Opec producers should not panic yet about slowdown in China

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 the capitals of Opec member countries and in boardrooms across the globe. India and South East Asian economies are also flourishing centres of energy demand, but China is front and centre.

China’s crude imports in the first six months of the year grew 7.5 per cent, yes, slower than the 10 per cent pace for the same period last year, according to customs data. But that is still a healthy increase, with Opec forecasting demand for its oil to rise by 1 million barrels per day next year.

The devaluation of China’s currency, the yuan, in mid-August fuelled fears in the global markets that China’s debt-driven burst on to the global stage over the past decade could crumble and take the bulk of Asia’s energy demand down with it. But while China overtook the United States as the largest crude importer in April for the first time this year and no longer posts 10 per cent annual GDP growth, its fiscal future is hardly bleak.


The IMF expects China to grow 6.8 per cent this year and 6.3 per cent next year, down from 7.4 per cent last year. Although 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. The General Administration of Customs in Beijing estimates that the country’s import of Middle Eastern crude rose 273,000 barrels per day in the first half of this year (from the same period last year) to a rough average this year of 3.5 million bpd – just below half of China’s total crude imports. Last year these rose 9 per cent year-on-year to an average of 6.2 million bpd, and surpassed 7 million bpd in the first half of this year.

The US Energy Information Administration (EIA) expects China’s oil consumption to grow at moderately to about 11.3 million bpd by next year. In short, China’s energy needs will ensure it is among the world’s top crude importers for a long while yet.

China’s import appetite has partly been driven by an ambitious plan to build its strategic petroleum reserve capacity to about 500 million barrels by 2020 to safeguard domestic supply. China’s current stockpile is likely to be about 130 million barrels, 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. There is no doubt that the collapse in oil prices over the past 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 petrol and jet fuel. The tentative forecasts that oil prices will strengthen towards the middle 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 bpd Nghi Son refinery, but efforts to take a stake in the new 300,000 bpd Zhanjiang refinery of China’s state-controlled Sinopec 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, led by Saudi Arabia. The kingdom, the world’s largest exporter of crude oil, accounted for the biggest portion of China’s crude imports last year, at 16 per cent, followed by Angola and Russia with 13 per cent and 11 per cent respectively.

China’s historic trade link to the Middle East that has endured for more than two millennia, plus Beijing’s aversion to wade into regional politics, continues to charm trade partners such as Oman, the UAE and Iraq. But such close ties can also risk leading to over-reliance, which could be said of Oman’s recent export portfolio. China accounted for about 90 per cent 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. Data from Facts Global Energy, a consultancy, shows that Iran accounted for 9 per cent of China’s total crude imports last year, 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.

Thangapandian Srinivasalu is the executive director of the Gulf Petrochem Group

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