China dares to dream in an era of change

China is at the forefront of global commodity demand and last year overtook even the US to become the world’s largest importer of crude oil. With its gargantuan appetite and enormous capacities, it is a country that no one in the energy and commodity space in the 21st century can ignore. Perhaps more so than ever before, the country’s vision for its economy, its environment and its role on the world stage has been clearly mapped out.

Under the leadership of President Xi Jinping – who is expected to remain in charge for many years to come – the country is entering a new growth phase, where quality rather than quantity is paramount. So what does a more environmentally-focused, streamlined and globally influential China look like? And what will be the resultant impact on the country’s energy and commodities supply-demand situation?

S&P Global Platts attempted to answer these questions and many others in its recently published special report, entitled The Chinese Dream – Energy & Commodities in an era of change

Here is the report’s executive summary:

: The removal of China’s two-term limit on presidential terms at the National People’s Congress in March has strengthened President Xi Jinping’s ability to pursue his vision for China, its economy and people. A more streamlined, better-managed government should improve policy implementation and enhance Beijing’s ability to lead China through the next phase of its economic development.

Maintaining GDP growth is a core policy aim. The economy is increasingly consumer-driven, but investment will remain key to maintaining growth. The focus now is on quality over quantity, sustainability and deleveraging. Near-term demand for manufacturing, construction and infrastructure should stay robust, but growth will be slower than in the past. Market mechanisms will be deployed where useful, but the state will stay at the heart of the economy.

Supply-side reforms are removing systemic risk and excess capacity from the country’s ‘pillar’ industries, such as steel, coal, refining and petrochemicals. China is lifting the overall quality of its industrial output and improving its energy efficiency and environmental performance. But capacity reductions do not necessarily mean less overall production. Instead, leaner, more competitive industries should emerge capable of producing high-quality products.

Hydrocarbon demand growth: Despite China’s efforts to develop renewables and improve energy efficiency, oil and natural gas demand is projected to rise, leaving China ever more dependent on imports. Even coal use may increase, if economic growth proves stronger than expected. China will continue to depend on all forms of energy provision, including nuclear power.

US-China energy relations: Despite trade war concerns, US-Chinese energy ties may well strengthen. China’s refining sector is the logical destination for the US’s growing surplus of light, sweet shale crude. The US is ramping up its LNG exports as China emerges as the world’s second largest importer of LNG. The US shale industry can help meet China’s growing hydrocarbon demand.

Improving the environment will remain a central focus, including the use of supply-side reforms to close inefficient, polluting industrial capacity. As in the very recent past, surprises should be expected – environmental measures announced and implemented that have significant impacts on global commodity prices. China’s efforts in this regard will sustain its growing international leadership on climate change.

Circular economy: China is at the forefront of the electric vehicle revolution, hoping to take advantage of the technological disruption in the auto industry caused by automation and EVs. In combination with its huge build out of renewables, Beijing hopes to create a more circular economy based on emerging technologies that eventually reduce its rising reliance on imported crude oil and natural gas.

E10 by 2020: Beijing’s plans to displace oil with ethanol in the country’s gasoline pool are highly ambitious as China lacks sufficient domestic ethanol production capacity and the roadmap to implementation is uncertain. In the short term, the target can only be achieved via ethanol imports, on which Beijing has placed heavy import duties. Longer term, ethanol production capacity should not be a barrier to the mandate’s implementation.

Cleaner act: China’s rejection of other countries’ waste marks a turning point in its recycling industry. It opens an opportunity for virgin polymer imports, but longer term the aim is to replace imported waste feedstocks with domestic collection.

By opening derivatives markets to foreign participation, China hopes to gain influence over international commodity pricing commensurate with the country’s vast appetite for raw materials. In addition, Beijing wants to promote use of the RMB as an international currency. It is no mean task to challenge the dollar’s hegemony and established market structures, but China has had some success with ferrous derivatives. Now, as the world’s largest crude importer, its launch of a new crude oil contract open to international investors is timely.

Behind all this is the Belt & Road Initiative, a long-term strategy costing trillions of dollars, in which China hopes to create or recreate trade routes, with Beijing at their center. It will do so by the extension of ‘soft power’, using finance to foster long-term relationships economically beneficial both to its neighbors and itself. The BRI embraces economic, political and cultural dimensions and may prove the most ambitious, far-reaching geopolitical strategy of the 21st Century. It is a reminder that Beijing thinks big and long term.

Download the special report here: Platts.com/china-report