Those helpful people at Bank of America Merrill Lynch have sent me a research note from their Global Research report services. The note examines the likely future trend in oil pricing, a trend which has consequences for the cement industry. This is what they say:
"What is in store for global oil demand in the medium term? We [BoAML] project global oil demand to grow at a cumulative 6.15 million b/d over the next five years. Global oil demand in 2016 will likely stand at 95 million b/d, relative to 85 million b/d in 2005. The developing world, which already accounts for half of the world's output, will in 2013 overtake the developed world in terms of oil consumption. By 2016 we estimate that emerging markets will comprise 53% of global oil consumption, with China alone making up 12.8% or 12 million b/d of global consumption."
"Our outlook on medium term supply is cautiously optimistic. On the non-OPEC supply side, we see non-OPEC supply growth drop steadily through 2014, though we now believe that volumes will flatten rather than contract. 2015 will likely show the strongest output growth through the medium term, followed by much lower growth in 2016. On our latest estimates, non-OPEC supply will grow by a cumulative 2.4 million b/d from 2011 to 2016, up from 0.9 million b/d previously. Despite these upward revisions it is important to point out that production growth over the next five years will be below the historical average."
"Globally, decline rates are not improving due to OPEC. Improving decline rates are a key supporting factor. Based on an analysis of the IEA's field-by-field database, non-OPEC production is now declining at a rate of 4.2%, a slight improvement from the 4.4% that was observed last year [2011]. OPEC, however, faces the opposite problem. OPEC decline rates continue to rise, with the existing production base declining at a rate of 4.5% per year, compared to 3.9% observed a year ago. Overall, given improving non-OPEC decline rates combined with deteriorating OPEC rates, we estimate that global production is declining at an average annual rate of 4.3%, from 4.2% last year."
"How will oil prices behave over the next five years? In our view, Brent oil is unlikely to dip below $80/bbl, on average, as significant non-OPEC supply constraints and rising OPEC budgets will create a high floor on oil prices. But oil is unlikely to hover around its floor. Rather, we believe oil will remain a key constraint on global economic growth, suggesting that prices will continue to spike, to ration demand back down to the limited supplies. What constitutes the upper bound for oil? The world economy can hardly afford to spend more than 9% of GDP on energy. In a supply-constrained world, increased liquidity should set oil prices on an upward path. In other words, with nominal global GDP estimated to expand to $92trn through 2016, demand rationing will likely require ever higher $/bbl prices. On our estimates, oil prices could even spike to $200/bbl over the next five years."
In short, BoAML suggests that increasing demand for oil and a restricted supply will mean that there will be no weakness in oil pricing in the medium term, and possibly significant spikes.
What are the consequences for the cement industry? Well, the immediate impact will be very much higher costs for any kiln using oil as a primary fuel. Switching to lower-cost fossil fuels will be an immediate priority, possibly to gas or to coal or other solid fossil fuels such as lignite or anthracite. However, the increasing 'base' cost of oil is likely to have an impact on the cost of coal as well - there is approximately a 0.7 correlation between coal and oil prices, partly because some users can switch between coal and oil as a feedstock/energy source, and partly because oil is used to produce coal (around 25-50% of the cost of coal comprises the energy used to dig it up, process it and transport it).1
The increasing cost of oil is certainly going to impact the 95% of cement kilns that use a solid fossil fuel as their primary fuel (even if they also use alternative fuels). I think that we may be entering into a 'Golden Age' of alternative fuel use in the cement industry, where there is a rush to use AF by those kilns that don't already use it, and a push to increase the thermal substitution rates to as high a level as possible by current AF users. This is a big business and it's going to get bigger still.
We'll discuss all of this at the Global CemFuels Conference in Aachen on 5-6 March. You can find more details and information on the conference and on alternative fuels in general at www.CemFuels.com.
And finally... I'm running the London Marathon (fifth time) on 22 April to raise money for WaterAid, a charity that provides clean water for comminities in developing nations. Please sponsor me - it's a good cause!