By Kevin Morrison
Nowhere is China’s dramatic effect on global commodity prices over the past two years more visible than on the oil price, which recently jumped to more than $40 a barrel, stirring concerns of higher inflation and lower world economic growth.
Although India’s fast-growing economy has also boosted energy consumption, it is the scale of China’s demand that has helped propel energy prices, including crude oil, coal, diesel and jet fuel, to record highs this year. The mainland’s increasing affluence has stoked a surge in car sales, road haulage and air travel, while the country’s rapid industrialisation is straining the limits of China’s power generation capacity.
China has invested in energy-intensive industries, such as steel and aluminium production, and plastics, which use naphtha, a product derived from crude oil. The combination of heavy industrial expansion and rapidly-growing car usage has doubled Chinese oil consumption over the past 10 years to around 6m barrels a day, causing the country to leapfrog Japan to become the second-largest oil consumer behind the US. Having become a net importer of oil only in 1994, China now imports half its daily oil requirements.
Goran Trapp, a managing director at Morgan Stanley, says the additional 3m b/d of oil China now consumes compared with 10 years ago does not sound like much. But when global production capacity has not risen much over the same period, the increase represents a significant narrowing of global spare capacity.
China was responsible for a third of the rise in daily global oil consumption in 2003, and is expected to account for another third of this year’s projected 2m b/d increase in daily world oil demand, says the International Energy Agency. This represents the single largest increase by any country during those two years.
Higher Chinese oil consumption has been a boon for oil refineries in the region, which spent much of the 1990s suffering from low returns after a massive expansion of capacity that ground to a halt during the 1997-98 Asian crisis.
“It has taken until now for Asian refineries to operate anywhere near capacity,” says Graham Sharp, director of Trafigura, the commodities trader. Mr Sharp says until 18 months ago, Singapore oil refineries were operating at 65 per cent capacity, compared with more than 90 per cent at present. But with Asian gasoline, jet-fuel and naphtha prices all up by 60-70 per cent over the same period, refiners are again enjoying healthy margins.
Plans by China, India, South Korea (news – web sites) and Taiwan to build government-owned emergency stockpiles could boost oil demand further. Barclays Capital estimates that these four countries could boost global strategic stocks by a hefty 215m barrels over the next two years.
China has also had a big effect on coal prices. Although it is the world’s largest thermal coal producer, traders are now worried that the country’s growing power demands will require more coal for internal use and less for export. China’s power consumption rose by 15 per cent last year, sharply higher than its 9 per cent economic growth.
And while China last year exported 15m tonnes of coal, exports are down by as much as 30 per cent so far this year, says Erik Verhaar, director of coal and natural gas trading at Deutsche Bank. This has triggered a jump in coal prices of more than 80 per cent in 2004, to around $55 a tonne before shipping costs, a level unseen since the early 1980s.
Mr Verhaar says the coal market is like the oil market in that there are limited resources to boost supply in the short term, suggesting prices for both will remain relatively high.
Asia’s big economies – China, India and Korea – are embracing other forms of energy, particularly nuclear and natural gas, to enhance energy self-sufficiency, but their economic success means they are likely to remain dependent on coal and oil for a long while yet.
Their growing middle-classes, with a voracious appetite for bigger houses, their first cars and overseas travel, are certainly going to consume more energy. “When people have enough money they are going to buy a car,” says Mr Sharp. “It’s human nature.”