Citi花旗｜2Q24全球大宗商品展望

CitiResearch

2Q2024CommoditiesMarketOutlookMarch17,2024

OpportunitiesAbound,forBothCorporatesandInvestors

MaximilianLaytonAC

AakashDoshiAC

FrancescoMartocciaAC

KennyXunyuanHu,CFAAC

ArkadyGevorkyanAC

ViswanathraoKintaliAC

GlobalHead|Commodities

NorthAmericaHead

EnergyStrategy

CommoditiesStrategy

CommoditiesStrategy

MetalsStrategy

max.layton@

aakash.doshi@

francesco.martoccia@

kenny.x.hu@

arkady.gevorkyan@

viswanathrao.kintali@

+442079864556

+12127233872

+390289064571

+6566573873

+12127231051

+912242775092

AnthonyYuenAC

EricG.LeeAC

MaggieXuetingLinAC

TomMulqueenAC

ShreyasMadabushiAC

Pan-AsiaHead

EnergyStrategy

EnergyStrategy

MetalsStrategy

MetalsStrategy

anthony.yuen@

eric.g.lee@

maggie.x.lin@

tom.mulqueen@

shreyas.madabushi@

+85225012731

+12127231474

+85225012796

+442079864559

+912242775048

*withthankstoAsimRahimandDanielRostro

SeeAppendixA-1forAnalystCertification,ImportantDisclosuresandResearchAnalystAffiliations

CitiResearchisadivisionofCitigroupGlobalMarketsInc.(the"Firm"),whichdoesandseekstodobusinesswithcompaniescoveredinitsresearchreports.Asaresult,investorsshouldbeawarethattheFirmmayhaveaconflictofinterestthatcouldaffecttheobjectivityofthisreport.Investorsshouldconsiderthisreportasonlyasinglefactorinmakingtheirinvestmentdecision.Certainproducts(notinconsistentwiththeauthor’spublishedresearch)areavailableonly

Citi'sportals.

2

TableofContents

1.

ExecutiveSummary,priceforecasts,macroeconomicoutlook

2.

Energy

Petroleum

NaturalGas

Carbon

Uranium

3.

PreciousMetalsandPGMs

Gold

Silver

Platinum

Palladium

4.IndustrialandBatteryMetals

Copper

Aluminum

Nickel

Zinc

Tin

Lead

Lithium

Cobalt

5.Bulks

IronOre

ThermalCoal

CokingCoal

ManganeseOre

6.Agriculture

CBOTGrainsandOilseeds

Cocoa

Coffee

Sugar

(pg.3)

(pg.23)

(pg.24)

(pg.41)

(pg.57)

(pg.61)

(pg.67)

(pg.68)

(pg.75)

(pg.79)

(pg.80)

(pg.83)

(pg.87)

(pg.94)

(pg.98)

(pg.101)

(pg.103)

(pg.105)

(pg.107)

(pg.113)

(pg.114)

(pg.116)

(pg.119)

(pg.121)

(pg.123)

(pg.124)

(pg.125)

(pg.136)

(pg.140)

(pg.142)

1.Executivesummary,priceforecasts,and

macroeconomicoutlook:Opportunitiesabound

CItI

3

ExecutiveSummary–Opportunitiesabound

4

•Weseethepresentsupportivesetupforcyclicallyexposedcommoditiesashavingalittlefurthertorunoverthecomingweeks,underpinnedbyinvestordemand(broaderrisk-on,prospectsforpolicy-easing,bottominginUSmanufacturingindicators),anumberofsupplyconcernsanddisruptions(notablyforoilandcopper),generallylowinventories(alsonotablyforoilandcopper),andbullishtailwindsfromstrongerthanexpecteddemandovertheyeartodate(oilinparticular).However,ourbasecaseisnotforarunawaycommoditybullmarketforthe2024yearasawhole,asthebullishimpactofeasingmonetarypolicyoncommoditiesislikelytobecheckedbyheadwindsfromsharplyrisingdebtserviceburdens,recessionaryconditionsinthematureeconomies(see

slides9

and

10

),andonlymoderateChinapolicyeasinginthefaceofChinaprivateandhousingsectorweakness(see

slide11

).

