Beyond China

The Future of the Global Resources Economy

Citi was one of the first to call the death of the Commodities Supercycle, but while most now accept that the “Long Boom” has ended, there has been limited effort devoted to mapping what comes next. This report presents Citi’s view of the next decade for commodity markets and repercussions for natural resource economies.

The structure of global economic growth is once again undergoing a fundamental transition, shifting away from the prevailing model of China as the world’s factory and advanced economies as the drivers of consumer demand. In its place, a more heterogeneous, multipolar framework is emerging with both manufacturing and final consumption more broadly spread across the globe.

Whereas the Commodities Supercycle was characterized by rapid, synchronized global demand growth centered on the rise of China, we expect the coming decade to feature slower, more geographically diverse, less synchronized demand growth. The drivers of natural resources demand are spreading across the globe in new ways. For oil, demand growth should increasingly come from the Middle East. For coal, the same is true of India. Only in base metals does China’s predominance look to remain unchallenged. As a result, the traditional practice of analyzing commodities demand based on the U.S., China and Europe will become less relevant as the drivers of incremental demand come increasingly from the “Emerging 5”: India, ASEAN, the Middle East, Latin America and Africa.

However, no large emerging market is likely to rise up to the point where China has now come to a landing. The most cited potential successors, India and Brazil, are based on democratic institutions unlikely to provide the consensus required to sustain high fixed asset investment levels. Japan and Europe could do this from the 1950s through the 1970s due to the imperative of post-WWII reconstruction. The “Asian tigers” also succeeded, but under what were initially authoritarian systems.

Moreover, growth in the “Emerging 5” is unlikely to prevent structurally slower commodities demand growth. This is due partly to slowing global population growth, partly to China’s slowdown, and partly to elevated base effects following China’s rise. Technological innovation also plays a role, particularly for energy.

Trade flows are expected to slow as China’s demand growth decelerates and as natural resource exporters focus on developing domestic downstream industries. At the same time, the U.S. energy revolution is transforming the world’s largest energy importer into an exporter, even if lower prices slow production growth. Commodities flows are thus redirecting away from the U.S. and Europe, growing less rapidly to China, and instead focusing on the “Emerging 5”.

Economies highly dependent on natural resource exports (which were among the fastest growing during the Commodities Supercycle) now face structural economic, social and political challenges. In response, these countries are likely to invest in downstream manufacturing sectors, resulting in more diversified domestic economic profiles and more diversified global commodities demand.

While the highly cyclical character of natural resources supply is unlikely to change, reduced reliance on the U.S. and Europe for consumer demand, as well as on China for manufacturing and infrastructure investment, is likely to lead to more stable, less synchronized and less cyclical demand.