The COVID-19 pandemic's huge blow to the middle class of India — a key target for Australian efforts to diversify its commodity export dependence from China — makes the Commonwealth Bank of Australia skeptical that the world is on the cusp of a new supercycle.

"We need to see another emerging economy urbanize and industrialize" for another supercycle to occur, the bank's mining and energy commodities research director, Vivek Dhar, told the Australasian Railway Association's Heavy Haul Rail conference in Perth, Australia, on April 14.

Dhar said India and Vietnam are the "front-runners" as the trigger for the next supercycle, similar to the extended periods of growth that occurred during the American industrialization from 1903-1932, the post-war European and Japanese industrialization from 1965-1996, and the rise of China from 1996-2006.

A recent report from the Australian Parliament urged stronger trade ties with India, Indonesia and Vietnam to mitigate Australia's dependence on mineral exports to China, which has exposed it to economic and security risks.

The Commonwealth Bank of Australia is "hesitant to believe we're on the cusp" of another supercycle given that India's middle-income bracket — the class that traditionally drives supercycles — fell for the first time in a number of years in 2020, Dhar said.

"We really need to see this change to solidify the view that a supercycle is coming," Dhar added.

Yet Dhar cited evidence that things are improving, namely the fact that the prices of Australia's major commodity exports including iron ore, thermal coal and oil are now above pre-pandemic levels.

Though coking coal was the exception, Dhar said "the longer-term trade story for coking coal is India," which lacks high-quality resources and has ambitions to build out steel capacity from over 140 million tonnes now to about 300 Mt by 2030.

Thus the bank expects India to increasingly have more market power in coking coal, though Australia's export volumes to the subcontinent are not expected to rise significantly over the next five years, Dhar said.

Diversification challenges

The unofficial ban on Australia's coking coal exports to China has seen India, Pakistan, Bangladesh, the Middle East and Brazil step in to receive cargoes, though Dhar said it has not been enough to offset the volumes lost to China, according to the latest trade data.

"China typically accounts for 23% to 24% of Australia's coking coal exports, and finding alternate buyers has been challenging," Dhar said, adding that the same is true of thermal coal.

Though many have called for a peak in China's steel demand over the past five years, Dhar said "the view is that over the next decade, its steel output will reach a high point" either from easing commodity demand or greater use of scrap steel, which will also dent China's iron ore demand.

Dhar believes that the biggest threat to thermal and coking coal is the longer-term trend of decarbonization, which most proponents believe will drive the next commodity supercycle.

Dhar cited the International Energy Agency's 2020 analysis that the thermal coal trade will halve and coking coal cut by a third over the next decade in a scenario in which the goals of the Paris Agreement on climate change are met, namely to limit global temperature rise to less than 2 degrees C compared to the preindustrial age.

However, Australia has some protection given its high-quality coking coal and thermal coal, Dhar said, and the fact that Australia services Asia also helps.

As Australia's "big four" major banks, including the Commonwealth Bank of Australia, continue to distance themselves from thermal coal, Asian banking experts recently told S&P Global Market Intelligence that some Asian banks remain actively interested in financing the contentious commodity.