•Despitethemixedmacrobackdropfor2024,wefindthatOPPORTUNIESABOUNDwithinthecommoditiescomplex,intermsofcorporateRISKMANAGEMENTopportunitiesandinvestorTRADINGopportunities.Wehighlight15(!)oftheseopportunitiesbelow.

•Butbeforewegettoourcorerecommendations,wewishtohighlightthatinthisreportwealsocoversomeexcitingnewthemesincommodities,includingCommoditiesandAI/Datacentres(see

slide18

),ExtendedRangeElectricVehicles(EREVs)–whichwepredictwillbethenextbigthingintheautomotivemarketsbecausetheysolverangeanxietyatahighlycostcompetitivepricepoint(see

slide19

),China’scrackdownonEnergyIntensiveIndustries(see

slide12

),andChina’ssustainedboominEnergyTransitionCapex(see

slide14

).

•1.WerecommendOILproducerstakeadvantageofstrongpricing(andneardecadelowBrentvolatilitylevels)overthecomingmonthsbylockingin2025prices,astherecentmovesbyOPEC+areadecentstopgapfor2024,butnotenoughtostopadeteriorationinthebalancesfor2025,duringwhichperiodwesee$60/bblBrent,owingtosubstantiallyweakeningmaturemarketdemandgrowthandsolidnon-OPECsupplygrowth.Weseethemarketasbroadlybalancedatpresent,withhighpricessupportedbylowinventories,OPEC+cuts,thesituationintheMiddleEast,whichisraisingtheamountofoilintransit(andappearsmonthsfromde-escalating),aswellasUkraine’simpactonRussianenergysupplies.

Seeslides25-38fordetails.

•2.Wenowrecommendconsumers(investors)starttoscaleintoCOPPERhedging(buying)2025-2026overthenext3-6months,withanythinginthe<$9k/trangenow‘cheap’inourview.WenowseeCOPPERmoregraduallyrisingto$12k/toverthenext2years($10k/tyearendthisyear),asdeficitssupportcopperoutperformanceinwhatislikelytobeachoppymacroeconomicenvironment.Intheshortrun,ourtacticalbullcallonCOPPERto$8,800/thasworkedwell,andweseecopper’srangerisingto$8,300-9,300/toverthenext3-6months,from$7,800-$8,800/toverthepastyear.Seeslides87-93fordetails.

•3and4.WecontinuetoseeGOLD(to$2,300/oz,+6%)andSILVER(to30/oz,+20%)performingstronglyoverthenext6-12months,underpinnedbyaweakerdollar,weakerUSgrowthexpectations,strongphysicaldemand,andFedeasingexpectationsacceleratinginlate2024.WeexpectasteadytohigherGOLD/SILVERpriceratio(88-100x)butthinkthewhitemetalcouldplayacatch-uptradeaftertheUSelections.

Seeslides

68-78fordetails

.

ExecutiveSummary–Opportunitiesabound(2)

5

•5.WearetacticallybullishRBOB/BrentandNorth-WestEuropeNAPTHAcracks,targeting$35/bbland-$2/bbl,respectively.Thestartupofthedrivingseasonandtherecoveryinthepetchemmarketshouldexertadditionalupsidepressureinatightmarket,withinventoriesatseasonallowsandsupplyplaguedbyintermittentrefinerydisruptions,asexplainedinourrefinedproductssection.

Seeslides39-40fordetails

.

