Friday, October 19 07:58:34
How do we reconcile China's implied oil demand rising to a record high with its power consumption at an eight-month low? The short answer is that while the numbers seem to make contradictory statements about the state of China's energy demand, they can co-exist since when economies are at turning points, the data can be volatile, and contain a mix of lagging and leading indicators.
But it's also not quite as simple as saying that power consumption is a lagging indicator useful only as a history lesson, and oil demand shows where the economy is heading. Electricity demand rose 2.9 percent in September from a year earlier, the lowest monthly growth figure since January, and year-to-date growth is up 4.8 percent. Not surprisingly, the data show the weakness is concentrated in the heavy industry sector, which includes steel and automobile makers, with a drop of 0.1 percent in September from the year-earlier month.
This fits neatly with the evidence that China's commodity demand growth has come off the boil as the nation's factory sector struggles with lower export demand because of renewed recession in Europe, and lukewarm growth elsewhere in the developed world. The power figures also show why demand for imported coal has eased recently, with thermal generation dropping 269 billion kilowatt hours to 3,707 billion kilowatt hours year-to-date, while hydro power has risen 416 billion kilowatt hours to 2,788 billion kilowatt hours. However, the use of hydro may be constrained in the coming winter months, which could provide a boost to coal-fired generators. If power consumption data is a lagging indicator, then what is to be made of the strength in apparent oil demand?
It jumped 8.3 percent in September from a year earlier to reach an all-time high of 9.75 million barrels per day (bpd), a number that on the face of it sounds like China's fuel demand is roaring ahead. But what the figure masks is that growth in fuel demand has been modest so far this year, gaining only 1.9 percent in the first nine months over the same period in 2011. This is the slowest pace in more than a decade, and the increase in September can also be explained by temporary, rather than structural, factors.
Fuel prices were raised in August and last month, improving margins for refiners, which increased runs 7 percent to a new record high of 9.43 million bpd. While large, state-controlled refiners also increased their throughput, much of the increase came from the small, private refiners known as teapots. These plants, which have a total capacity of about 2 million bpd, aren't allowed to import crude, so they use imported fuel oil as a feedstock. Imports of oil products, which includes fuel oil, jumped to 317,300 bpd in September from August's 30,000 bpd.
There also would have been the pull-forward effect from the week-long holidays in early October, with refiners boosting output to meet demand for travel as millions of Chinese return to their homes for the national vacation. Taken together, the power and oil demand data confirm that growth in the Chinese economy has been slowing, and also that the mix of growth has been switching from heavy industry to more consumer-led. This is especially visible with residential power use, which has gained 11.6 percent year-to-date, while primary industry is down 0.3 percent. While industrial power and fuel use will get a boost from the government's stimulus measures, it's also likely that the trend toward consumer-led growth will continue. ( C) Reuters