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Tuesday, December 12, 2017

The impact of Chinese expansion

Everybody is looking to China with wonder, greed and anxiety. China is keeping the world busy by importing huge amounts of raw materials and other products and exporting everything we use in our daily lives. All the transactions created by the Chinese activity naturally also boost the financial markets. China started to move from a very low level only a few years ago. When hundreds of millions of people start to produce and consume more, the rest of the world is bound to feel the impact.

Average consumption and production figures almost become meaningless as the figures for large populous countries are so low compared to the figures for the industrialised countries. The oil consumption of China is at about the same level as the oil consumption of Japan with only a 10th of the population of China. The Chinese economy tripled in size during the 1990s, and China became a member of the WTO in December 2001. However, the above graphs indicate that China has a large growth potential. If the Chinese consumed as much oil per capita as the Americans, China would consume some 90 mbd or 10 mbd above total world oil production! The situation in India is similar. It is obvious that for many reasons, including limited resources and environmental concerns, the American way of life is beyond the reach of most people in the world, unless revolutionary new technology is introduced. But millions of Chinese get their first car each year, which means that oil consumption will continue to increase.

What is important for the tanker industry is that the increase in Chinese oil imports has over the last couple of years represented a major part of the world increase in oil production. China has over the last 10 years increased oil consumption by more than 2 mbd, and over the last three years by a million barrels per day.

China takes its oil from the Middle East, Africa, Russia (via rail) and Asia. Crude oil imports in February 2004 were some 2.66 mbd. By making certain assumptions, we have calculated that these imports represent some 11% of world tonne mile demand. Oil imports are projected by IEA to increase by 0.7 mbd in 2004. If 70% of the increase is taken from the Middle East and the balance from West Africa by VLCCs, this would represent an incremental VLCC demand in 2004 of 17 tankers or an increase in total tanker demand of some 3%.

For nearly 10 years China has been discussing with Russia the possibility of constructing a pipeline to transport oil from Siberia. However, last New Year’s Eve Russia's energy ministry announced plans for 2004 saying it would focus on the development of a pipeline to the Pacific coast serving Japan, failing completely to mention the Yukos sponsored pipeline link to China. The China project, which is more advanced, cheaper and technologically more feasible than the Japan plan, appears to have been shelved, at least temporarily.

We will not add to the speculations on the consequences of an overheated Chinese economy, but perhaps the clearest sign of a construction slowdown is found in the falling price of some steel products. According to Financial Times, prices of reinforced bars, one of the most common steel products, have fallen by up to Rmb1,000 ($121, €101, £68) a tonne since early March after surging for more than 18 months. The MD of Iron and Steel in the southern province of Jiangx said that "There is oversupply of reinforced bars and wire rods and, at the same time, demand is slowing down". Nationwide, the growth in car sales is also moderating to around 20 per cent year-on-year, compared with around 80 per cent last year.

Surging imports yielded a trade deficit in the first quarter despite exports in the first quarter increasing by 34.1% compared to the same period a year ago; and China could possibly post a full-year trade deficit this year for the first time since 1993.

Port and shipping capacity are limited, creating considerable demand over the next few years, which is expected to be sustained by the robust nature of Chinese exports. In addition, industrialisation and urbanisation have caused a chronic and worsening shortage of electricity, rail capacity is in short supply, and there is a chronic and widespread shortage of water. A population of 300 million people - larger than the total population of the US - is expected to migrate to towns and cities by 2020. Defaults on loans are reported to have increased by 470 m Yuan Renminbi 1Q04, according to Dow Jones Newswire. Banks are reported to hold defaulted loans totalling some 188 billion Yuan. By end March the banks had increased lending by 21% on an annual basis, 5% above the authorities’ target of 16% for 2004.

Consistently one of the most pragmatic of analysts, Stephen Roach, Morgan Stanley’s chief economist, believes China will come in for a soft landing by year end. China is not as fragile as it once was in terms of dealing with economic speed bumps, he argued in a recent report.

Roach predicts that China’s economy will grow 7% this year — the same as the official forecast — and continue that growth through 2005. Last year, the country hit a six-year high growth rate of 9.1%. China has weathered tough learning experiences. The Chinese authorities are very serious in their attempts to slow down the unbalanced and rapidly growing Chinese economy to a more manageable level.

Beijing is reported to be continuing to encourage the use of Chinese controlled ships to transport as much as possible of the country’s oil imports. Sinopec, the largest importer, has reached agreement with Ming Wah of Hong Kong, a subsidiary of the China Merchants Group, to carry its crude oil cargoes from early 2004. Ming Wah operates 8 VLCCs, 1 suezmax and 7 aframax tankers. The Chinese government has announced plans to build a fleet of crude oil carriers, with the aim of eventually being able to transport 50 million tonnes per year (1 mbd) of imported crude. More than 50% of Chinese foreign crude oil purchases this year have been imported by Sinopec, but only about 10% of the country’s total imports have been carried on Chinese shipping company vessels.

According to the LRFairplay database, the Chinese tanker fleet above 5,000 dwt comprises 187 tankers of 7.6 m dwt, including 31 tankers of 3.3 m dwt on order. In addition, there is a fleet of almost 50 smaller tankers of below 5,000 dwt.   INTERTANKO has recorded three 90s-built VLCCs and one panamax sold to Chinese interests in April.

Source above graph: E.A. Gibson Shipbrokers Ltd.

Almost 60% of oil imports fixed in the spot market are carried by a growing number of VLCCs. The VLCCs (127), suezmaxes(109), and aframaxes (198) cargoes make up about 1.2 mbd compared to Chinese net crude oil imports of 1.7 mbd in 2003.

Chinese charterers are expected to continue to play a major role in the tanker markets over the coming years, as China plans to increase its crude oil refining capacity by 52 million tonnes per year, to reach 332 million tonnes by 2010. This will involve the expansion of six existing refineries and the construction of three new refineries with a throughput of 30 million tonnes per year. Of the 52 million barrels per day of extra capacity, only 27.5% will be financed by foreign investment, with the balance being funded by Chinese capital. Three Chinese oil companies will participate: Sinopec will build 32 million tonnes, CNOOC 12 million and Petrochina 8 million. When the new facilities have been built, eight out the nine operating refineries will be along the coast, with access to tanker terminals. Most of the increase in capacity will be geared towards using imported crude oil, as China’s petroleum demand is forecast to grow by an average of 12% per year and reach 400 million tons per annum by 2020.