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Outlook 2019: Slowing economy and electric vehicles take a bite out of China's gasoline demand

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Passenger car sales sink 6% in 2018, first drop in 20 years

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EVs to displace 2.23 mil b/d of Chinese gasoline demand by 2040

Singapore — Going into 2019, China's gasoline demand growth will be capped by a slowing economy, falling car sales, growing fuel efficiency and the inevitable electrification of road transport.

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These risks to transportation fuel demand in the world's second-largest economy have implications for the crude barrel, as the onus for oil demand growth had shifted to China's consumer economy from its industrial sector in recent years.

In 2018, China's passenger car sales fell 5.8% year on year to 22.35 million units, the first annual decline in a 20-year period of consistent growth, data from China Passenger Car Association showed this week. It expects car sales in 2019 to increase by 1% due to the low base in 2018.

Oil demand, car sales and consumer confidence are strongly correlated, and as an economic indicator, vehicle sales are also one of the first to show signs of a downturn, Bernstein Research noted in mid-2018 when the numbers first started to weaken.

S&P Global Platts Analytics expects China's total automobile sales to grow by 4.7% in 2019 to 31.1 million units, comprising 25.85 million gasoline-fueled cars, 3.28 million diesel-fueled cars and 1.97 million cars running on other fuels.

But it said this growth will not help gasoline demand much, as fuel efficiencies grow and Chinese consumers switch from gas-guzzling sport utility vehicles to gasoline sedans and electric vehicles.

"We estimate implied car fuel efficiency will likely improve by 7.3% and 7% respectively in 2019 and 2020," according to the latest Platts China Oil Analytics report.

This means China's gasoline demand will likely grow by less than 3% year on year to 3.5 million b/d in 2019 and by 2.5% to 3.6 million b/d in 2020. Demand growth likely halved to 3.2% in 2018, with consumption reaching 3.43 million b/d, it said.

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CHINESE CONSUMERS GO FRUGAL

Chinese middle-income families are cutting back on discretionary spending, deferring new car purchases, and consumer confidence has been dented by the ongoing US-China trade war.

China's official manufacturing PMI contracted in December 2018, its first drop below the 50-mark since July 2016 and much weaker than the January-November 2018 average of 51.0, Japanese bank Nomura said, adding that the weak data supports its view that the worst is yet to come.

"Looking ahead, we see more headwinds to growth from weakening domestic demand, the ongoing credit downcycle, a cooling property sector and lingering China-US trade tensions," Nomura said.

Retail sales have also slowed. In November, China's Singles Day online shopping volume hit a record of $45 billion, but growth slowed to 24% last year from 44% in 2017 and 79% in 2014. The event started by Jack Ma's e-commerce giant Alibaba posted three times more sales in 2018 than Black Friday and Cyber Monday online sales combined, according to McKinsey, and is a bellwether of Chinese consumer demand.

Weakening economic fundamentals have eroded people's purchasing power and curbed demand for non-essential car purchases in the fourth quarter, and the situation is expected to continue in 2019, analysts said.

Other factors have also hit car sales in 2018.

China had accelerated the adoption of new Phase 6 emissions standards in key regions under its "Blue Sky Defense" anti-pollution action plan. Once implemented, it would bar vehicles under the older emissions standards from being registered and sold.

But several major cities recently postponed the implementation of the new standards, including Beijing, Tianjin, Guangzhou, Shenzhen and Chengdu, with delays ranging from three months to one year. This was because car manufacturers were not able to produce enough new vehicles, dealerships faced shortages and older vehicle inventories were still high.

The uncertainty, combined with multiple regulations that could depreciate old models very quickly, forced buyers to defer purchases indefinitely.

China's car sales also fell in 2018 because tax cuts had frontloaded new car purchases between 2015 and 2016, and this is unlikely to be repeated in 2019, Platts Analytics said.

THE RISE OF ELECTRIFICATION

Electrification poses the most sustained threat to long-term fuel demand, and 2019 will see this trend gain traction.

China's light duty passenger car penetration is expected to saturate at 375 vehicles for every 1,000 residents by 2040, from around 150 currently, according to Platts Analytics. Comparatively, the US has around 820 vehicles per 1,000 residents and the EU has around 530.

A large chunk of this increase in China's fleet size will be electric.

Platts Analytics forecasts China will have 10 million new energy vehicles, including plug-in hybrid, battery electric and fuel cell vehicles, on the road by 2023, and 200 million by 2040 when most will be pure electric vehicles.

This level of adoption will displace an estimated 29,000 b/d, 684,000 b/d, and 2.23 million b/d of gasoline by 2020, 2030, and 2040 respectively, Platts Analytics said. To put this in context, the US consumed around 9.33 million b/d of gasoline in 2018.

Sales for new energy cars have bucked the trend and continue to rise.

In 2019, other-fuel car sales will likely increase 33% year on year to 1.97 million units, accounting for 35% of China's total car sales of all types, according to Platts Analytics. It expects them to account for 2.6% of China's total passenger car ownerships by 2020.

This is supported by government subsidies of up to $6,000 for new energy cars to achieve sales of 2 million units by 2020. Beijing is expected to provide new stimulus to the automobile sector to boost sales, and much of this will be for electric cars and battery production.

-- Eric Yep, eric.yep@spglobal.com

-- Oceana Zhou, oceana.zhou@spglobal.com

-- Analysis by Cindy Liang, newsdesk@spglobal.com

-- Edited by Irene Tang, irene.tang@spglobal.com