•6.WearebullishGASandrecommendshort-termtacticalupsideexposureinHH,TTFandJKMbasedonourhigher0-3mpriceviewvs.currentforwardcurves,aspricesupportlikelyemergedduringthelowpriceperiodinFebruary.Our0-3mpricetargetsare$10/MMBtuforAsianJKM,$9/MMBtu(~€28/MWh)forEU’sTTF,and$2.5/MMBtuforHenryHub(HH).

Seeslide42fordetails

.

•7.Werecommenda2025USLNGofftakerhedgeorthatinvestorstakeupsideexposurebybuyingUSHHGAS,inanticipationofpotentiallyhigherpricesthen.HHpricescouldriseabove$5/MMBtufor2025becauseUSproducerscuttingcapexandthetimeneededtorampupcouldmeanthatthe2025productionmomentumcouldbeweakevenasLNGexports,pipelinegastoMexicoanddomesticindustrialdemandaretorise.

Seeslide54

.

•8.EUCARBONAllowances(EUA’s)havefallento$55/t,andwenowrecommendcorporateandinvestorbuyingasweseeashortcoveringledrecoveryinpricesto$80-90/tbytheendoftheyearandinto2025(+33-50%fromcurrentlevels),onthebackofamodestfundamentaldeficitandthepotentialforgovernmentsupportonceelectionsareheldinJune.WeestimatethattheEUproducersandimporterscansaveupto$600mnbyhedging2025exposuresatcurrentforwards,shouldourpriceforecastcometofruition.

Seeslide60fordetails.

•9.WerecommendbuyingIRONOREatorbelow$90/twithupsideto$110-120/toverthecourseoftheyear.Ourcallforironorestrengthhasnotplayedoutrecently.Priorcyclessaw$80-90/tascostsupportandChinaeasingshouldsupportareboundby3Q’24.Seeslide116fordetails.

•10.WeseeNICKELfallingto$15,500/tonasurplus,easingofIndonesianoresupplyissues,andlikelyincreasesinvisiblestocks.ThiscouldbeagoodrelativepositionagainstthebuildingofanIRONOREbullishposition.Seeslide98fordetails.

•11.CBOTCORNspreadsandharvestpricesshouldweaken~25%onnormalNHweatherand2024/25inventorybuilds.Seeslides129-130.

•12.WeseeLITHIUMpricesfallingby33%to$10k/tfrom$15k/toverthenext3-6months,drivingmineclosuresinwhatisan~8%surplusmarketin2024.Rebalancingshouldseepricesrecoverto20k/tbyyearend2025.Seeslide107fordetails.

•13.WecontinuetoseePALLADIUMmineclosuresdrivingpricesupto$1,200/ozoverthecomingquarter,providingstrongcorporatehedgingandinvestorsellingopportunities,asthelong-termbearmarketremainsintact,withpriceslikelytohalveagainoverthenext2-3years.

Seeslide80

.

•14.NYCOCOApricesareexpectedtoscale$8,000/tandcouldhitarecord$9,000-10,000/tpriceareain2Qfromcurrentspotnear$7,000/t.Arecord2023/24deficitrequireshighpricesandsustainedold-crop/new-cropbackwardationtorationdemand.Seeslide136fordetails.

•15.WeremainlongtermbullishCaliforniaCarbonAllowances(CCAs),withalmost50%upsideto$60/toverthemediumterm.Recentsoftnessprovidesagoodentrypointinourview.

Seeslides58-59fordetails

.

