While the world is waiting for the Chinese governmental changes (and the outcome of the US election I want to focus this month on the economic statistics. At the UEIL conference in Portugal this week, Apu Gosalia of Fuchs reported that, in their analysis, national lubricant demand broadly follows GDP minus four percent; re-affirming OATS' continued focus on GDP in the introduction to our monthly Bulletins.
In China, according to the National Bureau of Statistics (NBS GDP grew 7.4% in the third quarter, making combined growth for the first nine months 7.7%. While falling fractionally below government predictions, the country should still be close to annual targets of 7.5% if current trends continue.
On that basis, China's overall growth will mean lubes demand will continue to expand by between 4-4.5%. Any data suggesting a recovery will certainly be welcomed by the nation's top leadership group, which will hand over an economy growing almost as fast as ten years ago; when the current regime took over.
Other indicators, however, present a more mixed picture. The HSBC flash manufacturing PMI for China rallied at 49.1 in October – a dramatic increase from August's reading of 47.5. Commodity prices were a key growth indicator this quarter as both crude steel output and refinery throughput were up.
Refinery output rose a solid seven percent from a year ago, reaching a record daily rate of 9.43 million bpd. Implied oil demand had also soared to 8.3% over the same period, as refiners ramped up production before Chinese “golden week” and capitalised on newly-raised fuel prices.
On top of this, consumption grew 13.2% in September while fixed-asset investment increased by 20.2%, Around $157 billion-worth of public infrastructure projects have also been granted approval, putting a pretty solid floor under demand.
But, how reliable are these figures? Not everybody is as convinced by these statements of growth. Analysts at Standard Chartered bank remarked that the “unimpressive” manufacturing survey and a year-on-year drop of 1.5% in electricity production, makes the pickup in factory output “a bit difficult to believe”.
In addition, China's iron and steel makers are facing hard times, suffering combined losses of 3.18 bilion yuan ($508 million) through the first eight months of the year. Industry insiders claim that of the nation's top 80 iron and steel companies, two-thirds are preparing for stagnant growth, with the remaining third setting aside provisions for losses.
Even Li Keqiang, China's probable leader-in-waiting, is cautious of relying too much on GDP numbers, which he remarked were vulnerable to being “man-made”. Instead, he claims to watch data on power, rail cargo and loans.
Yet, in spite of all the doomsayers, I still expect China to grow steadily and firmly believe it will be able to transform itself into a market-driven service economy. The IMF has suggested the Asian superpower has until 2030 to do this. If not, it will risk falling into the 'middle income' trap, where its manufacturing is out-priced by cheaper countries but has not generated enough wealth to sustain itself as a developed economy.
There is a risk that the low birth rate and the imbalance of the male/female ratio may restrict this long-term growth. But, the rapidly-increasing wealth in second and third tier cities where there are no restrictive auto regulations may bolster demand for both cars and lubricants.
It is important to remember GDP per capita was just $5,445 last year; similar to Japan's in 1963. A large amount of lubricants are still be sold before the market levels off. The equipment manufacturers will also be looking for more advanced lubricants for increasingly sophisticated and environmentally-friendly equipment. Of course, OATS is continuing to build the databases and web-based solutions to support these requirements.
In the short-term, the confirmation of the new ruling elite will remove uncertainty which, of itself, should release some economic energy. The next month will be interesting.
As always, if you would like to comment on this, or anything else you have read in this Bulletin, simply contact Diana at DShen@oats.co.uk. We look forward to hearing from you.
Sebastian Crawshaw
Chairman, OATS