The Ingredients:
Weak USD
Ability for developing countries to increasingly trade in their own currencies.
Cheap energy
China stimulus
Access to highly competitive Chinese goods and services, with 0% finance.
There are 3.5 billion consumers rapidly climbing their S-curves in ASEAN, China and India, who stand to benefit in a big way.
The removal of the US dollar handbrake
The other side of the US running large deficits and overconsuming has been Asian countries running surpluses to ensure they have the US dollars to buy the commodities/energy they need.
Asia's oil import dependency is ~81% so increasingly being able to purchase their energy needs in their own currency takes the handbrake off their ability to grow more rapidly (boosting consumption and trade with each other).
Louis-Vincent Gave was the first I heard describe this as a “Reverse Asian crisis”:
"To me, it has a very sort of Asian-crisis-in-reverse feel to it," said Louis-Vincent Gave, founding partner of Gavekal Research, in a podcast, due to the speed of the currency moves.
In 1997 and 1998, capital flight sank currencies from Thailand to Indonesia and South Korea and left the region determined to accumulate dollars in the aftermath.
"Since the Asian crisis, Asian savings have not only been massive, but they've had this tendency to be redeployed into U.S. Treasuries. And now, all of a sudden, that trade no longer looks like the one-way slam dunk that it had been for so long," said Gavekal's Gave.
Those surpluses are going to be used to ramp trade between themselves without the USD bottleneck.
While Western media often highlight Yuans tiny share of SWIFT payments, this is short sighted, given that SWIFT was weaponised by the US and Europe, thereby incentivising China and Russia to develop workarounds.
Alternative trade methods, such as settling trade in Yuan and local currencies, as well as China's alternative to SWIFT, CIPS (Cross-Border Interbank Payment System), are growing rapidly.
Russia's exports are a clear example of this trend, which accelerated post-2022 with their USD/Euro assets being frozen.
Russia has rapidly moved its exports away from the US dollar with three-quarters now settled in currencies Yuan and Ruble.
Luke Gromen has been all over this trend (happy Tree-Ring subscriber) as trade is being increasingly net settled in gold.
These gold flows continue to break western financial media brains. This is not “Russia selling gold and silver to China”, this is Russia and China net settling CNY- and RUB-denominated trade in gold and silver.
China’s exports to the US were roughly double those of the ASEAN countries for the last decade.
This has recently flipped…
While everyone is focused on the new terms to access the US 340 million consumers, China is targeting billions of consumers in the developing world with highly competitive goods combined with 0% financing packages.
I've started to notice these billboards around Bali with 0% interest finance packages on goods that are already dirt cheap.
Take the BYD Atto, which is priced at USD 12,400 before financing for 3 years interest-free.
Westerners are (or were) accustomed to cheap finance, and how 0% interest finance was offered to pull forward demand.
What will be the effect on consumption when 0% finance packages are offered to billions in Asia?
The Effect on Energy Demand?
Cheap energy combined with the ability to purchase it in their own currencies is going to ramp economic growth as the two go hand in hand.
"To discuss energy and the economy is tautology" -Vaclav Smil
Asia now consumes 48% of global primary energy and has represented 77% of the growth in energy since 1990.
3.5 billion Asian consumers are at the start of their S-curves in ASEAN, China and India.
Yes, Africa will be important in the long term, but for now, it's still in the infancy phase, with 43% of the population having no access to electricity, compared to ASEAN, where 90% have electricity but only 15% have air conditioning, for example.
When it comes to growth (real) and energy demand, the West will be irrelevant compared to developing markets.
To illustrate this consider:
Developed countries (1.2 billion people) consume ~13 barrels per person per year.
Population growth is anemic.
They are in the maturity phase of their S-curve with marginal increases in consumption.
Developing countries (6.9 billion people) consume ~3 barrels per person per year.
Population growth of ~2 billion people by 2050 will increase demand by ~50% based on the status quo.
Then consider half of the 6.9 billion are at the expansion point of the S-curve, wanting to improve their standard of living, which increases energy consumption.
When you compare this reality to what both IEA and OPEC are forecasting, it is clear their models are way off, particularly the IEA’s.
I’m not referencing the IEA’s Net Zero Scenarios either, just their Stated Policies Scenario (prevailing direction of energy system progression).
The IEA World Energy Outlook 2024 expects energy demand growth to be 0.5% per annum.
IEA’s forecast of 0.5% per annum over 12 years gives 6% growth in global energy demand by 2035.
To illustrate how bad this forecast is, consider we are currently averaging 2.2% growth per annum, so we will hit the IEA’s 2035 target at the end of this year!
The IEA is notorious for underestimating developing countries demand growth (this sector of Goehring & Rozencwajg commentary highlights it beautifully).
I believe we are in for another decade of large upward demand revisions as the IEA emboldened by having the most accurate forecast last year they are now extrapolating weak demand energy growth.
End of the Oil Age Beckons for Top Forecaster
But overall, the agency seems to have been emboldened by the success of its forecasts for this year. The prediction of a sharp deceleration in demand growth to barely 1% is looking far more accurate than those made by others such as the OPEC cartel.
What's surprising is OPEC’s forecasts aren’t much better…
Even OPEC has dialled back its long-term oil demand forecast to 0.7% growth per annum, so almost half of the long-term average.
They've also copied and pasted the IEA's coal forecast and renewable growth rates.
It’s easy to see how silly this is, with India and other parts of Asia being the largest growth drivers in primary energy between now and 2050.
If wind and solar are to dominate growth in energy demand for India and Asia, why is there so little planned?
This is all from the Global Energy Monitor if you want to have a play.
In India, there is a total of 19,646MW of wind in the pipeline (or ~4% of the current grid). The rest of Asia doesn’t have much wind in the pipeline either bar China.
In India, there is a total of 34,946MW of solar in the pipeline (or ~7% of the current grid)
And if coal is in decline in India, why are there 27,570MW under construction and 92,180MW Announced + Pre-permit + Permitted? (or ~25% of the current grid).
Putting this in context India’s operating coal fleet is 245,083 MW, so +11% under construction and +38% planned…
China’s coal growth is nuts with 1,189,041 MW operating, +19% under construction, and +22% planned.
Asia's coal fleet is young and growing rapidly, contrary to the forecasts of both the IEA and OPEC.