Priceforecasts*andbull/bearoutlook

PriceTargets

QuarterlyForecasts

AnnualForecasts

LTPrices

Spot*

0-3M

%chgvsspot

6-12M

%chgvsspot

Q32023

Q42023Q12024EQ22024EQ32024EQ42024E

2022

2023

2024E

%chgvsspot

2025E

%chgvsspot

Energy

5YCyclical

ICEBrentUSD/bbl

86

80

-7%

72

-16%

86

8281787470

99

82

76

-11%

60

-30%

70

NYMEXWTIUSD/bbl

82

75

-8%

68

-17%

82

7876747066

95

78

72

-12%

57

-30%

67

HenryHubNaturalGasUSD/MMBtu

1.7

2.5

47%

4.0

135%

2.7

2.92.32.12.13.3

6.5

2.7

2.4

41%

5.5

223%

5.0

JKMLNGUSD/MMBtu

8.5

10.0

18%

13.9

64%

12.6

15.89.610.211.214.4

34.0

14.4

11.3

33%

15.0

77%

8.6

TTFNaturalGasUSD/MMBtu

8.0

9.0

13%

11.8

48%

10.8

13.58.59.09.712.6

40.4

13.1

10.0

25%

12.9

61%

6.8

EUACarbonEUR/t

57

80

41%

90

59%

86

7882889791

81

86

90

59%

100

76%

N/A

PreciousMetals

LTPrice

GoldUSD/t.oz

2164

2,200

2%

2,300

6%

1,950

1,9782,0602,2002,3002,250

1,804

1,956

2,200

2%

2,050

-5%

1,550

SilverUSD/t.oz

25.0

24.5

-2%

25.0

0%

23.6

23.323.024.025.026.0

21.8

23.4

24.5

-2%

26.0

4%

16.5

PlatinumUSD/t.oz

936

975

4%

1,050

12%

932

9179209509751,000

964

968

960

3%

1,000

7%

1,150

PalladiumUSD/t.oz

1072

1,200

12%

900

-16%

1,254

1,0959801,100975950

2,110

1,341

1,000

-7%

825

-23%

600

IndustrialandOtherMetals

LTPrice

LMECopperUSD/MT

8840

9,200

4%

10,000

13%

8,366

8,1768,5009,0009,00010,000

8,832

8,486

9,125

3%

10,250

16%

9,000

LMEAluminumUSD/MT

2222

2,300

4%

2,400

8%

2,159

2,1962,2002,3002,3002,400

2,707

2,255

2,300

4%

2,600

17%

2,500

LMELeadUSD/MT

2166

2,150

-1%

2,100

-3%

2,171

2,1172,1002,1002,1002,100

2,153

2,136

2,100

-3%

2,190

1%

2,000

LMEZincUSD/MT

2541

2,650

4%

2,700

6%

2,434

2,4982,5502,6002,6502,700

3,487

2,649

2,625

3%

2,700

6%

2,400

LMENickelUSD/MT

18145

15,500

-15%

17,000

-6%

20,396

17,25716,50016,00016,00016,500

26,263

21,505

16,250

-10%

17,000

-6%

17,000

CMELithiumHydroxideUSD/MT

13500

10,000

-26%

14,000

4%

27,649

16,26314,90010,00010,00014,000

61,033

34,528

12,200

-10%

15,750

17%

23,000

LMECobaltUSD/MT

27550

24,000

-13%

27,000

-2%

33,320

32,30728,00026,00024,00025,000

67,314

33,531

25,750

-7%

26,500

-4%

55,000

UraniumUSD/lb

83

95

14%

105

26%

59

759995100100

50

60

99

19%

110

32%

63

BulkCommodities

5YCyclical

IronOre(TSI)USD/MT

108

120

12%

100

-7%

113

127120120110115

121

119

116

