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Abstract: The recent downturn in commodity prices is in stark contrast to the first half of the year.

In the first half, we observed a more tangible supply constraint brought about by insufficient upstream capital expenditure, with structural shortages gradually emerging, such as the concentration of oil surplus capacity and the fermentation of contradictions in metal mining and smelting.

Coupled with improved expectations for demand growth, the market began to price copper, oil, and other commodities with a consensus expectation of shortage.

The "super cycle" of commodities has resurged.

However, as we entered the second half of the year, macroeconomic fluctuations emerged, and the spiral risks brought by expectation adjustments became apparent.

Weaker employment and economic data in the United States have deepened market concerns about a hard landing.

The transformation of China's fiscal policy into tangible work volume remains slow, and demand in the golden September and silver October may be lackluster.

With weakening macroeconomic expectations, the commodity market also faces significant selling pressure.

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Crude oil, which represents global demand, and iron ore and rebar, which price domestic demand, once fell below $70 per barrel, $90 per ton, and 3,000 RMB per ton, respectively, both hitting new lows since 2024.

At the current juncture, with the Fed's 50 basis point interest rate cut in place, the possibility of a soft landing for the U.S. economy has increased, and market concerns about an economic recession have eased.

Domestic demand is bottoming out, with marginal improvements in apparent demand for energy and industrial metals, and inventory destocking is accelerating.

With improved domestic and international macroeconomic sentiment, we expect commodity pricing to gradually return to their respective fundamentals.

In the foreseeable future, we believe that the theme of the commodity market will still be the transformation of downstream demand momentum from old to new, and the potential contradictions between upstream capacity investment and price decoupling.

Although we judge from the fundamentals that the global commodity market may have completed the transition from a majority surplus to a majority shortage in 2024, the incremental demand from green and emerging economies is still in the quantitative change, and has not yet reached the qualitative turning point, and traditional stock demand still faces the drag of potential global economic deceleration.

The transition from a balance sheet shortage to reality still depends on the realization of demand growth expectations, and if the relay of old and new momentum drops the baton, excessive speculation in the shortage of advance pricing will also face the risk of adjustment.

In summary, we believe that the start of the super cycle may still lack the right conditions, and under the new paradigm of supply and demand, commodity market pricing may still focus on the differentiation of supply and demand conditions.

The new and old relay on the demand side, from quantitative change to qualitative change, emerging economies may take over China to become the new momentum: The growth trajectory of commodity demand in various countries basically follows the S-curve.

Consumption (or per capita consumption) first climbs slowly, then grows rapidly, and finally peaks and stabilizes into a long-term trend.

Looking at the position on the S-curve, China's consumption of various commodities has reached or is about to reach its peak, while emerging economies such as India still have relatively low per capita consumption of various commodities and are still in the early stages of the S-curve growth.

Over the past 20 years, China's urbanization and industrialization have been the main driving force behind the growth of global commodity consumption, but we expect this momentum to be gradually slowing down.

China's population has reached its peak, and the growth rate of urbanization is slowing down and approaching the end, and the central demand for real estate in China has passed the turning point and started a downward trend, and the incremental space for traditional infrastructure is also relatively limited, industrial metal consumption will be significantly under pressure, and the black series that is too dependent on real estate and infrastructure will be the first to be hit.

At the same time, as the economy continues to grow, India and Southeast Asia, as emerging forces in the upward channel of demand, whether they can become incremental contributors to commodity demand when global demand returns to endogenous drivers, has attracted market attention.

The acceleration of urbanization and industrialization in emerging economies may bring significant growth potential to global commodity demand.

The proportion of green transformation demand continues to increase, and some varieties are gradually decoupling from the traditional economic cycle: The slowdown of the global economy, the peak of demand for real estate and infrastructure in China, and the dual carbon goals will also put significant pressure on fossil energy consumption.

However, while traditional demand is under pressure, green transformation also brings new opportunities for some commodities.

Taking non-ferrous metals as an example, in the traditional demand framework, the demand for non-ferrous metals is mainly driven by the real estate and infrastructure cycle in China.

However, comparing the downstream data of copper and aluminum in 2018 and 2023, we find that the proportion of new energy demand has increased rapidly in five years.

In our historical balance sheet, the proportion of new energy demand for copper (including photovoltaics, wind power, and new energy vehicles) has risen from 4% in 2018 to 14% in 2023, and the proportion of new energy demand for aluminum (including photovoltaics, ultra-high voltage, and new energy vehicles) has risen from 3% in 2018 to 16% in 2023.

Although the marginal growth rate of new energy has slowed down, it is enough to compete with traditional construction demand in terms of base, and the incremental demand for copper in the new energy field in recent years has been able to basically offset the negative impact brought by the downward cycle of domestic real estate.

On the supply side, the differentiation between new and old energy, regions, and upstream and downstream is obvious, which may sow risks.

New energy has not yet been established, but old energy has already been broken, and energy supply may lack elasticity: Under the pressure of green transformation, we have seen that multinational oil and coal companies have maintained high capacity discipline, and the proportion of cash flow in the past few years that has been converted into capital expenditure is not high, and the willingness to invest is generally not strong, and there are also many external constraints.

This makes the supply side of fossil energy may lack enough elasticity to cope with demand fluctuations.

Although investment in new energy is still increasing, the stability of new energy power supply is insufficient due to natural conditions, which may mean phased supply risks for commodities with high energy density such as electrolytic aluminum and chemical industry.

Relevant industrial policies implemented to meet carbon emission requirements will also constrain commodity supply.

Emerging resource countries provide increments, but uncertainty rises simultaneously: Looking at the geographical distribution, the exploration of commodity capacity is increasingly concentrated in emerging resource countries in Asia, Africa, and Latin America, such as copper in Chile and Peru, iron ore and coal in India, coal, nickel, and copper in Indonesia, coal in Mongolia, bauxite and iron ore in Guinea, tin ore in Myanmar, etc.

These countries or regions have rapidly increased mining development investment in recent years due to their own urbanization and industrialization needs or commodity export demand.

