“When China wakes, she will shake the world,” as Napoleon said. Now the country, having dominated the commodities market over the past decade, is again shaking it – but this time the tremors of economic worries are bringing prices crashing down.
On 11th August, the yuan was devalued by nearly 2 percent. On 24th August, the Shanghai stock exchange slumped by 8.5 percent, and markets around the world followed it down.
Oil, priced above $100 per barrel in June 2014, has tumbled since then, before recovering slightly. But on the Chinese news, the Brent crude benchmark dropped to $42 per barrel, the lowest since the financial crisis.
This oil price drop was a combination of realistic fears and panic. At a time of global oversupply, further weakness in demand sends more sellers in a crowded market in search of buyers.
Oil suppliers from Venezuela and Nigeria to Central Asia and the Gulf, gas exporters such as Qatar, Turkmenistan and Russia, coal miners including Australia and Indonesia, and metals producers in Brazil, Zambia and Chile, are all hit by ebbing commodities demand.
Interpreting Chinese oil demand is difficult. The country does not release data on its strategic stocks, and refiners often stockpile crude when prices fall, both of which create apparent demand. China also exports large volumes of refined products to its neighbourhood.
Estimated demand was down in July to 10.12 million barrels per day (bpd), from 10.56 million bpd in June. This is still up year-on-year by 400 000 bpd, quite comparable to annual growth from 2011 onwards. But, in a negative sign for future demand, car sales have fallen monthly since April. Less activity in coal mining and steel-making means lower demand for trucking fuel: diesel demand has been flat this year.
In the longer term, the bearish signals for commodities are clearer. The Middle Kingdom’s economic expansion drove oil prices from below $10 per barrel in 1998 to a record $147 per barrel in 2008, as it went from a net oil exporter as late as 1992 to the world’s biggest importer in 2014.
In response to 2008’s economic crisis, Beijing embarked on a stimulus plan which saw the country use more cement from 2011 to 2013 than the US did during the entire twentieth century.
This ravenous appetite was clearly unsustainable. Since the Great Recession, the country’s growth has been only half as energy-intensive as it was before.
It was widely predicted, firstly that Chinese growth would slow down from more than 10 percent annually to 7 percent or so, and secondly that this growth would be less resource-intensive and more focussed on services and domestic consumption. Its workforce has now started shrinking as the population ages, and environmental concerns require cleaner, more efficient growth.
In April, Sinopec, China’s biggest refining company, suggested that national oil demand would peak earlier than most people expected. Its well-respected chairman, Fu Chengyu, saw diesel consumption topping out as soon as 2017, and gasoline use reaching its maximum around 2025. That was sharply at variance with International Energy Agency forecasts that Chinese oil demand would keep increasing until at least 2040.
A Chinese slowdown now presents OPEC with a tricky conundrum. The Gulf countries, led by Saudi Arabia, have since last summer’s oil price collapse stumbled into the wisest strategy: to expand production to drive out high-cost producers, revive demand, and, perhaps, to create room for the further growth of Iraq and expected return of Iranian exports.
Oil majors have already slashed investment, shale oil growth will slow to a trickle, and mature fields elsewhere will decline. This will probably lead oil prices to recover somewhat later this year and in 2016.
But, if Chinese and other Asian demand is weak, the hoped-for market space may still not materialise. Unlike 2008-9, when global demand had collapsed and OPEC agreed on collective production curbs to defend prices, cuts now would leave Saudi Arabia surrendering market share to U.S. shale oil producers, Russia or political rival Iran.
China’s current economic concerns may be overblown. But as it slows down, commodity producers, the major oil exporters foremost, need to prepare for a long period of weak demand and lower prices. China has shaken the world, but, as the saying goes, the bigger they are, the harder they fall.SHOW MORE