8%

101

-6%

85

ThermalCoal(Newc6K)USD/MT

131

135

3%

150

14%

147

136130135140145

357

174

138

5%

130

-1%

100

CokingCoal(AusPHCC)USD/MT

288

275

-5%

250

-13%

264

334315280270260

366

296

280

-3%

250

-13%

200

Agriculture

CBOTCornUSd/bu

423

400

-5%

375

-11%

500

475430400395375

693

550

400

-5%

360

-15%

N/A

CBOTSoybeansUSd/bu

1181

1,100

-7%

1,000

-15%

1400

13131180112510751050

1,550

1,374

1,110

-6%

990

-16%

N/A

CBOTWheatUSd/bu

520

525

1%

490

-6%

625

582570525500480

901

618

520

0%

460

-11%

N/A

ICESugarUSd/lb

21.8

23.0

6%

25.0

15%

24.9

25.622.523.023.022.5

18.8

24.1

22.8

5%

20.0

-8%

N/A

ICECoffeeUSd/lb

189

185

-2%

170

-10%

156

172185175165165

220

171

173

-9%

145

-23%

N/A

ICECocoaUSD/MT

7405

8,000

8%

5,500

-26%

3465

39795500690056005000

2,450

3306

5750

-22%

4565

-38%

N/A

0-3MForwardOutlook**

Bullish

Neutral-to-bullish

Neutral

Neutral-to-bearish

Bearish

Energy

AsiaLNG,EUACarbon,EUGas,Uranium,USGas

Brent,WTI

IndustrialMetals

Copper,Zinc

Aluminum,Lead

Nickel,Tin

BatteryMetals

Cobalt

LithiumHydroxide

PreciousMetals

Gold,Palladium,Platinum

Silver

Bulks

IronOre

ThermalCoal

CokingCoal

Agriculture

Cocoa

Sugar

Coffee,Wheat

Corn,Soybean

Source:Bloomberg,CitiResearch,*Spotasof03/14/2024,**asofMar2024,intendedasadirectionalforecastona0-3mbasis,subjecttorevision6

Amidthelowvolatilityenvironment,weseesubstantialopportunities

Pulledforwardbysofts,livestock,petroleumproducts,andmoremetals,commoditiesareup0.6%YTD.Despiteadecliningandlowvolatilityenvironment,weseetacticalopportunitiesinmanycommoditiesincludinggas,oil(petroleumproducts),gold,andcocoa,amongstothers.Geopoliticaltensionsandglobalweathershouldcontinuetoplayaprominentroleincommoditiespriceaction.

Cross-assetmarketreturns*,$denominated

PercentagechangeinpromptYTD

BCOMindicesYTD2024returnsandprojected2025returns**

RetailandinstitutionalcommoditiesAUMbysector($Bn)***

cltSource:Bloomberg,CitiResearch,*notvolatilityadjusted,**usingCitiResearchforecastsfromspotreturnsrelativetospotprices,***subjecttorevision;biasedtoUS/Londonmarkets.ExcludesOTC7

Commoditiespositioninghasbeenrisingrecently,thoughstilllightoverall

BrentandWTIfundslengthremainatbestneutralastight,range-boundpricingthisyeardepressessentimentforbullishstructures.

Ontheotherhand,positioningforgold,copper(LMEmoresothanCME)andICEsoftshavebeenstrengtheningrecentlyasupside

momentumpersistsforthesecommodities.