We expect these countries and regions to become the main source of incremental supply of commodities in the future.

These regions have sufficient resources, but the infrastructure such as ports and roads is not perfect, and the political situation is risky, and the development progress also has certain uncertainties.

Most importantly, under the trend of deglobalization, resource countries may "hold goods and sell them," and resource "protectionism" is clearly on the rise.

Trade policies based on the theme of resource security may become an indispensable source of supply risk in the commodity market.

The density of capital expenditure and expansion cycle of upstream and downstream does not match, and the contradiction between mining and smelting is intensifying: We have seen that the profit distribution in the bulk industry chain in recent years has generally been tilted towards the upstream, which is specifically manifested as a significant decrease in TC/RC in the copper industry, the squeezing of steel mill profits by iron ore and coking coal prices, or the suppression of pig farming profits by feed prices in the agricultural product industry.

Compared with the smelting end, the capital expenditure of the upstream is relatively low, and the average grade of mines is also gradually declining, and the supply is relatively more bottlenecked, which may be the contradiction between the uneconomic characteristics of traditional resource development scale and the economies of scale of the manufacturing industry.

The downstream manufacturing link has a larger expansion elasticity compared to the upstream raw materials, and it is not advantageous in profit distribution, and compared with the terminal demand, the capacity is relatively excessive, which also makes it difficult to pass on cost pressure.

The profits of the middle link have to bear pressure from both sides.

The new paradigm of supply and demand conditions, differentiation is still the main line in the commodity market, the supply condition is insufficient has been revealed, but the start of the second half of the cycle is still waiting for the trend-breaking of demand.

Under the new paradigm of supply and demand conditions, differentiation is still the main line.

Demand is our main basis for distinguishing price performance.

The same upstream investment is insufficient, for copper mines it is a driver of upward prices, but for iron ore and coal it can only be used as a bottom support for prices, the essence lies in the difference in demand direction.

We expect the price differentiation of black and non-ferrous metals may still be a long-term trend.

For varieties with relatively optimistic demand prospects such as copper, speculative sentiment catalyzed by pulse-like rises is not beneficial for the release of supply, but only amplifies the price elasticity of demand and triggers negative feedback on the demand side.

And a sustained high price may be an indispensable way to encourage the supply side to continue to invest to meet the gap.

Of course, the so-called supply and demand gap is just a theoretical deduction of future supply and demand, and in the long run, the supply and demand sides will match each other through the price mechanism.

Prices will rise until enough marginal supply is stimulated, or marginal demanders are squeezed out.

Taking copper as an example, under the premise of relatively rigid demand, to stimulate enough increase in copper mine supply, the theoretical incentive price of copper should be above $10,600 per ton.

For varieties with relatively pessimistic demand such as iron ore and coal, prices may seek cost support downward, and the long-term equilibrium price should be anchored at the marginal position of the cost curve.

Taking iron ore as an example, from the cost curve, we expect the theoretical center of the long-term price to be around $80 per ton.

However, expectations also have reflexivity, and the market lacks enough motivation to expand investment, which will also cause the cost curve to contract spontaneously, thus lacking elasticity to cope with demand fluctuations.

The performance of copper prices in the next few years may be a mirror image of the trend of iron ore prices in the past few years.

Since 2021, the center of iron ore prices has gradually moved down, and the upper and lower edges of price fluctuations have also gradually narrowed.

At the turning point of China's steel demand reaching its peak, the establishment of market cognition requires a process.

The clearer the market's understanding of the supply and demand prospects, the narrower the price fluctuations.

In contrast, we expect that the copper price in the next few years may be a process of central fluctuation and lifting, but the price fluctuations will also gradually narrow.

On the one hand, the rise in prices is the most likely path for supply and demand matching, and on the other hand, the elasticity of the copper supply and demand curve will also be clearer, and extreme high or low prices may be more difficult to appear.Demand-side new and old relay, from quantitative change to qualitative change, China's demand-driven growth may be nearing its end.

Looking at the growth trajectory of China's commodity consumption from two curves: Since the 21st century, urbanization and industrialization in China have been the two forces driving the growth of commodity consumption.

Along with the urbanization process, there has been not only large-scale construction of housing and various infrastructures but also an increase in various consumption needs with the improvement of residents' living standards.

China's industrialization is not only to meet domestic demand but also an important part of the global industrial chain and supply chain.

The concentration of the industrial chain in China has, on the one hand, promoted the import of upstream mineral resources, and on the other hand, the direct and indirect export of bulk commodities in the middle reaches has also risen.

Therefore, we have seen that over the past 20 years, the absolute amount and proportion of China's consumption of various bulk commodities have both increased, and the consumption of many commodities has reached an unprecedented level.

As of 2023, China's per capita consumption of coal, steel, copper, aluminum, crude oil, and soybean meal is 2.23 tons of standard coal, 648 kilograms of steel, 11.8 kilograms of copper, 28.9 kilograms of aluminum, 685 liters of crude oil, and 54.7 kilograms of soybean meal, accounting for 56%, 51.1%, 51.6%, 58.4%, 16.3%, and 30.3% of global consumption, respectively.

Specifically, as China's main source of energy, the per capita consumption of coal was already higher than the global average in 2000, and it has supported China's urbanization and industrialization process over the past 20 years, with a steady increase in consumption, recording an annual growth rate of about 5.1%.

Industrial metals such as steel, copper, and aluminum are widely used in construction and manufacturing, and their annual consumption growth rate since 2000 has been around 10%.

In comparison, the growth curve of oil consumption seems to be slightly flat and lagging, and the per capita consumption in 2023 is still slightly lower than the global average.

Constrained by resource endowment, the proportion of oil in China's energy structure has always been low.

In terms of agricultural products, the demand for protein by residents has been increasing year by year, and the per capita consumption of feed such as soybean meal is about five times that of 23 years ago.

From the experience of China and some advanced countries, the historical growth trajectory of commodity consumption can generally be simplified into two curves.

One is the S-shaped per capita consumption (versus per capita GDP) growth curve.

