Three years ago, leading Wall Street experts predicted that the world was entering a decade-long commodity supercycle wherein leading commodities including oil, natural gas, iron ore and copper would soar to new highs and remain elevated. Goldman Sachs global head of commodities research Jeffrey Currie predicted that the fundamental setup in the commodities complex including oil and metals was incredibly bullish. According to Currie, there has been a complete redirection of capital over the past few years due in large part to poor returns in the oil and gas sector, with flows moving away from old world economy investing style in things like oil, coal, mining, and towards renewables and ESG– and now there is a demand imbalance is being exposed. Currie declared copper the new oil, noting it’s absolutely indispensable in global decarbonization strategies with copper shortages already being felt.
Unfortunately, the commodity supercycle was abruptly cut short, thanks in large part to slowing economic growth in China, the world’s largest consumer of commodities. Back in October, we reported that China has seen very mixed fortunes from its commodities markets, which have been languishing under a long-running crisis in the property sector. And while iron ore, the key raw material used to make steel, has been defying expectations of a slowdown, it’s not that simple. In the first half of 2024, Iron ore imports rose a robust 6.8% compared to the same period in 2023, reaching 611.18 million metric tons, up 35.05 million from the first half of 2023.
However, all that iron ore did not go to make extra steel; instead, it was used to rebuild inventories amid weak iron ore prices. Iron ore prices fell almost 30% in 2024, and have fallen below $90 for the first time since 2022, again driven by the vicious cycle of weak Chinese fundamentals.
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Meanwhile, China–the world’s biggest importer of crude oil–imported an average of 11.05 million barrels per day (bpd) in the first half of 2024, down 2.9% from 11.38 million bpd recorded in the previous year’s corresponding period. The decline in crude imports coincided with a period of rising oil prices. Not surprisingly, China’s oil and steel industries are now in the red: the cumulative losses in the world’s biggest steel industry hit 34 billion yuan (S$6.3 billion) over the first nine months of the year, while China’s oil refining sector saw losses deepen to 32 billion yuan over the period. Steel mills have been forced to slash output in a bid to protect margins while oil refiners are also cutting runs, with the rapid adoption of electric vehicles disrupting oil demand.
“That engine is over,” Steele Li told the Financial Times, referring to the Chinese slowdown.
It will be interesting to see how the Chinese economy and its commodity markets will respond to recent stimulus measures adopted by the People’s Bank of China. However, there’s another supercycle unraveling around the globe.
Electricity Supercycle
Over the past few years, dozens of pundits and industry experts have laid out prognostications that the ongoing Fourth Industrial Revolution will drive unprecedented electricity demand growth in the United States and globally. Last year, the power sector consulting firm Grid Strategies published a report titled “The Era of Flat Power Demand is Over,” which pointed out that United States grid planners—utilities and regional transmission operators (RTOs)—had nearly doubled growth projections in their five-year demand forecasts. For the first time in decades, demand for electricity in the U.S. is projected to grow by as much as 15% over the next decade driven by the Artificial Intelligence (AI), clean energy, and cryptocurrencies boom.
AI, in particular, is expected to drive a lot of that surge in power demand. According to the Electric Power Research Institute (EPRI), data centers will gobble-up up to 9% of total electricity generated in the United States by the end of the decade, up from ~1.5% currently thanks to the rapid adoption of power-hungry technologies such as generative AI. For some perspective, last year, the U.S. industrial sector energy consumed 1.02 million GWh, good for 26% of U.S. electricity consumption.
“ A new electricity supercycle is under way,” The Economist has declared.
According to Goldman Sachs, escalating electricity needs from running AI data centers will generate downstream investment opportunities that will benefit utilities, renewable energy generation, and industrial sectors. GS has forecast that data center power demand will grow at 15% compound annual growth rate (CAGR) from 2023-2030, with data centers consuming 8% of total U.S. electricity output at the end of the forecast period. Approximately 47 GW of additional power generation capacity will be required to meet the growth in U.S. data center power demand by 2030.
The “U.S. power demand (is) likely to experience growth not seen in a generation. Not since the start of the century has US electricity demand grown 2.4% over an eight-year period, with US annual power generation over the last 20 years averaging less than 0.5% growth,” Goldman Sachs projected.
Goldman Sachs’ Wall Street peer UBS has forecast that global AI revenue is on course to hit $420B in 2027, representing a large fifteen-fold increase from $28B in 2022. GS has also projected that infrastructure spending, driven by GPU cloud and other emerging trends, will hit $195B in 2027 from $25.8B in 2022. The banker notes that only about 5% of companies are currently using generative AI, “But we expect monetization to rise and account for a larger portion of overall AI growth over the longer term,” Nadia Lovell, senior U.S. equity strategist at UBS’s global wealth management division, has projected.
The surge in power demand is anticipated to be met by approximately 60% gas and 40% renewable sources and drive ~$50 billion in capital investment in U.S. power generation capacity by 2030.
Our top picks to play the AI power boom are Vertiv Holdings Co. (NASDAQ:VRT),Quanta Services Inc. (NYSE:PWR) and Eaton Corporation (NYSE:ETN).
By Alex Kimani for Oilprice.com