Managedmoneycombinedlong/shortratios*

Sector

Commodity

L/SRatioLatestCOT

L/SRatioPriorWeek

L/SRatio4WksAgo

2YAvg

5YAvg

2Yz-score

5Yz-score

Energy

Brent

4.1

4.4

4.3

5.0

5.0

-36%

-33%

WTI

7.6

5.3

2.2

6.5

6.8

26%

19%

HHGas

0.7

0.7

0.7

0.8

1.0

-75%

-60%

Gasoline

6.4

5.8

4.7

9.3

8.4

-50%

-30%

Gasoil

2.3

2.4

2.2

5.9

7.4

-56%

-56%

HeatingOil

1.7

2.3

1.9

2.6

2.0

-82%

-22%

EUACarbon

0.5

0.5

0.5

1.2

4.6

-109%

-44%

IndustrialMetals

Copper

1.9

1.7

1.3

1.6

2.3

62%

-20%

Aluminium

0.9

0.8

0.9

2.0

2.6

-57%

-77%

Nickel

0.8

0.6

0.5

1.2

2.3

-51%

-76%

Zinc

0.9

0.7

0.8

2.6

2.7

-71%

-94%

Lead

0.7

0.8

1.2

1.6

1.7

-97%

-109%

Tin

4.3

2.2

1.1

2.6

9.5

57%

-20%

Precious

Metals

Gold

4.9

2.4

2.9

2.7

5.5

141%

-7%

Silver

1.6

0.9

0.9

1.5

1.9

8%

-37%

Platinum

0.6

0.7

0.9

1.5

2.3

-85%

-81%

Palladium

0.2

0.2

0.3

0.5

2.5

-72%

-82%

Grains

Corn

0.4

0.4

0.4

5.4

5.3

-50%

-65%

Soybeans

0.2

0.2

0.3

7.2

7.3

-87%

-69%

Wheat

0.6

0.6

0.5

0.6

0.9

-20%

-86%

SoybeanMeal

0.6

0.6

0.8

12.7

7.1

-89%

-64%

SoybeanOil

0.5

0.5

0.6

5.5

4.8

-62%

-74%

KCHRWWheat

0.6

0.5

0.6

2.4

2.2

-65%

-72%

Softs

Sugar

1.7

2.6

2.0

4.0

4.3

-124%

-78%

Coffee

3.6

3.5

3.9

3.0

2.8

24%

29%

Cocoa

2.3

2.3

2.8

1.8

1.6

67%

91%

Cotton

18.9

14.7

5.5

11.6

17.8

31%

3%

Livestock

LiveCattle

3.4

3.4

2.7

4.7

4.2

-42%

-26%

LeanHog

7.8

7.2

2.6

2.6

3.2

260%

204%

Source:CFTC,Bloomberg,ICE,CitiResearch*asofMarch5th,20248

Monetarypolicysettoease,thoughrisingdebtserviceburdensareaheadwind

Source:S&PGlobal,IIF,Bloomberg,CitiResearch9

Weagreewiththemacrobullsthatthegradualeasingofmonetarypolicyacrossthematureeconomiesoverthecomingyearwillprovideabullishtailwindforriskassetsandeconomicactivity,andthatasubstantialamountoftheimpactofmonetarypolicyongrowthhasalreadyoccurred(supportingthisargumentisthefactthatmanufacturingPMIshavepickedupoflate,ledbytheUS,seechartleft).However,weseeacountervailingforcecomingfromrisingdebtserviceburdens,as$23trofmatureeconomydebtwillmatureduring2024,raisingdebtserviceburdensby1-2%ofmatureeconomyGDP,stiflingtherecovery(potentiallythrough2024and2025)unlessUSratesarecutmuchmoreaggressivelythanthemarketiscurrentlypricing(seechartright).

Manufacturingindicatorsareturninghigher,ledbytheUS,suggestingthattheworstoftheratehikecycleisbehindus…

…howeverthereis~$23trofdebtmaturingindevelopedmarkets

in2024,drivingupdebtserviceburdensby$500-900bn,or1-1.8%ofGDP

24

22

20

18

16

14

12

10

Maturingdebt(MatureMarkets,$trn,lhs)

Cashrate(average,%,rhs,Fedfunds)

US5yearbondyield(average,%,rhs)

201620172018201920202021202220232024

5.55.04.54.03.53.02.52.01.51.00.5

0.0

UKabellwethertestofrisingdebtservicingand‘immaculatedisinflation’

10

Source:ONS,BankofEngland,OECD.See:UKEconomicOutlook:Fallout

TheUKisabouttogethitwithalargenetinterestincomeshockreflectingarisingdebtserviceburden.Thiswillbeabellwetherforwhat happensinEuropeandtheUSoverthenext1-2yearsshouldratesgetcutinlinewithcurrentmarketpricing.IftheUKcanweatherthe stormoverthenext6months,wewouldbecomemuchmoreconstructive.IftheUKcannot–ourbasecase–thiswillbeacyclicalheadwind for2025,thoughweexpectothercentralbankstotakenoteandcutmoreaggressivelyduringlate2024/2025inordertoavoidthesame fate.UKwageinflationhascollapsedto0%during2H’23intheUKalongsideonlyaverysmallincreaseinunemployment-abigwinfor teamtransitory-andfortheideaof‘immaculatedisinflation’.Thisisquitebullishmediumterm,asmatureeconomywagegrowthisnotas stickyasfeared(UKandEU/USlabourmarketCovid-relatedsupplysideissuesarecommonacrossthem),meaningmoreroomforcuts.