The other is to outline with the amount of bulk commodity consumption per unit of GDP (intensity).

The consumption intensity of bulk commodities actually reflects the slope of the per capita consumption and per capita GDP curve.

The consumption intensity of bulk commodities in advanced countries has generally entered a long-term downward trend, and the trend of energy varieties such as crude oil and coal or primary energy consumption tends to decline from a high position, meaning that the demand growth elasticity is often equal to or weaker than the GDP growth rate.

However, the consumption intensity of industrial products in developing countries will be significantly increased in the first half of urbanization and industrialization, that is, faster than the GDP growth rate, and will reach a peak and decline after a certain stage of development, which is also the time point when the slope of the per capita consumption curve slows down.

Looking at the country comparison, the growth slope and peak position of the same variety in different countries are also different, and the stage of economic development at the peak is also different, depending on the development path and economic rhythm of each country, so it cannot be mechanically compared.

The growth of commodity demand has a difference in precedence and elasticity.

Agricultural products: Generally speaking, the growth of consumption of grain agricultural products is ahead of the peak of energy and industrial products, but the growth of demand for protein, oil, and other improved agricultural products is relatively late.

China's per capita consumption of staple food (rice, wheat) has peaked in the 1980s (about 200 kilograms/person).

The second growth since 2015 is mainly driven by the demand for biofuels, which belongs to the industrial application of agricultural products.

Industrial products: Among industrial products, the growth trend of copper and steel demand is basically the same, and there are many overlapping application scenarios for black and non-ferrous metals in real estate, infrastructure, machinery, automobiles, home appliances, etc.

Looking at the experience of advanced countries, the peak time of Japan's consumption of both is basically the same, while South Korea's copper consumption peaks earlier than steel.

However, we believe that the growth of China's steel demand is likely to peak earlier than copper, mainly because the application scenarios of steel in China are more biased towards the first half of economic development, such as housing, railways, bridges, and other infrastructure construction with strong fixed investment attributes, but the downstream demand for copper is relatively high in consumer products such as automobiles and home appliances, and the increase in electrification also provides more opportunities for copper consumption.

The growth elasticity of aluminum consumption is much greater than that of copper and steel, and we believe this mainly reflects the impact of the supply side on demand.

According to our calculations, the cost increase of electrolytic aluminum over the past 30 years is far slower than that of copper.

The compound annual growth rate of electrolytic aluminum costs from 1990 to 2023 is only 1%, but at the same time, the cost of copper has increased by 170%, with a compound annual growth rate of 3.1%.

Aluminum is weaker than copper in some physical properties, such as conductivity and corrosion resistance, but its cost advantage has promoted the wider application of aluminum in industrial scenarios.

For example, in general low-voltage conductors, the cost of aluminum conductors with the same conductivity is about 87% lower than that of copper conductors, and its weight is also lighter.

Therefore, in the long-distance power transmission in open areas, steel-core aluminum stranded wire has become the mainstream choice.

Energy: The growth slope of fossil energy such as coal and oil is weaker than that of electricity and industrial products.

Over the past 20 years, measured by the elasticity relative to GDP, the growth of China's fossil energy is relatively weak compared to the generation of electricity and industrial products such as non-ferrous and black metals.

As China's basic energy source, coal has maintained growth with economic development, but in the process of adjusting the economy and power structure, the consumption intensity of coal is actually declining.

However, after the first peak in coal consumption in 2013, it did not continue to decline but maintained a certain resilience and rebounded again after 2019.

The proportion of oil in China's energy structure has always been low, and the growth space for oil vehicles is also restricted by the development of new energy vehicles.

China's commodity consumption is about to peak.

Looking forward, we expect that the growth of commodity demand driven by China may gradually slow down.

First, the peak of the population combined with the slowdown and near-end of the urbanization slope, China's real estate demand center has crossed the turning point and started a downward trend, and the incremental space for traditional infrastructure is also relatively limited, and the consumption of industrial metals will be significantly under pressure.

The black series that relies too much on real estate and infrastructure will be the first to be hit, and the consumption proportion of copper and aluminum related to construction will also show a downward trend.

Second, under the dual-carbon goal, the consumption of fossil energy will gradually decrease, and the peak of coal consumption is imminent, and the space above oil is limited.

Looking at the S-shaped curve of per capita consumption, the consumption of staple food and steel has basically peaked, and the peak of coal is imminent.

However, under the electrification trend of the dual-carbon goal, non-ferrous metals and crude oil may not follow the traditional demand growth path.

Looking at the consumption intensity per unit of GDP, except for electricity, all kinds of bulk commodities have basically entered a downward trend, which means that even if there is an incremental space for consumption in the future, the growth elasticity will be weaker than economic growth.

Black series: The peak of per capita iron consumption has been reached, and steel consumption has begun to decouple from economic growth.

Real estate is the biggest driver of steel consumption growth in the past.

We calculate that from 2000 to 2020, China produced about 12.3 billion tons of crude steel, of which 40% came from the direct demand of real estate construction, and this does not even consider the steel products related to the real estate industry chain such as machinery and home appliances.

The shrinkage of new starts and construction area will continue to drag on the consumption of steel varieties such as rebar.

In addition, the hedging of infrastructure against the decline of real estate is also difficult to sustain.

The annual new volume of traditional infrastructure projects such as railways, highways, and urban transportation will gradually decrease, and the steel consumption intensity per unit of infrastructure investment will gradually decline.

Considering the scale of China's manufacturing industry and new demand growth points such as new energy, there may be structural highlights in the demand for steel in some areas, such as automobiles and steel structures.

However, from a volume perspective, structural increases are difficult to drive the overall demand for steel upward.

Coal: Under the dual-carbon goal, we expect that China's coal demand is about to peak.

In August 2024, the Central Committee of the Communist Party of China and the State Council issued the "Opinions on Accelerating the Comprehensive Green Transformation of Economic and Social Development" [1], which clearly proposed to gradually reduce coal consumption in the next five years.

Power generation is still the largest field of coal consumption.

