China’s reopening after three years of Covid Zero is the main source of optimism for commodities markets wracked by a string of bank failures and slowing global growth.
Wood Mackenzie Ltd. has run the numbers on what it could mean for prices, under a base case scenario where the economy expands at 5.5% this year, and a more bullish forecast that the government pulls out the stops to engineer growth of 7%.
Woodmac doesn’t think markets can reclaim the extreme highs of 2022 as they’ve “now adapted to the chaos brought about by Russia’s war on Ukraine.” But Beijing’s habit of over-delivering on its targets could yield significant upside to energy prices that are “leveraged to a super-charged Chinese bounce,” the research firm said in a report on Thursday.
Central to the bullish argument is the government engaging in a massive push on infrastructure investment, which raises construction growth to 10.7% in 2023 from Woodmac’s base-case estimate of 3.2%. That would ripple through into the global economy, lifting growth to 2.6% from 2.2%.
In the bullish scenario, Chinese oil demand would expand by 1.4 million barrels a day, about 400,000 barrels more than the base case. That could add $3 to $5 a barrel to its forecast of Brent averaging $89.40 a barrel in 2023, Woodmac said.
The impact on gas markets would be more pronounced as stronger Chinese demand for seaborne cargoes drives up “competition for supply at a time when no new projects are expected to be commissioned before 2025,” according to the report. As such, prices could rise to $25 per million British thermal units, versus a base case of $15 to $20 per MMBtu.
For coal, China’s high-growth scenario would boost global demand to a record level, lifting benchmark prices by 37% above the base case to $151 a ton, Woodmac said. For metals, particularly steel, aluminum and copper, rising consumption would underpin a recovery in prices, with the added twist that higher energy demand could lead to a repeat of the power-related supply disruptions seen across China and Europe over the past two years.
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