UKhouseholdandprivatenon-financialcorporatenetinterestincomeseesashockof1.5%ofGDPby3Q’24,indicativeoftrendselsewhereinEuropeandtheUS

0.8%

0.6%

0.4%

0.2%

0.0%

-0.2%

-0.4%

-0.6%

-0.8%

-1.0%

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

Q3-23

(F)

HouseholdPNFCsTotal

Q3-24

AsmallincreaseinUKunemploymenthasledtoa

collapseinwageinflation,whichisamassivewinfor‘teamtransitory’–withlowerrateandbullish

implications

China–Constructionissoft,butcreditiseasing;renewables,EVs&gridlookbullish

Source:CitiResearch,MoF,NBS,Wind11

2011

2012

2013

2014

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2024

China’sconstructionactivitypostCNYhasbeenweak,consistentwiththerecent35-40%declineinironorepricesto~$100/toverthe

pastfewmonths.China’sNPCmeetingwasgenerallydisappointing.Havingsaidthis,China’scredithasbeengrowingby+30%y/yover

thepast6months,whichshouldataminimummitigatethedownsidetoeconomicgrowthandcommoditiesdemand,and,ifitcontinues,

representsamajorbullishdriverforcommodities,inparticulartheoilandmetalscomplex,during2024.

•Weseetheriskssurroundingthe5%GDPtargettothedownside,astheambitiousgoallaidoutintheGovernmentWorkReport(GWR)comeswithonlyamoderatestimuluspackage.

•ThoughtheNPCandGWRofferednonewstatementonthepropertysectornorfurtherdetailsontheThreeMajorProjects(urbanrenewal,dual-useinfrastructureandurbanvillageredevelopment),wedoexpecttheThreeMajorProjectswilloccuratsomestage(withanadditionalRMB500bnPSLinjectionplausible),andsupportconstructionactivityandeventually,ironoreandmetalspricingastheyearprogresses.

Centralgovernmentisbestpositionedtosupportgrowthamidlocalgovernmentdebtconcerns

Chinacreditisgrowingbyaround30%y/yoverthe

past6monthsandtheimpulseisnow+2-3%

15%

10%

5%

0%

-5%

-10%

75%

50%

25%

0%

-25%

-50%

Chinacreditimpulse(lhs)ChinaTSFy/y6mma(rhs)

China-thereturnofenergyintensitytarget–bullishforrenewables,grid

TheenergyintensitytargetreturnedintheNPC,withanewdefinitionthatexcludedrenewablesenergyuse,andoil,gasandcoaluseasfeedstocks.Renewables,thegrid,andequipmentupgradingshouldbenefitfromthedefinitionchange.Ourestimatessuggestthattheenergyintensitytargetsoverthenext2yearsareachievableandarenotlikelytobedisruptivelikeduring2021.

TheGovernmentWorkReportexplicitlypledgedtolowerenergyconsumptionperunitofGDPbyaround-2.5%in2024.Nonumerictargetsweresetin2022-23afterthe-3.0%targetand“campaign-style”executionledtopoweroutagesin2021.

The14thFive-YearPlan(2021-25)setarestrictivetargetforenergyintensitytodeclineby-13.5%cumulatively.However,

progresshasslowedsincethen,withabumpystartin2021andde-emphasisin2022-23.The-2.5%reductiongoalthisyearlookssteepvs.anincreaseof+0.5%in2023,implyinggrowthofonly+2.5%intotalenergydemandgiventhe5%GDPtarget.