With the significant increase in new energy installations, we expect that the thermal power generation will peak in the next 1-2 years, and the peak of China's coal consumption will also arrive synchronously.

However, the uncertainty of natural conditions makes the output of renewable energy have the characteristics of intermittence and volatility.

Considering that the demand for electricity may grow beyond expectations under the trend of electrification, thermal power will still play a "ballast stone" role.

At present, it is in the transition stage from the main power source of thermal power to the supporting and adjusting power source.

Thermal power may still fluctuate at a high level for a period of time after reaching the peak.

Oil: The improvement of energy efficiency and green transformation limit the growth space of domestic oil consumption, so we believe that under the trend of electrification, the growth of China's oil consumption may not follow the path of some advanced countries, and the peak height and time point of China's oil demand will be significantly lower and earlier than those of advanced countries.

The growth of oil demand is more dependent on the increase in the number of cars, and generally, the number of cars per thousand people will accelerate when urbanization reaches a certain extent, which makes the growth of oil generally lag behind industrial products.

Currently, China's car ownership per thousand people is 245, which is a certain gap compared to developed countries, and China's per capita oil consumption may be one of the few bulk commodities that are also lower than the global average.

If other commodities are used as a reference, China's oil demand still has a large growth potential, but the increase in the penetration rate of new energy vehicles means that China may bypass this process.

However, new energy vehicles may not have formed a stock replacement for traditional fuel vehicles for the time being.

In the short term, the stock of fuel passenger cars may continue to grow.Colored Metals: Copper and aluminum, due to their excellent electrical conductivity, have been given new significance in the electrified era.

The demand for colored new energy will offset the decline in traditional demand, and compared with steel and other varieties, the upward trend in demand will be extended.

Further elaboration on this point will be provided later in the text.

Agricultural Products: We anticipate that the growth in total consumption of agricultural products in China will slow down, but the structure will become more diversified, shifting towards high-end and healthy directions.

The demand in emerging economies such as India is transitioning from quantitative to qualitative changes.

Behind the four commodity "super cycles" since 1900, there has been a significant increase in commodity demand driven by urbanization and industrialization in major economies such as Europe, America, Japan, and China.

India and Southeast Asia, as emerging forces in the upward demand channel, are closely watched by the market to see if they can become incremental contributors to commodity demand as global demand returns to endogenous drivers.

In our report "India's Commodity Demand: Opportunities and Challenges Coexist" published in October 2023, we have analyzed the potential and constraints of Indian demand from a macro perspective and provided a qualitative outlook for various commodities such as energy, black metals, non-ferrous metals, and agricultural products.

Theoretically, the growth of India's commodity demand should follow an S-curve.

Currently, the per capita consumption of various commodities is relatively low and still in the early stages of growth on the S-curve.

With the acceleration of urbanization and industrialization, there should be a significant potential for growth in commodity demand.

Considering the global share of Indian demand, we believe that the current "influence" of India on the global balance of various commodities is ranked as: coking coal > edible oils > petroleum > iron ore > copper, aluminum.

This article will mainly focus on the impact of India's demand for coking coal, iron ore, and petroleum on the global balance in the coming years.

Black Series: Steel consumption may benefit first, and the share of long process will continue to increase.

Based on China's experience, the downstream of steel is more investment-oriented in fixed assets, so we have reason to believe that in the first half of India's urbanization and industrialization, the demand for steel and raw materials such as coking coal and iron ore may benefit first.

In India's National Steel Policy [2] proposed in 2017, it is planned to increase the per capita steel consumption to 160 kilograms per person by 2030, and to increase the crude steel production capacity to 300 million tons.

In recent years, India's crude steel production has continued to grow, and from January to July 2024, India's crude steel production has increased by 7.2% year-on-year.

On the supply side, in the ironmaking process, the production of pig iron and DRI in India in 2023 was 85.7 million tons and 51.1 million tons, respectively.

In the steelmaking process, the production of converter steel and electric furnace steel in India in 2023 was 64.3 million tons and 71.9 million tons, respectively.

On the demand side, the apparent consumption of steel in India in 2023 was about 135 million tons, with per capita crude steel consumption of 94.7 kilograms.

Looking at the demand structure, construction accounts for about 70% of downstream steel consumption in India, machinery about 17%, and automobiles about 8%.

In terms of imports and exports, India became a net importer of steel in 2023 and may maintain a small net export status in the future.

We expect that the long process steelmaking based on blast furnace-converter will become the main driver of the growth of India's steel production.

Currently, the share of converter steel in India is about 47.2%.

According to its plan proposed in 2017, India will increase the output of the blast furnace-converter process to 60-65% by 2031.

Historically, due to the lack of coking coal resources, the coal-based DRI-electric furnace industry is more common in India, and Indian iron ore is also suitable for producing pellets required for DRI.

The ratio of Indian pellet/crude steel production is about 55%, while China is only 20%.

Currently, India is the world's largest producer of DRI, but its DRI is powered by thermal coal, not natural gas like in the Middle East and the United States.

Compared with electric furnace steel, the long process has advantages in scale, efficiency, quality, and employment, and is an important foundation for large-scale steel industry.

Looking forward, we expect the share of converter steel in India's crude steel production to gradually increase.

Undoubtedly, India's demand for iron ore and coking coal will grow year by year with the release of blast furnace production, but the growth of India itself is uncertain, and its own coal and ore production is also increasing, so its impact on the global balance sheet still needs to be analyzed specifically.

The different resource endowments of Indian coking coal and iron ore make their future roles in the seaborne market different.

In this article, we provide three scenarios for the growth of Indian steel consumption and analyze the potential impact on the seaborne market of coking coal and iron ore from the bottom up.

Looking at China's experience, during the first half of the "two transformations," the elasticity of steel consumption growth should be greater than its economic growth rate, that is, the intensity of steel consumption per unit GDP is gradually increasing.

