Concerns that the slowdown in China’s economic growth will curb Asia’s energy demand from the Middle East and beyond could be premature. Yes, any hint of weakness in the world’s largest net importer of crude and its second largest economy rings alarm bells in OPEC capitals and in boardrooms across the globe. India and Southeast Asian economies are also flourishing hubs of energy demand, respectively, but China is front and centre.
China’s crude imports in the first six months of the year grew by 7.5 percent, yes, slower than the 10 percent pace in the same period of 2014, according to customs data, but still a healthy increase with OPEC forecasting demand for its oil to rise by 1 million barrels a day in 2016.
The devaluation of China’s currency, the yuan in mid-August fueled fears in the globalmarkets that China’s debt-driven burst onto the global stage over the last decade could crumble and take the bulk of Asia’s energy demand down with it. But while China overtook the U.S. as the largest crude importer in April for the first time this year and no longer posts 10% annual gross domestic product growth, its fiscal future is hardly bleak.
The International Monetary Fund (IMF) expects China to report 6.8% growth this year, down from 7.4% last year, with 6.3% anticipated in 2016. While the forecasts mark China’s slowest economic growth in a quarter of a century, the data has also triggered Beijing’s plans to start switching to more sophisticated market reforms. If all goes to plan, China’s fiscal discomfort today will transform its rather wild economic prowess into a steady and safe consumer-based economy within a few years.
China’s energy demands are not expected to weaken in the meantime. Beijing-based General Administration of Customs estimates that the country’s import of Middle Eastern crude climbed by 273,000 barrels a day (b/d) in the first half of this year on the same period in 2014, to a rough average this year of 3.5mn b/d – just below half of China’s total crude imports. China’s total imports for 2014 rose by 9% on 2013 to an average of 6.2mn b/d, and in the first half of this year surpassed 7mbpd.
The US’ Energy Information Administration (EIA) expects China’s oil consumption to grow at a moderate pace to approximately 11.3mn b/d by 2016. In short, China’s energy needs will ensure it is amongst the world’s top importers for a long while yet.
China’s import appetite has partly been driven by an ambitious plan to build strategic petroleum reserve capacity to around 500 million barrels (bls) by 2020 to safeguard domestic supply. China’s current stockpile is likely to be around 130mn bls, but the exact figure is closely guarded. What is clear is that Beijing wants to have enough stored to equal at least 90 days of net oil imports by 2020, which amounts to and there is no doubt that the collapse in oil prices over the last year has created a perfect storm that has inadvertently lent China a helping fiscal hand to bolster storage.
China’s expanding middle class is also expected to ramp up consumer-based growth, driving demand for gasoline and jet fuel. The tentative forecasts that oil prices will strengthen towards mid of next year means that China will probably also increase its imports during that time of the year to lock in additional refining supply sooner rather than later.
Kuwait is particularly keen to push deeper into the Asia’s downstream sector and is pursuing joint ventures with local counterparts to build integrated refineries as investors shun Europe’s dying refining sector. But Kuwait has had mixed success. There has been significant progress on Kuwait’s investment in Vietnam’s 200,000 b/d Nghi Son refinery, but efforts to take a stake in China’s state-controlled Sinopec’s new 300,000 b/d Zhanjiang refinery have stagnated.
But there is no doubt that China’s robust and dual relationship with a handful of partners in the Middle East will continue, spearheaded by regional hegemon, Saudi Arabia. The Kingdom, the world’s largest exporter, accounted for the biggest portion of China’s crude imports last year, at 16%, followed by Angola and Russia with 13% and 11% respectively.
China’s historical trade link to the Middle East that has endured for over two millennia, plus Beijing’s aversion to wade into regional politics, continues to charm trade partners like Oman, the UAE and Iraq. But such close ties can also risk leading to overreliance, which could be said of Oman’s recent export portfolio. China accounted for around 90% of the Sultanate’s crude exports in June.
Meanwhile, China has kept a distance from Iran to appease the US and Europe during the economic sanctions on Tehran. But the historic Sino-Iran trade accord is expected to regain momentum following the testy nuclear agreement between Iran and the P5+1. Consultancy Facts Global Energy’s data shows that Iran accounted for 9% of China’s total crude imports in 2014, on par with Iraqi imports and a touch below Omani crude imports.
So should energy producers be rushing to safeguard investments against shaky Asian demand? Not quite, but they should heed the cautious undertone that has long accompanied China’s bullish story. There must be an appreciation of China’s changing economic framework and that the Asian heavyweight’s energy strategy will shift as it hits milestones in its quest for vast strategic petroleum reserves.
About the Author:
Thangapandian Srinivasalu, Executive Director, Gulf Petrochem Group
Mr. S. Thangapandian, Gulf Petrochem Group’s Executive Director is an oil and gas professional with over 30 years of experience in sales, marketing and trading of petroleum products in India and Nigeria with PSU, MNCs and Private sector companies in India. Before joining the Group, he was working at Essar Oil Limited as CEO – Marketing & IST. He established PetroFina in India and was part of the Team that launched Gulf oil in India post opening up of the market. As Head of Marketing & IST in Essar Oil, a fully integrated oil company, his responsibilities included, ‘Retail sales’, ‘Direct sales’, Retail Network Expansion, Sourcing Crude, Trading of Petroleum Products, Supply & Distribution for the company in India and Kenya.