Theredefinitionof“energyintensity”meansthatdemandforrenewablesandfuelsusedasafeedstockwouldnotbe

counted.*Withrenewablesandfuelsasfeedstockdrivingconsumptiongrowthinenergy,thismeansthatthetargets

shouldbeachievable,andenergycontrolsshouldbelessdisruptivethanin2021.Policymakersnowtakeamorepragmaticviewonthegreentransitionafterpreviouspowercrunches.Manypetchemfacilitiesalreadycomplywithtightenvironmentalpolicies.Upgradingrefinedoilproductsintochemicalsisalsoongoing.

Equipmentupgradesandfurtheradditionstorenewablesinstallationsarekeygrowthdrivers.2024renewablesgrowthcouldexceedthe293-GWin2023,particularlyasPRCgridcompaniesshouldabandonthe5%gridcurtailmentcap–a

bottleneckforrenewablesinstallationsincertainregions.

OurballparkestimatessuggestthatChinacanmeetitsnewenergyintensitytargets

Top-6energy-consumingsectorsaccountedfor¾ofindustrialconsumptionand½oftotalconsumption

*ChinaTargetsSmallReductioninEnergyIntensityfor2024–Bloomberg(3/4)Source:CitiResearch,NBS,Wind

12

China’spushintoRenewables,EVs,powerinfrastructureisgettingstronger

Source:Bloomberg,CitiResearch,BNEF,NBS13

OurviewthattheEnergyTransitionislikelytogainmomentumratherthanloseitisunderpinnedbythefactthattheChineseGovernment’sgrowthandpoliticalgoals,bothdomesticandinternational,arestronglyalignedwithasuccessfulChina-ledbuildoutof theelectricvehicle,renewablepower,andothergridrelatedsectors.Assuch,weexpectmassiveinvestmentandtechnologicaland costimprovementstodrivethecompetitivenessandglobalrolloutofrenewables,electricvehiclesandstorageoverthecomingyears.

•Inwhatisamomentousshiftfortheworld,Chinabegantotargetpeakemissionsby2030andnetzeroby2060in3Q’20.Asacontrolledeconomy,thepolicyshifthasalreadyresultedinanimmenseshiftofbothpublicandprivatecapital(capitalisbothcontrolledandtrappeddomestically)intoareasrelatedtodecarbonisation,includingtherenewablessector,electricvehiclesandbatterysector,aswellas

hydrogenandothercleantechnologysectors.

•China’spushtodecarboniseislikelytokeepitsrecentmomentum,sinceithasthefollowingpotentialbenefits:

•Energysecurity–EVsreduceChina’srelianceonoil;renewablesreduceChina’srelianceongas.

•Createsanewgrowthdriver–InvestmentinrenewablesandEVs,batteriesis

increasingsharplyinChina,risingto~3.5%ofGDPin2022from~1%in2020,asPropertyFixedAssetInvestment(FAI)growthwasfadinginthecontextofa

negativeurbanisationimpulseanddecliningpopulationgrowth.

•Technologicalleadership-Massivepublicandprivateinvestmentdrives

economiesofscaleandhasalreadydriventechnicalinnovations,resultinginChinabeingtheleaderinrenewableandelectricvehiclebatterytechnology.

•Drivesdowndomesticairpollutionandmitigatesclimatechangeanditsrelatedimpacts.

•RisingglobaldependenceonChina-WithChinabecomingatechleaderandthemostcompetitiverenewablesandbatteriesproducer,globaldependenceon

Chinamightincreaseratherthandecreaseduringtheenergytransitionperiod.

15.0%

14.0%

13.0%

12.0%

11.0%

10.0%

9.0%

8.0%

ChinaEnergyTransitionCapitalExpenditure

acceleratedsharplyduring2021and2022

FAIinproperty