Therefore, in the base case, we expect India's steel consumption to reach 214 million tons by 2030, corresponding to an annualized growth of 6.8% from 2023 to 2030, slightly faster than the 6.3% annualized GDP growth during the same period (refer to S&P's forecast for India's GDP growth), with per capita steel consumption of about 140 kilograms by 2030.

In the pessimistic scenario, India's steel consumption grows to 183 million tons by 2030 (23-30 CAGR 4.5%), corresponding to 120 kilograms of per capita steel consumption.

In the optimistic scenario, India's steel consumption grows to 244 million tons by 2030 (23-30 CAGR 8.9%), corresponding to 160 kilograms of per capita steel consumption.

Coking Coal: Seaborne market demand increase is expected.

In the base case, by 2030, India's pig iron production will grow to about 170 million tons.

In addition to blast furnaces, sintering, casting iron, and alloys also consume a certain amount of coke.

We expect India's coking coal import demand to grow in sync with its pig iron and coke production.

Although India has abundant coal resources, the endowment of coking coal is poor, and the quality is also relatively low.

According to CRU, the output of coking coal entering the coking process accounts for only about 9% of its officially announced coking raw coal production, mainly because the ash content of coking coal is high, generally between 28%-45%, and India's coal washing capacity is relatively limited, and the remaining coking coal is actually used in the power generation process.

Therefore, even if India's coal production capacity continues to expand, we believe that the high dependence of Indian steel mills on imported coking coal may not change much in the future.

We believe that by 2030, the actual utilizable coking coal resources in India will only be about 15 million tons.

India will have to seek coking coal resources overseas.

In the base case, by 2030, India's import demand for seaborne coking coal will be about 138 million tons, nearly double the current import volume, equivalent to 45% of this year's total coking coal exports.

Even if China's coking coal import demand may be a declining trend in the future, India's increment cannot be ignored for the seaborne coal market.

Of course, theoretically, India can also meet the demand of blast furnaces by importing coke.

Our balance sheet does not consider the incremental import of coke in India in the future.

To a certain extent, the demand for imported coke will be transmitted to the seaborne coking coal market through coke-producing countries such as China and Indonesia.

Therefore, if India chooses to import a large amount of coke from China, the demand pressure on the seaborne coal market may be shared by Mongolian coal.

Mongolia has abundant coking coal resources, with a high long-term output expectation, but the cost of transportation to the seaborne market is high.

It is logically feasible to export domestic coking capacity to the sea.

We have seen a significant increase in India's coke imports in the first half of this year, with an increase of 15.3% year-on-year.

The uncertainty of India's imported coke mainly lies in the policy end.

In April this year, the Indian Ministry of Commerce announced a proposal to implement a one-year safeguard measure for the import of low ash metallurgical coke (Low Ash Metallurgical Coke) in the form of import quantity restrictions [3].

Iron Ore: Not enough to affect the global balance.

India's impact on the seaborne iron ore market may not be as great as coking coal, mainly because its iron ore resources are also relatively abundant.

Indian iron ore resources are mainly hematite, and exports are mainly in the form of pellets and low-grade fines.

Indian iron ore is divided into commercial ore (exportable) and two types of steel mills, the former can be used for export, while the latter is generally self-digested by steel mills.

Currently, the proportion of commercial ore is relatively high.

Historically, the production and export of Indian iron ore have been greatly affected by court bans on illegal mining, export tariffs, etc.

In recent years, the mining rights of steel mills have been extended, and the rights to commercial mines have also been re-auctioned.

Indian iron ore production has risen with the growth of crude steel production, reaching a historical high of 249 million tons in 2023, a year-on-year increase of 28.2%, and we expect it to reach 300 million tons by 2030.

The growth of India's pig iron production and the increase in the proportion of self-owned mines may face certain pressure on exportable resources.

On the other hand, India's import demand for overseas iron ore, especially high-grade ore, will also increase in the long term.

However, in the short term, due to its own production growth, India's impact on the seaborne iron ore market is relatively small.

From our balance sheet, it can be seen that under the base case, India will not become a net importer of iron ore until 2028, that is, India's demand for iron ore will exceed its domestic supply.

In the optimistic scenario, this time point may be advanced to 2026.

In the pessimistic scenario, it will be after 2030.

Thermal Coal: The increase in electricity intensity is beneficial for energy demand.

India's demand for thermal coal will also benefit from its industrialization process, especially the rapid growth of power generation.

Compared with new energy power generation, the characteristics of thermal power's continuous stability and flexible adjustment are self-evident for power supply and the power grid in the early stage of industrialization, coupled with India's own strong coal resource endowment.

Although India also has clean energy plans, we believe that coal power will still be the first choice for India's power construction.

Coal power may still dominate in its power generation structure.

In 2023, its coal power accounted for about 75% of the total power generation, and the installed capacity of coal power was about half.

According to the "National Electricity Plan 2022-2032" [4] released by the Indian Ministry of Power, to meet its peak energy demand, India needs to add 46-54GW of coal power installation by 2032 (an increase of 20% on the current basis).We anticipate that the demand for coal in India will continue to grow in the medium to long term.

In addition to electricity, which accounts for nearly 70% of India's coal consumption, other sectors such as steel and cement production will also maintain growth.

In recent years, the demand growth has outpaced the release of domestic production, significantly increasing India's reliance on imported thermal coal.

Looking forward, as India focuses on advancing coal capacity development and release, we expect that India's demand for imported thermal coal may not increase in tandem with coking coal, but rather show a gradual downward trend.

Crude Oil: India has become an important source of global oil demand growth.

Economic growth drives resource consumption intensity along a similar trajectory.

Judging from the correlation between per capita oil consumption and GDP per capita, India's oil demand is still on an upward path.

Since 2014, India has started to become an important source of global oil demand growth.

In 2023, India's oil consumption is about 5.41 million barrels per day, accounting for 5.3% of the global share, which is roughly equivalent to China's share in 1997.

Looking ahead, we believe that India's industrialization and urbanization processes will continue to support the expansion of road transport demand and drive India's oil demand back to a long-term growth path.

The compound annual growth rate of demand from 2022 to 2025 is expected to reach 6.8%, contributing significantly to global oil demand.

