China's resource boom: not what you think it is

Last month China said it would scrap plans to build 85 coal plants and instead invest $350 billion in renewables. This is just one of many ways technology is reshaping the world of resources and transforming the global economy in the process. And China is at the center of it.

Technological innovation— the adoption of robotics, Internet of Things technology, and data analytics, along with more widely expected macroeconomic trends, are changing consumer behavior and fundamentally transforming the way resources are consumed and produced.

China is playing a key role in this transformation as it shifts to more service and consumption led growth, invests heavily in renewables, and transitions away from a dependence on fossil fuels, at the same time as it accounts for a growing share of global energy demand. 

According to new research at the McKinsey Global Institute, Beyond the supercycle: How technology is reshaping resources, the growth of primary energy demand will slow and could even peak in 2025 if new technologies are adopted rapidly. Demand for oil and coal will also likely peak and could decline over the next two decades. Less intensive use of energy and increased efficiency could potentially raise energy productivity in the global economy by between 40 to 70 percent in the same period.

While overall global energy demand slows, China’s share of that demand is growing. By 2035, China could account for 28 percent of the world’s primary energy demand from 24 percent today, according to our research. In comparison, the United States could account for 12 percent of global energy demand in 2035, a decline from 16 percent today. That means in this new commodities era, China dominates the resource market, accounting for more than double the share of demand coming from the US.

China’s rapid industrialization, its urbanization on a massive scale, and its surging economic growth were the primary factors that drove up prices during the 2003-2015 commodities supercycle. By 2015, China was consuming more than half of the global supply of iron ore and thermal coal and about 40 percent of the world’s copper. Then came the end of the supercycle, in part driven by a shift within China, as it began transitioning from an investment driven economic model to a services and consumption led one, and reduced its appetite for additional resources.

Today China is helping to drive a global trend in declining resource intensity. Increased energy efficiency in residential, industrial and commercial buildings, lower demand for energy from transport due to the rise of electric and autonomous vehicles and ride sharing, together with the falling costs and greater penetration of renewables will reduce global consumption of resources. 

China has already made significant progress in reducing the resource intensity of its economy and plans to do more. While China’s economy grew 18 fold from 1980 to 2010, energy consumption grew only five fold. Energy intensity per unit of China’s GDP declined 70 percent during this period, according to the World Bank. And the Chinese government aims to reduce energy intensity by 15 percent in its 13th five-year plan, from 2016 to 2020, after targeting a 20 percent reduction in the period 2006 to 2010 and a 12 percent reduction from 2011 to 2015.

Renewables are one factor behind declining resource intensity. They are not only substitutes for fossil fuels, but also reduce overall demand for energy, as they do not incur the heat losses associated with fossil fuel power generation. As solar and wind continue to become cheaper with the deployment of new technology, renewables will play a substantially larger role in the global economy’s energy mix.

If costs continue to fall at the current pace, solar and wind energy could be competitive by 2025, without subsidies, with the marginal cost of thermal coal or natural gas generation in most regions globally. Renewables could grow from 4 percent of power generation today to as much as 36 percent of global electricity supply by 2035, our research shows.

China is investing heavily in renewables with ambitions to be a world leader. Currently, China invests more than $100 billion a year in domestic renewables, double the amount that the United States invests domestically. In addition, China is investing $32 billion overseas, more than any other country, and China’s State Grid Corporation announced plans to develop a global grid that draws on wind turbines and solar panels from around the world. China’s top tier companies are gaining leadership across renewable value chains. For example, China’s solar panel manufacturers are estimated in recent studies to have about a 20 percent cost advantage compared with US peers thanks to economies of scale and supply chain developments. Chinese wind turbine manufacturers have been gradually closing technology gaps and now account for over 90 percent of the domestic market, up from just 25 percent in 2002.

Not only will China be the biggest center of demand in the world but the source of cutting edge technology. And that means China has a unique opportunity to provide a leadership role. Its experience in reducing the energy intensity of its economy can provide a way forward for developing nations. And its development of renewables at home and abroad can lead to further technological breakthroughs and drive costs lower, benefitting consumers of energy everywhere. Indeed, China seems to be taking a more active leadership role on energy. Just last month Chinese President Xi Jinping urged the United States and the world to stick to hard won agreements on climate change.

But China faces challenges in its transition from fossil fuels to renewables and from the overall transformation of the global resource sector. For starters, it is still highly dependent on coal and will face sizeable costs as its shifts capacity from coal to other resources like natural gas and renewables. At the same time, its construction of solar panels and wind farms have outpaced upgrades to the electrical grid, creating a great deal of waste. And its producers, like others around the world, face increasing pressure to drive costs down and increase efficiencies in an era of slower global demand for commodities.

Technological advances should ease some of these pressures, particularly for producers. Automated hauling trucks, underwater robots that can fix gas pipelines, drones that conduct predictive maintenance on wind turbines, data analytics that can improve outcomes across operations, these and other technological developments can help producers drive down costs and increase efficiency.

Just as technology helps producers unlock productivity gains, it will help consumers unlock savings from lower consumption of resources. We calculate total cost savings from both changes to the supply and demand for major commodities could be substantial, somewhere between $900 billion and $1.6 trillion in 2035 for the global economy, an amount equivalent to the GDP of Indonesia or, at the higher end of our range, the GDP of Canada.

How big these savings end up being will depend not just on how quickly new technology is adopted but on how policymakers and companies adapt to their new environment. More and more though, it will also depend on China.

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I'm a senior partner in McKinsey's Shanghai office and Director of the McKinsey Global Institute (MGI) in Asia. I also co-lead the Urban China Initiative (UCI), a thinktank devoted to transforming China's urban future. Visit the UCI website here. Read my latest work as co-author of No Ordinary Disruption (Public Affairs, May 2015), which examines how long-term shifts in the global economy challenge long-held assumptions.