(EnergyAsia, February 17 2015, Tuesday) — Breaking from a two-decade trend, China’s demand for energy and other natural resources grew at a significantly slower rate than the 7.4% increase in its GDP last year, said UK consultant Wood Mackenzie.
Calling this a “decoupling”, its principal economist for Asia, Cynthia Lim, said the energy sector will have to watch over the links between China’s economy and its demand for oil, gas, coal, power and other natural resources given Beijing’s plan to rebalance the economy in favour of domestic consumption.
She observed that China’s demand for power, natural gas, coal and diesel unexpectedly grew at a much slower rate than its GDP increase last year. Gas demand growth was down by more than eight percentage points, coal demand barely grew while diesel demand contracted for the first time in more than a decade. In contrast, China’s GDP growth merely slowed from 7.7% in 2013 to 7.4% last year.
While the firm expects China’s natural gas appetite to recover over the next two years on cyclical reasons, it believes power, coal and diesel demand may not over the long-term on account of “major structural changes in the economy and policy.”
The energy industry will have to identify which changes are structural or cyclical to accurately read future demand patterns and opportunities.
“7.4% is still a large year-on-year GDP increase for any economy so this fall in commodity demand is counter-intuitive and we have only seen the tip of the iceberg,” said Ms Lim.
“The Chinese government is moving away from the post-2008 investment binge and gradually moving towards a more moderate but sustainable consumption-led economic growth.
“There are two aspects of rebalancing: one, away from investment towards consumption, particularly in the developed coastal region; and two, a shift in economic gravity away from the coast and towards the inland region.”
She said the two trends will have significant implications on commodity demand patterns.
Wood Mackenzie expects Chinese industrial investment to remain subdued through 2016 but to maintain growth through the medium-term as a result of the government’s push to urbanise the country. Two of China’s industrial sectors such as coal and steel will be weighed down by overcapacity, tighter environmental regulations and the slowdown in the property market.
While the government has relaxed both house purchase restrictions and credit conditions through 2014, recovery in real estate will be slow as inventory levels remain high and potential buyers stay on the side line due to market uncertainty.
“The rebalancing of China’s economy will play an important role in shaping the energy demand outlook for 2015 and beyond. We believe a recovery in demand for power, coal and diesel in particular is closely tied to the industrial demand outlook,” said Ms Lim.
“While these commodities will experience a moderate recovery in the medium term as over-capacity is reduced, the on-going transition of China’s economy away from an industry-led model suggests their relationship with GDP growth will weaken permanently in the longer run.”
Power demand to experience short-term weakness
The short-term weakness in the industrial sector will continue to subdue power demand growth.
“Industrial output will eventually recover from overcapacity and weak demand but China’s rebalancing away from industry to the service sector will have a longer-term structural impact,” said Gavin Thompson, Wood Mackenzie’s principal analyst for gas and power in the Asia Pacific.
Reflecting Beijing’s focus on developing less well-off regions, he sees higher growth in power demand in the western provinces where industrialisation processes are focused.
Mr Thompson expects power demand in the interior western regions to grow at around twice the pace of coastal markets over the next two to seven years, with significant implications for capacity and fuel choices.
Coal demand to slow
In the short-term, Mr Thompson expects China’s use of coal to generate electricity to be muted as a result of lower power demand, environmental policies and a rise in non-coal generation including hydro.
Longer-term, he believes coal demand pace and patterns will be impacted by structural changes, with demand rising fastest from inland provinces and the acceleration of ultra high voltage (UHV) transmission lines to export power to the east coast.
The pace of annual coal demand growth slowed to 4-5% in 2012 and 2013, with the eastern coastal markets registering no growth in their use of the fuel for power generation.
“Coal remains king in China but growth has been severely reduced, due to industrial weakness as well as cyclical weather patterns that saw higher rainfall boost hydro output,” said Mr Thompson.
Natural gas demand to rebound
China’s annual natural gas demand growth has slowed notably over the last two years after surging by 16% between 2004 and 2013. Demand grew by just over 13% in 2013, and by just 8% in 2014.
Mr Thompson said the slowdown was due to cyclical factors.
“In addition to slowing GDP growth, evolving environmental policies, higher hydro output, mild winter weather in northern China and high domestic gas prices relative to oil were key factors that saw gas demand growth fall sharply,” he said.
He expects the government’s decision on domestic gas price reform to impact this year’s demand.
“While we expect domestic demand growth over the next few years to return to historic levels, a swift return to double-digit growth may not be achievable without lower city gate gas prices,” he said.
Gasoline demand remains strong while diesel demand is weak
Oil decoupled the most from China’s economy, with 2014 being the fourth straight year the two went their separate ways as the effects of Beijing’s 2009 economic stimulus programme faded.
Wood Mackenzie noted that growth in oil products demand has varied across the barrel.
Diesel demand is estimated to have contracted 0.7% in 2014 as commercial transportation demand fell.
“We believe we are now witnessing a structural change in China’s diesel demand as the economy rebalances away from heavy industry. In contrast, gasoline demand, which reflects personal car ownership, maintained a robust growth of 8% in 2014,” said Mr Thompson.
Healthy growth momentum for gasoline demand will likely be sustained as the economy shifts further towards consumption.”