Agricultural Products: Benefiting from dual growth in population and per capita consumption, economic growth and the acceleration of urbanization will drive changes in the dietary structure of residents.

Coupled with the expansion of the population base, we believe that India has significant growth potential for high-protein foods such as meat and soybeans, as well as oils, and has the potential to become a new driver of growth in the global agricultural product market in the future.

According to USDA-ERS research, India's per capita caloric intake in 2019 was about 2,500 calories per day, with meat caloric intake at only 300 calories per day, far below the global average, indicating a substantial room for improvement in caloric intake.

Additionally, India's agricultural product consumption will also benefit from India's continuously growing and large population base.

We expect India to play an increasingly important role in the global agricultural product market in the future.

Green demand hedges against headwinds in traditional sectors.

The "dual carbon" goals mainly benefit the growth of non-ferrous metal demand through three aspects: first, the structural transformation of front-end energy, second, the increase in terminal electrification rates, and third, the construction of a matching power grid system.

These three main lines complement each other and jointly promote the long-term growth of non-ferrous metals consumption such as copper and aluminum.

First, globally, power production is the main source of carbon emissions, accounting for about 30% of total emissions, so its decarbonization pace is also the most advanced, and its driving effect on the consumption of non-ferrous metals such as copper and aluminum is also the most significant.

According to BNEF forecasts, by 2028, global photovoltaic new installations are expected to reach 722GW, and GWEC forecasts that wind power new installations are expected to reach 162GW.

With technological progress bringing cost reduction, efficiency improvement, and the continuous improvement of the power market, the dependence of photovoltaic and wind power demand on supporting policies is expected to weaken, gradually shifting to endogenous growth guided mainly by economic viability, and demand resilience will be significantly enhanced.

Secondly, the promotion of non-ferrous metal demand growth by terminal consumption electrification is most prominent in the field of new energy vehicles.

However, we are also aware that policy changes cannot be ignored in the short term for the penetration rate of new energy vehicles.

Since the beginning of the year, the decline in European subsidies, the increase in import tariffs, and the new U.S. battery procurement regulations have led to a narrowing of subsidy scopes, resulting in relatively weak growth in new energy vehicle sales in markets outside of China.

In the first half of 2024, new energy vehicle sales outside of China reached 2.55 million units, with a year-on-year growth rate of 6%, of which European sales were 1.39 million units, with a year-on-year growth rate of only 2%; North American sales were 810,000 units, with a year-on-year growth rate of 10%.

But in the long term, as the cost of power batteries continues to decline and the cost-performance ratio of new energy vehicles continues to improve, coupled with the continuous improvement of the energy supply network, we believe that the upward path of new energy vehicle penetration rate is still relatively clear.

On the other hand, as the core product competitiveness of new energy vehicles, driving range and energy supply efficiency, various car companies are accelerating technological iteration, driving the continuous growth of copper and aluminum consumption per vehicle.

Copper benefits from the continuous increase in the amount of electricity per vehicle, and the trend of high-voltage fast charging iteration is clear, requiring more battery cells to be connected in series in the whole vehicle.

The increase in aluminum comes from the demand for lightweight vehicles.

Compared with high-strength steel, the density of aluminum alloy materials is only 1/3 of it, and compared with carbon fiber and other composite materials, it has a significant cost advantage.

Therefore, aluminum alloy is currently the most ideal choice to achieve vehicle lightweighting.

Finally, the above-mentioned green transformation of energy supply and consumption sides requires a matching power grid system as the foundation.

On the one hand, there is a geographical mismatch between the new energy power generation side and the power consumption side, and the demand for power transmission will drive the increase in the use of ultra-high voltage steel core aluminum stranded wire.

For example, China's wind and solar energy resources are concentrated in the northwest region, but the power load centers are mainly concentrated in the southeast.

While the construction of large-scale wind and light bases is gradually landing, during the "14th Five-Year Plan" period, the State Grid plans to add 12,600 kilometers of ultra-high voltage AC lines and 17,200 kilometers of DC lines.

On the other hand, the change in the energy structure has put forward higher requirements for the acceptance capacity and consumption efficiency of the distribution network, and future grid investment is expected to further tilt towards the distribution side with higher copper density.

On March 1, the National Development and Reform Commission and the National Energy Administration issued the "Guiding Opinions on the High-Quality Development of Distribution Networks under New Situations" [5], proposing to increase investment in distribution networks.

We expect that the proportion of distribution network investment during the "14th Five-Year Plan" period is expected to break through 60%.

The improvement of power grid facilities is also conducive to the further release of potential installation demand.

In recent years, China's real estate cycle has faced downward pressure.

The start-up data has entered a deep negative growth range since the end of 2021, and the completion data has entered a deep negative growth range since the beginning of 2024.

At the same time, under the dual pressure of local debt pressure and the decline in the rate of return on investment, infrastructure investment has also slowed down marginally.

In the traditional framework, the increase in non-ferrous metal demand mainly comes from China, and China's demand is mainly driven by the real estate and infrastructure cycles.

Therefore, since 2022, concerns about Chinese demand have formed a clear suppression on non-ferrous prices.

However, comparing the downstream data of copper and aluminum in 2018 and 2023, we found that the proportion of new energy demand has shown a rapid upward trend in five years.

In our historical balance table, the proportion of new energy demand for copper (including photovoltaics, wind power, and new energy vehicles) increased from 4% in 2018 to 14% in 2023, and the proportion of new energy demand for aluminum (including photovoltaics, ultra-high voltage, and new energy vehicles) increased from 3% in 2018 to 16% in 2023.

Although the growth rate of new energy has slowed down, it is enough to compete with traditional construction demand in terms of the base.

In recent years, the increase in demand for copper in the new energy field has been able to basically offset the negative impact brought by the downward cycle of domestic real estate.

Looking forward, we expect that from 2024 to 2028, the proportion of global green demand for copper will increase from 14% to 17%, and the proportion of green demand for aluminum will increase from 13% to 22%.

