The Chinese economy is expected to grow by 5.5% in 2023, but could grow by as much as 7%, and this could result in a record-breaking year for global coal demand, according to a new report by Wood Mackenzie.
China is the largest importer of almost every commodity on the global markets and ‘The Great Reopening’, a new Horizons report, looks at the expected impact from the Asian powerhouse’s re-emergence from the Covid pandemic.
It offers both base case and high case scenarios for the Chinese economy and global commodities including coal, metals and crude oil.
Massimo Di Odoardo, Vice President for Gas and LNG research at Wood Mackenzie, said: “Faster-than-expected Chinese growth would reshape short-term commodities supply and prices dramatically.
“Few commodities remain unaffected, but some are more impacted than others.”
Base case versus high case
The report states that if China’s economy grows at the expected base case of 5.5%, the recovery will remain domestically contained with minimal global impact.
However, due to the industry-intensive nature of the high case scenario laid out in the report, positive ripple effects will be felt across the global economy.
The high case scenario of 7% will also see exporters of capital equipment, resources and materials to China witness some considerable upside.
Wood Mackenzie Head of Economics Peter Martin said: “A hotter China lifts the global economy with gross domestic product growing by 2.6% in 2023 versus 2.2% in our base case.”
Huge potential for global coal demand
China has prioritised domestic coal production in recent years resulting in imports falling by 16% or 38 million tonnes (Mt) in 2022.
The move was designed by Beijing to reduce reliance on more expensive seaborne coal and LNG.
The report’s base case scenario states that China will see significant growth in coal demand in 2023 with an increase of 4%, or 85 Mt, in the power sector and 17Mt in the non-power sector.
Increased domestic production of 85 Mt makes up the bulk of the additional coal needed meaning seaborne coal prices remain relatively low, ranging between US$86/t and US$118/t through 2024 (benchmark Newcastle high-ash (HA)).
However, this changes drastically in the report’s high case scenario.
Higher growth would see demand for coal used in power generation increase by 158 Mt in 2023.
Increased demand for construction materials would also drive demand in the non-power sector in this scenario with a 56 Mt year-on-year uptick meaning total Chinese coal demand would be 112 Mt more than base-case estimates, 98 Mt for thermal coal and 14 Mt for metallurgical.
Natalie Biggs, Global Head of Thermal Coal Markets at Wood Mackenzie, said: “In our high-growth scenario, China sets a record for global coal demand, exceeding 2019 demand of 8,512 Mt.
“China [would] still need an additional 49 Mt of seaborne coal potentially putting pressure on a market that remains finely balanced and could potentially cause another spike in coal prices.
“Wood Mackenzie sees a 37% increase in benchmark Newcastle HA coal prices over our base case by Q2 2023, to US$151/t.”
Oil prices set to rise
China’s return to normal mobility is expected to drive a strong recovery in global oil demand in 2023 from both a base and high case perspective.
Ann-Louise Hittle, Head of Macro Oils at Wood Mackenzie, said: “China being on the move again after the Zero Covid policy of 2022 will account for 1 million barrels a day (b/d) of the 2.6 million b/d gain we expect in oil demand this year.
“This should see Brent crude prices rising from current levels to average US$89.40 per barrel (/bbl) for 2023.”
The more bullish high case scenario would see increased construction activity driving Chinese oil demand even higher in 2023 with the report predicting that the 1 million b/dfigure could increase by as much as 400,000 b/d and push annual oil prices higher by US$3-US$5/bbl.
Metals prices hinge on construction activity
With global metals markets so closely linked to the ebbs and flows of the Chinese economy, the level of growth is heavily dependent on how quickly the country’s industrial and property sectors ramp up.
Nick Pickens, Research Director Global Mining at Wood Mackenzie, said: “In our high-growth scenario, where growth is driven by more intensive industrial production and an outperforming property sector, the impact is greatest among the metal market’s heavyweights – steel, aluminium and copper.”
The report concludes that energy and natural resource markets remain delicately balanced and while China’s leadership remain cautious on monetary policy and fiscal policy, sharper growth cannot be discounted.
China’s reopening could once again turn up the heat on prices across the energy and natural resources spectrum.