Welcome to the First Anniversary edition of the OATS China bulletin!
It's been a year since we published our first monthly look at one of the world’s fastest-growing marketplaces, so this special edition of the China View From the Bridge will take a look back at the key events of the past year and speculate on the likely events in the year to come.
The enormous boom in the nation’s auto sector has been a recurring theme throughout the year: the number of passenger cars exceeded 100 million last August, Western firms like VW and Ford continue to build plant after plant across the nation, the government has put the squeeze on new joint ventures and throughout this boom, struggling Chinese automakers have looked to exports to boost often dismal profits.
Fuelled largely by the growing auto sector and a strong demand for premium products, China's lubes market has continued to boom throughout the year. According to recent analysis, consumption has grown by just under five percent year-on-year to 7.1 million tons in 2011. Lubes and greases demand has added seven percent compound growth over the last decade, although some analysts predict the market will only add around four percent this year.
The recent ICIS base oil conference in London provided some key insights into the growing superpower’s lubes market. Many of China’s state-owned oil companies, like Sinopec and PetroChina, are focusing on the production of high-quality products, and are quickly developing major refinery and chemical complexes to compete with global lubricants majors like Shell and ExxonMobil.
There is still room, however, for foreign firms to capitalise on the widening use of Group II and Group III base oils. International additive companies, such as Lubrizol and Afton Chemicals, have already invested heavily in upgrading or building their research and development facilities across China to provide better customer support for their clients and increase supply to key players in the region.
While there's good news for lubes and manufacturing industries, the sustainability and environmental repercussions are raising concerns. Academics at Tsinghua University predict car ownership in China peaking at 300 million vehicles by 2025, highlighting the need for more environmentally-friendly modes of transport. Companies manufacturing EVs and hybrid vehicles, such as the Warren Buffett-back BYD Motors, have seen profits plunge throughout the year, as even the most tempting government incentives fail to lure car owners away from status-symbol Western gas-guzzlers.
Suffocating pollution in the nation’s capital has highlighted the problem. For several days at the start of 2012, pollution reached such high levels that the American Embassy was warning its citizens not to venture outdoors! Realising the pressing need to remedy pollution, the government has introduced CN4 emissions standards, as well as a number of restrictive ownership policies. There is also a strong likelihood that Beijing will adopt even tougher ‘Beijing 5' standards later this year.
At sea, as well as on land, the environment is a hot topic in China. The Bohai Bay oil spill, one of the nation’s largest to date, saw well over 700 barrels of oil leak in the area, affecting over 6,200 sqm of the local marine environment. ConocoPhillips and CNOOC, who jointly own the fields, have agreed to pay $360 million in compensation. After a string of minor accidents across oil facilities over the past year, including several explosions and a burst pipeline, the government has now vowed to improve safety and increase scrutiny during inspections.
Overall, many are watching to see how China will weather the recession crisis which has once again reared its ugly head across the EU. Rising oil costs, weaker EU demand, wage increases and an inflating renminbi all pose a threat to China’s growth model, which has until now been heavily reliant on cheap manufacturing. Some predict that GDP growth could slow to as little as 6% this year, significantly lower than the government’s 7.5% targets.
However, some believe that the $1 trillion windfall reaped from the rising oil costs will actually help China to re-balance its economy. As developing, oil-producing nations, particularly in the Middle East and Africa, continue to profit from the soaring cost of crude, they will in turn use the cash surplus to purchase high-value equipment from China.
Construction equipment, telecoms network equipment and heavy-infrastructure goods (components which were previously imported into China) will be exported to its global developing partners. In essence, the money generated from fuel sales to China will be used to pay for infrastructure imports, thus helping Chinese companies climb the value chain.
The team at OATS has also been busy over the past 12 months, strengthening our relationships with key organisations in the Chinese oil and OEM sectors and broadening our databases, products and services specifically to meet the needs of our Chinese customers. We have even launched a new Mandarin language OATS website.
So what events do the next 12 months have in store? Could we see the Chinese government introducing a CN6 emission standard, or is it possible they will they go the way of the EU transport minister, who is lobbying on behalf of the automotive industry to cap emissions? Could we see another large-scale takeover, like the recently failed YPF deal? If so, Chinese majors might find one or two bargains to be had in the Mediterranean region.
Whatever the future holds, everyone at OATS would like to thank you for your continued support and we look forward to providing you with the latest news from the Chinese oil industry and other aspects of the nation's activities in the years to come. In the meantime, please feel free share the OATS China Bulletin with your colleagues and contacts and, as always, if you have any feedback, ideas or possible content for the Bulletin or website, we would be delighted to hear from you. Simply contact Diana Shen at DShen@oats.co.uk.
Sebastian Crawshaw
Chairman, OATS