Looking at the increase in the proportion, the growth of new energy demand is not inferior to the growth of Chinese demand between 2000 and 2010.

Quantitative change brings qualitative change, as marginal demand increment is replaced by new energy vehicles, wind power, photovoltaics and other fields, the copper and aluminum price cycle may be more closely related to the energy transformation process, and gradually differentiate from the traditional demand cycle.

The copper consumption of data centers is limited, but in the long run, the upgrade and expansion of the power grid may benefit the demand for copper.

The development of AI and data centers may drive the consumption of copper through the demand for the upgrade and expansion of the power grid.

BHP predicts that by 2050, the rise of data centers and artificial intelligence will bring an annual consumption of 3.5 million tons of copper.

Although the current demand related to data centers accounts for less than 1% of the total demand for copper, by 2050, this proportion will increase to 6%-7%.

This includes not only the internal cooling systems and processor connection systems of data centers but also the supporting power supply systems.

The demand for copper consumption by data centers themselves is limited, but data centers require stable and huge power supply, putting higher requirements on the power grid.

The global demand for the construction and transformation and upgrading of the power grid is expected to drive the long-term growth of copper consumption.

According to the IEA calculation, the electricity consumption of data centers (excluding cryptocurrency) in 2022 is about 240-340TWH, accounting for about 1.3% of the global electricity consumption; including cryptocurrency is about 450TWH, accounting for about 1.7% of the global electricity consumption.

The IEA estimates that under the neutral situation, the electricity consumption of data centers (including cryptocurrency) will increase to 800TWH by 2026, with a CAGR of about 15%.

We believe that data centers have a strong demand for the stability of power supply, so the current power grid system may have the need for upgrading and expanding, which is beneficial to the consumption of copper.

The reindustrialization of the United States provides marginal increments.

In order to measure the pull of the reindustrialization process on the demand for bulk commodities, we calculated the elasticity of the consumption volume of major bulk commodities in the United States from 1988 to 2001 against the actual investment in fixed assets of the manufacturing industry in "The Demand Calculation of the Reindustrialization of the United States: Seeing the Small and Knowing the Great".

Overall, the upward trend of investment in the manufacturing industry in the United States is relatively obvious in promoting the demand for global commodities, especially oil demand.

When actual fixed asset investment rises by 1%, global oil consumption may be stimulated by 0.24%.

It should be noted here that due to the "Inflation Reduction Act" focusing on the return of the new energy industry chain to the United States, considering the higher density of copper and aluminum in photovoltaics and new energy vehicle applications, we expect that the consumption elasticity of copper and aluminum may be higher than the historical level.Since the fourth quarter of last year, we have observed signs that the growth in U.S. manufacturing investment is beginning to transition from construction to equipment investment, which may subsequently bring certain marginal increments to markets such as oil and non-ferrous metals.

On the supply side, there is a clear differentiation between new and old energy sources, regions, and upstream and downstream segments, which may sow the seeds for risks.

Non-ferrous metals: The rise in disruption rates is driving the early realization of capital expenditure constraints.

As we pointed out in our second half of 2024 outlook, there has been a long-term insufficiency in capital expenditure for non-ferrous metal mineral resources such as copper, tin, and zinc.

Taking copper mines as an example, global copper mine capital expenditure has remained at a low level for many years after peaking in 2013.

Even during the upward cycle of copper prices in 2020-2021, expansionary capital expenditure that drives the intrinsic growth of copper mining capacity did not increase significantly.

Large mines are more inclined to expand their copper mining capacity through mergers and acquisitions.

From the perspective of stock, the trend of deglobalization and resource nationalism is driving an increase in mining disruption rates, which is tightening the supply logic ahead of schedule.

We expect global copper mine supply to peak in 2026.

Specific impact events include the ruling by the Supreme Court of Panama on November 28, 2023, that the 20-year operation contract for the Cobre copper mine, renewed by the government with First Quantum Minerals, is unconstitutional, ordering the mine to cease production.

Indonesia may also implement a ban on copper concentrate exports by December 31 of this year.

In addition, most of the existing operational projects come from the mining cycle of 2000-2012.

As shallow resources are depleted, mine grades decline, and mining costs tend to rise.

The aging of mining equipment also leads to more frequent maintenance and production stops.

From the perspective of increment, most potential copper mines in the future are greenfield projects, and the initial capital investment required tends to rise.

As shown in the chart, the initial capital expenditure intensity of long-term large-scale projects such as Baimskaya and El Abra is as high as $25,000 per annual ton of copper produced.

Moreover, most future projects are located in politically unstable and poorly developed countries and regions, so the risk compensation required in the incentive price has increased significantly.

According to WoodMac's calculations, under the baseline scenario of an IRR of 15%, the incentive price for copper mines is as high as $4.85 per pound (equivalent to $10,689 per ton).

We believe that the insufficiency of capital expenditure in mining and the weaker supply elasticity are also important reasons why iron ore prices have been able to maintain relative resilience in the face of downstream demand headwinds in recent years.

In recent years, iron ore prices have long been maintained at a level above $100 per ton, and they also occupy a clear advantage in the profit distribution within the black industry chain.

Comparing the capital expenditure cycles and production volumes of the iron ore business of the four mainstream mines, the last CAPEX cycle peaked in 2011, slightly lagging behind the high point of the iron ore annual average price in 2010.

This round of capital expenditure has driven the mine production to be released year by year and peaked and stagnated in 2018.

The production peak is about 7 years behind the capital expenditure peak, which is basically consistent with the development cycle of iron ore projects.

In a sense, the seeds of this round of iron ore "bull market" may have been sown in 2011 when the last round of capital expenditure cycle peaked.

This round of capital expenditure cycle started to rise after bottoming out in 2017, keeping pace with the trend of price recovery.

According to the rule of a 7-year interval between capital expenditure and production in the last round, the production capacity release cycle should start from 2024, which is basically consistent with the performance of iron ore shipments this year.

In recent years, overseas mining projects have been put into production one after another and have begun to climb the production curve, such as Rio Tinto's Gudai-Darri, BHP's South Flank, and FMG's Iron Bridge II projects.

