Given India’s projected development trajectory, a strong pick-up in energy demand is more assured than a sharp rise in metals demand.
By Paul Bloxham and Pranjul Bhandari
With a population of 1.35 billion, which is forecast to rise to 1.44 billion by 2030, India could have a large effect on global commodity markets. However, while size is an important factor for commodity demand, a country’s stage of development matters, too. At low levels of development, growth is typically not very metals- or energy-intensive, but historical patterns show that once a country gets to a certain level of development, its growth typically becomes more commodity intensive. A positive view on India’s commodity demand is also supported by the idea that there is a large amount of investment needed in India. In particular, India’s current level of capital stock per worker is less than half that of China’s and an eighth of that in the US. A large part of India’s development is expected to be driven by further rapid urbanisation, which supports capital deepening and commodity demand, as housing and infrastructure develop.
India’s urbanisation rate, at 34%, is still low compared to China, at 58%. Recent projections by Oxford Economics show that between now and 2035, 17 of the 20 fastest growing cities in the world (in terms of economic output) will be in India—including all of the top 10. For commodity markets, this backdrop is promising. Some observers will point out that although India’s growth path is expected to be strong, the economy is still far smaller than China’s, so it is unlikely to dominate commodity markets anytime soon. This is certainly true. Given its size and expected growth path, China is set to remain the largest consumer of most commodities for many years yet. However, for commodity markets, marginal demand matters most. And as China’s economy develops, its growth is set to become less commodity intensive. China is already nearing ‘peak construction’, which could start to weigh on its metals demand over time.
The International Energy Agency (IEA), as well as the large global energy producers, forecast that India’s energy demand is set to rise rapidly in coming years. The IEA projects that India will be the biggest contributor to new energy demand between now and 2040, driving 30% of total global growth in energy consumption. The mix of global energy consumption is also expected to change. BP forecasts that India’s consumption of coal is set to continue to rise, such that it may largely offset expected declines in coal consumption in all other economies. India’s 2018 National Electricity Plan assumes 24% growth in coal-powered electricity generation over the decade from 2017, although the 2027 target was lowered by nearly 5% from the previous Plan, published just two years earlier.
A key driver of the adjustment to the outlook for coal usage is the increased focus on renewable energy, which has become more cost-competitive. Additions to renewable energy capacity are now running ahead of net new thermal coal capacity installations, and the National Electricity Plan projects a 360% increase in renewable generation capacity by 2027, taking renewables past coal as India’s primary generation technology.
Although consumption per capita is still low, India is already the world’s third-largest oil consumer. India’s oil needs will probably continue to increase for several decades. OPEC forecasts a 150% increase by 2040, taking India’s share of global consumption to 9%, from 4% now. Key variables will be how quickly the penetration of electric vehicles rises and, in the more immediate future, how quickly India’s electricity network is upgraded and expanded.
Metals usage in India is also low when compared with countries at similar levels of development and the historical performance of other countries as they developed. This suggests that there may be considerable scope for a ramp up in India’s demand for metals. However, a strong pick-up in India’s demand for metals is less certain than the strong outlook for energy demand. This partly reflects that India’s development path has been quite different to many other Asian economies, which had much larger manufacturing industries, while India has a larger
Although the ‘Make in India’ policy initiative has the capacity to shift India’s growth more into manufacturing, this has yet to eventuate. In addition, changing global trade relationships, including rising protectionism, may make it more difficult for India to follow the path of development of other Asian economies, which, in many cases, involved becoming increasingly involved in the global manufactured export supply chain. Nonetheless, it is still the case that, given India’s low capital stock ratio, much infrastructure and housing will need to be built for India to develop, so demand for metals will rise.
One way to assess how much India’s metals demand could rise is to compare it to countries that have had development paths that have had varying degrees of commodity intensity. HSBC uses estimates put together by the Australian Department of Industry that do this. These estimates set out two scenarios. The first, is a ‘low-intensity’ scenario where India is assumed to follow the average growth path of Brazil, Argentina and Mexico and the second, is a ‘high-intensity’ growth path which is based on China.
In the low-intensity scenario, India’s role in base metal markets would remain quite modest—with consumption of aluminium, copper, nickel and zinc by 2035 less than one-quarter of what China consumed in 2017. Coking coal, iron ore and steel usage would be stronger, but in the low-intensity scenario, India would still be consuming far less in 2035 than China does now. In the high-intensity scenario, India would consume more of each of the metals than China now does. This scenario does seem unlikely, though, given the different structures of the two economies and the fact that China’s development has been highly metals intensive. Of course, a key question in determining what type of investment path India will take is how supportive its policy environment will be.
India’s investment deficit is well known. India’s investment rate has fallen by around 6% since the highs of 2011-12, with a marked slowdown in private sector participation. Economic policy uncertainty includes election related uncertainties. Research finds that private sector investment activity slows sharply in the run-up to national elections, and revives thereafter. However, a sustained increase is only expected over the medium term. HSBC has estimated India’s potential growth at 7.1%, rising to around 7.5% over the next few years. Therefore, for any meaningful increase in investment rate to materialise, growth in investment spending will need to rise faster than 7.5%. For this to happen, authorities will need to reform public finance, untangle stalled investment projects, revitalise PPP and develop the corporate bond markets.
Edited excerpts from HSBC’s India’s Growing Role in Commodity Markets (Dec 12). Co-authored by Daniel Smith, economist, Australia and New Zealand
Bloxham is chief economist, Australia, NZ & Global Commodities. Bhandari is chief economist, India