View from the Bridge - China July 2012


With the world adjusting to the China “slowdown”, prices for commodities have fallen sharply affecting the major trading partners, Brazil and Australia for example, which are beginning to see a significant fall off in their growth. In turn, the oil price has fallen back to levels not seen since before the Arab Spring.

The impact of this, provided OPEC do not restrict production too much, will be to reverse the negative stimulus that the previous price spike imposed.  In this inter-connected world this should stimulate China’s trading partners in Europe and the US and eventually China.

After a two-year long spending spree, Chinese oil majors Sinopec, PetroChina and CNOOC have begun to slowdown overseas unconventional oil and gas purchases. Combined, the three state-owned companies spent just $16.3 billion last year, down over a third from $23.4 billion in 2010, with deals in 2012 currently at a comparatively low $5.1 billion.

The majors are deliberately slowing purchases in order to focus on developing existing projects and hone their expertise for use in the domestic market, which is believed to be sitting on the world’s largest supply of shale gas.

Meanwhile, Chinese production of vehicles has continued to rocket this year, with Western automakers contributing a record number of imports and new facilities to boot. BMW is applying to increase its production capacity by 80% from 200,000 units to 360,000, Volkswagen is investing $17 billion to increase capacity to 4 million units per year by 2018 as it aims to overtake GM as the world’s largest car manufacturer, while Japanese rival Nissan will build a 240,000 units-per-year facility in the northern city of Dalian.

The Financial Times predicted that annual production figures could hit 40 million units annually as early as 2020, a figure which looks very possible if current trends continue. With the market share held by Western manufacturers increasing, the demand for higher quality lubricants is also likely to increase dramatically, meaning good news for lubes and additives producers.

However, the oversupply of cars is proving difficult for dealers, who have been inundated with passenger cars faster than they can sell them. Wholesale deliveries were up an optimistic 23% in May, although retail sales in the first five months of the year increased by only 5.5%, much lower than last year’s double-digit figures. Average inventories at Chinese showrooms are bloated, compelling dealers to make unsustainable price cuts.

There are currently mixed reports as to whether Chinese authorities will re-introduce 2009’s “cash-for-clunkers” scheme, which it used to remedy a slump in sales after the financial crisis led to a lack in consumer confidence. If it does, there is a danger of an artificial boost in sales, with the long-term benefit to the industry being questionable. At best, any new incentives would inspire a fresh round of buying in major cities and increase the availability of good quality second-hand cars in rural areas.

Policymakers would do well to note that slow sales in major cities, where the largest portion of the wealth lies, are much more likely to be the result of restrictive policies and less to do the liquidity of their citizens. After all, over 90% of car buyers pay with straight cash, not loans.

By the time you read this, OATS’ very own Diana Shen will have addressed the question “are Chinese OEMs getting the right oil?” at the ICIS Conference in Singapore this month, which offered a stimulating insight into the complex and varying market. For those who could not attend, we will be providing a summary of her speech and a white paper to accompany it in our next Bulletin.

In the meantime, we would welcome any feedback, ideas or possible content for the Bulletin or website.  Simply contact Diana at DShen@oats.co.uk.