In addition to mainstream mines, the supply of some low-grade non-mainstream mines has also begun to be released, contributing a lot of increments, such as Mineral Resources' Onslow project.

This has made the iron ore cost curve in 2024 have a more obvious right shift, and the equilibrium price of iron ore supply and demand is also under pressure to fall (see "Black Metals Outlook for the Second Half of 2024: Demand Unremarkable, Supply Back in Focus", "Iron Ore: Supply Surplus, Returning to Equilibrium Point").

In the next few years, we expect global iron ore supply to break away from the stagnant period and continue the trend of growth this year, such as Guinea's Simandou, which is currently the world's largest reserve and highest grade to be put into production project, and may be put into trial operation as early as the end of 2025.

However, compared with the last round, the amplitude of this round of capital expenditure recovery is still relatively poor, especially since 2020, the CAPX of the four major mines is relatively weak compared to the rise in iron ore prices.

We believe this may be due to the mines' pessimistic outlook on long-term demand, and they are relatively cautious about capacity investment.

On the one hand, China's iron ore consumption is facing a decline, which is basically a market consensus, on the other hand, the steel industry is also facing the demand for decarbonization, Western Australian iron ore resources are hematite, mainly used to produce sinter powder, but the sintering process has a large carbon emission, and there may not be much room for use in future steel production, which are all issues that several mines in Western Australia need to consider in their investment.

In contrast, pellets that can be used for DRI and hydrogen smelting have been favored in recent years and are the hot spots for investment in the steel and iron ore industries.

India and China, respectively, for the sake of economic development and resource security, under the guidance of policy, the development of their own mines is also increasing.

Overall, the willingness of capital expenditure on the supply side of the seaborne iron ore market is not enough, although the demand side is facing greater pressure, but the bottom support of iron ore prices compared to the past may be raised, and the process of its decline may also be more tortuous.

Coal: New capacity investment is mainly in India, Indonesia, and Mongolia.

In the past few years, high coal prices have brought rich cash flow to global coal companies, but under the pressure of transformation, the increase in capacity investment in traditional coal-exporting countries such as Australia and the United States is still relatively limited, the willingness of coal companies to invest in capital expenditure is not high, and they also face many external constraints.

After the brief disturbance of the Russia-Ukraine conflict, the demand for coal power in Europe has returned to the downward channel, suppressing the willingness of coal companies to expand production.

But even for coking coal, which has a relatively optimistic demand outlook, companies are not very interested in capacity investment.

From the chart, it can be seen that the capital expenditure growth of the three major seaborne coking coal producers is flat, which is in stark contrast to the high coal prices.

In the long run, we believe that the supply side of the seaborne coking coal market may lack enough elasticity to cope with the growth of demand.

However, in emerging economies such as India, Indonesia, and Mongolia, coal, as a basic energy for economic development or an important export commodity, may still have a place.

We see that these regions are still on an upward trend in investment in the coal industry to meet domestic or export demand.

As mentioned earlier, India's industrialization and urbanization process cannot be separated from coal.

India has high coal resource endowment, currently about 110 billion tons of coal reserves, ranking 5th in the world (after the United States, Russia, Australia, and China), and the reserve production ratio is as high as 147 (China is 37), which means a large potential to be developed.

Indian coal is mainly open-pit mines, with relatively low mining costs.

Chart 24 shows the rising capital expenditure of CIL, the largest coal company in India, in recent years, and we expect India's coal production to maintain a high growth rate.

The Indonesian coal industry has enjoyed the dividends of high coal prices caused by geopolitical conflicts in recent years, with a rapid increase in export volume and relatively active capacity investment.

We expect Indonesian coal to mainly meet the economic development and energy demand of the Indo-Pacific region.

In Mongolia, China's own coking coal resource bottleneck and the shift in Australian coal trade flow have led to a rapid increase in Mongolian coal export volume.

As an important export commodity, the Mongolian government encourages the development of domestic coal resources.

In addition to highways, cross-border transportation channels such as AGV and railways on the China-Mongolia border are also actively advancing, taking Ganqimaodu port as an example, if the railway is opened, the cross-border transportation capacity is expected to exceed 100 million tons/year.

We expect that the consumption proportion of Mongolian coal may increase with the import volume in the future, and the import demand for seaborne coal may be replaced, which may be a downward risk in the future seaborne coal market.

In China, capacity investment is still policy-driven.

Under the "dual carbon" target, coal demand is about to peak, but the short-term positioning of coal as the "main energy" will not change, and it is still the ballast stone of the energy system, and the country encourages the release of advanced capacity.

The "Opinions on Establishing a Coal Capacity Reserve System" [7] requires "to maintain a reasonable abundance of coal capacity, enhance the elasticity and flexibility of coal supply, and effectively deal with cyclical and seasonal fluctuations in coal supply, etc.

", "by 2027, initially establish a coal capacity reserve system, orderly approve the construction of a batch of coal capacity reserve mine projects, and form a certain scale of dispatchable capacity reserves.

By 2030, the capacity reserve system will be more perfect, the capacity management system will be more improved, and strive to form about 300 million tons/year of dispatchable capacity reserves, the national coal supply guarantee capacity will be significantly enhanced, and the supply elasticity and resilience will continue to improve."

It is worth mentioning that in recent years, Xinjiang has been very enthusiastic about the development of coal capacity, and it may replace the three western regions to become the main source of China's coal increment in the future.

Crude oil: Insufficient upstream investment brings supply bottlenecks.

The high oil prices since 2021 have had a limited stimulating effect on upstream investment.

According to IEA data, the global oil and gas upstream capital expenditure in 2023 is about $538 billion, about 7% lower than the level in 2019, but the central axis of Brent oil prices has risen by about 28%.

We calculate that the remaining production capacity of global oil supply in 2024 may have been basically concentrated in the OPEC+ countries that are actively restricting production, and after the U.S. crude oil production reached a historical high in 2023, the growth rate may have entered a slowing channel.The 2