering a similar level of security are already a reality, albeit with centralized ledgers using the similar reconciliation and physical documentation of trade, but sans the need for simultaneous record keeping. This cuts energy, latency and costs. These efforts could significantly cut costs and barriers to entry across commodities markets.
Data automation and artificial intelligence will play an increasingly transformative role in 2020.
In a world where data is now more valuable than oil, the seriousness of efforts by companies — including S&P Global Platts — to harness the power of data and technology can’t be underestimated.
Martin Fraenkel is president of S&P Global Platts.
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