A new report from Wood Mackenzie discusses the unprecedented wave of disruption affecting the mining commodity and energy markets.
Governments around the world are increasingly reinforcing their focus on hitting greenhouse gas (GHG) emission targets. Concurrently, slower demand for hydrocarbons and several base metals has come at a time when demand growth has slowed. Recovery from this supply glut is dependent on a number of factors.
Meanwhile, the cost of developing renewable energy projects has plummeted. For example, the cost of building large-scale solar projects has fallen by as much as 80 percent over the last ten years. As battery storage develops, renewable power supply will become more reliable, displacing demand for oil, coal and gas in the power generation sector.
Therefore, peak oil demand is imminent. Thereafter, the role of oil in the world economy will decline. The pace, nature and implications of this transition are not easy to predict.
Wood Mackenzie has identified a number key themes that will affect commodity markets as they adapt to the transforming environment:
-The strong growth in hydrocarbon and base metal supply is not being matched on the demand side due to major transitions and structural changes
-Transitions to alternative technology in power and transport raise questions about the imminence of peak oil demand, as well as demand growth for other fossil fuels
-Adapting to transitions in energy, the investment landscape presents new challenges and opportunities, requiring innovative strategies to access new markets or strengthen positions in traditional markets.
Looking at the potential of the oil market, Wood Mackenzie says that as tight oil steps in to replace the decline from onstream conventional production, the question becomes how much of this new resource is recoverable, at what rate, and at what cost? This will be a key determinant of price into the 2020s. The market is restructuring to make room for tight oil and the impact can be seen throughout the value chain and around the world. For upstream, the question is one of cost of extraction, crude quality and proximity of the resource to refining hubs, as well as the competitiveness of tight oil to conventional projects.
Cost deflation in conventional projects has strengthened project economics — especially in deepwater fields. Project costs are down more than 20 percent since their 2014 peak, and breakevens for all pre-FID conventional projects are down closer to 30 percent, said Wood Mackenzie.
Meanwhile, the break even point for tight oil projects have risen due to higher costs and slower productivity gains. Should this trend persist, the market will reach a new equilibrium as investment dollars target more conventional and less tight oil development. However, as tight oil becomes a permanent feature of the global oil market, it could switch from being a ‘disrupter’ of price to a ‘stabiliser’ as it responds relatively quickly to price moves.
China’s metal consumption, together with demand associated with the Belt and Road Initiative (BRI) will continue to be crucial for global metals markets for the foreseeable future. However, demand growth is forecast to slow in the coming years with the restructuring of the economy. Also, as the economy matures over the next decade, more domestic scrap metal will become available for recycling, reducing the dependence on imported primary material.
Wood Mackenzie says that miners will look to India, the ASEAN region, and countries such as Indonesia and Vietnam, to bridge the gap. Demographics and trends in urbanisation, industrialisation and electricity consumption are expected to support metal demand over the next decade in these regions.
The full report can be seen here.