The impact of China’s economic slowdown on the energy sector

Nick Butler writes a good blog in the Financial Times about the dynamics of the energy sector in China, given the current economic situation. There are definitely implications for all of us, given the size of China’s economy.

 

The energy implications of China’s downturn

The Chinese economy is clearly going through its most serious downturn in more than 30 years. After three decades of continuous growth averaging more than 8 per cent per annum, the problems of industrial over capacity and excessive debt are starting to take their toll. The stock market volatility of the last few weeks is a symptom of the bubble that has been allowed to develope in recent years and of the doubts that are now setting in about the sustainability of high growth. The more serious problem, as the published data is now showing, lies in the real economy and in the accumulated and now unfundable debts that have financed booms in sectors such as housing construction and urban property development.

Given China’s role in the international energy economy, any downturn will have serious implications which will be felt across the world.

Just as Chinese economic growth helped to sustain the world economy after the crises of 2008, the country’s growing need for energy has been the main driving force behind rising global demand over the last decade.

A few statistics – all drawn from the latest BP Statistical Review illustrate the point.

  • Chinese oil demand has risen 4.5mbd since 2004. Most of the growth has come from imports and China now accounts for one barrel in every eight traded internationally.
  • China’s coal consumption is up by almost 80 per cent over the last 10 years and the country now burns more than half of all the coal used worldwide each day.
  • Twenty-three percent of the world’s primary energy consumption is now accounted for by China. The country’s total energy consumption has risen by more than 90 per cent in the last decade.

Imagine, then, a world in which Chinese demand growth was absent. The latest economic figures suggest that, far from being imaginary, this is the world we have now entered. The extended period of rapid growth has faltered. China is no more able to escape from the inexorable realities of the economic cycle than any other country. We are not in recession territory but with the full implications of the debt problems yet to work through the economy the prospect of a sustained period of low growth now looks highly likely.

China is one of the last genuinely centrally planned economies in the world. One of the great unanswered questions in the current situation is whether the country’s leadership will deploy their full financial firepower to prevent or limit the downturn. I assume they will do something to maintain stability but that they see some value in a period of adjustment in which private sector debts can be reduced and the economy rebalanced. That means low growth, rising unemployment (however disguised) and energy demand at levels well below current expectations.

The prospect of several years of low growth in China would have serious implications for the energy business worldwide.

Most forecasts still assume that Chinese oil imports will continue to rise. Over time that is probably still a safe assumption but the likelihood now is that import growth will be minimal for the next two or three years. That in turn will compound and extend the existing surplus of supply over demand.

Companies hoping to sell energy supplies into China – from new nuclear stations to additional tankers filled with liquefied natural gas – will find projects cancelled or postponed. There could also be even greater scrutiny by the Chinese authorities of the business methods and pricing policies of those doing business in the country. The continuing tide of anti-corruption cases raises the level of risk for international investors.

Equally, energy projects outside China hoping for Chinese capital could find their plans put on hold. In any downturn, the priority for Beijing will be domestic demand and local investment to protect employment. External activity – in Venezuela, Iraq or even Europe – will have a lower priority.

A downturn is not the end of the world, of course. China will remain a dominant player in the world energy market. As things stand, the country has no means other than imports to meet its energy needs. China will be at the heart of world energy trade for decades to come. Nevertheless, even if the downturn is temporary it will be disruptive to a market already sinking under the weight of excess supplies of oil, coal and natural gas. What is happening in China will be a stark reminder that prices in all these markets are set by the balance of supply and demand and that on the demand side no single country is more important than China.

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