Goldman Sachs: China’s Demand For Oil And Copper Is Booming

• Despite economic slowdown concerns, China's demand for major commodities, driven by its clean energy sector, is growing at robust rates.
• China's operating solar capacity has reached 228 GW, more than the rest of the world combined, indicating its dominance in global clean energy markets.
• The U.S. clean energy sector faces hurdles due to rising interest rates and remains dependent on China for raw minerals essential in EV manufacturing.

Worries about the waning strength of China's economy have been weighing heavily on many commodity and financial sectors in the current year. Economic pundits have warned that China’s rapid growth since the global financial crisis are unlikely to be replicated in the next decade, particularly in sectors of property construction and local government investment. Indeed, 

China’s economic slowdown has mainly manifested  in the property sector’s decline, hardly surprising considering that the industry represented 20 to 25 percent of GDP at its peak. Unfortunately, new  annual housing starts are now down 57 percent, with the sector expected to remain below half of its previous size over the next decade. 

Experts have also warned that China is poised to lose its prominence in global oil markets with India replacing it as the main driver of global demand growth. 

“China’s role as a global oil demand growth engine is fading fast,” Emma Richards, senior analyst at London-based Fitch Solutions Ltd, has told The Times of India. 

According to the analyst, over the next decade, China’s share of emerging market oil demand growth will decline from nearly 50% to just 15% while India’s share will double to 24%.

But fresh data coming from the Middle Kingdom suggests that these fears could be overblown. Wall Street investment bank Goldman Sachs has reported that China’s demand for many major commodities has actually been growing at “robust rates,” thanks in large part to its booming clean energy sector. 

According to GS, China’s demand for copper is up 8% Y/Y, while demand for iron ore and oil are up by 7% and 6%, respectively, exceeding the bank’s full-year expectations. China’s green copper demand rose 71% in July from a year ago

“This strength in demand has largely been tied to a combination of strong growth from the green economy, grid and property completions. The most significant strength has come on the renewables side where related copper demand is up 130% y/y year-to-date, led by surging solar related demand,” the Goldman report has observed.

China’s hegemony in global clean energy markets does not appear in any imminent danger. A June report by the Global Energy Monitor revealed that the country’s operating solar capacity has hit 228 GW, more than the rest of the world combined. China is now on track to double its wind and solar capacity a good five years ahead of its 2030 target.

U.S. Renewables Struggling

Unfortunately, the same cannot be said about the U.S. clean energy sector with high interest rates hammering renewable energy stocks. The iShares Global Clean Energy ETF (NASDAQ:ICLN), the world’s largest green energy ETF and a catch-all bet on clean energy, has crashed nearly 30% over the past two months, much steeper than the 6% decline by the S&P 500 over the timeframe. The solar and wind energy benchmarks have not fared any better, with Invesco Solar ETF (NYSEARCA:TAN) having cratered 34.0% YTD while First Trust Global Wind Energy ETF (NYSEARCA:FAN) has declined 19.8%.

“There’s a dark cloud hanging over green stocks,” Martin Frandsen, portfolio manager at Principal Asset Management, has told the Financial Times.

The renewable energy sector tends to be highly sensitive to interest rates because clean energy projects require developers to borrow lots of capital up front to build projects. To make matters even more complicated, the cost of electricity generated from renewable energy tends to be impacted much more by rising interest rates compared to electricity generated from fossil fuels.

It’s unfortunate that the U.S. is likely to struggle to create a robust and independent domestic clean energy manufacturing sector and has resigned itself to remaining dependent on China despite the Biden administration unveiling the historic Inflation Reduction Act (IRA) a year ago.

“This is not about China. We are perfectly happy to work with them on this and right now we purchase many of the minerals from Chinese companies. It’s about diversifying. The world needs them to be involved--the broader picture is climate change, and we’re not going to solve the climate crisis without the involvement of the PRC,” Jose Fernandez, the U.S. under secretary for economic growth and the environment, has told a briefing in New York. “China is the second-largest economy in the world, a major trading partner of the US. We will continue working with them while pursuing our interests and protecting our companies and criticizing them when we feel they should be criticized,’’ he has added.

According to Fernandez, China’s key role in the processing of raw minerals critical in the manufacture of EVs means it will remain a key U.S. partner.

By Alex Kimani for Oilprice.com

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