Is Chinese Oil Consumption Actually Falling?

SHANGHAI (Interfax-China) -- Some domestic analysts have expressed surprise at the figures released on Thursday by the Paris-based International Energy Agency (IEA), indicating that China's oil consumption actually fell by 1% in the second quarter of this year.

In its global demand forecast, the IEA said that China's oil consumption had fallen from April to June, mainly because of the discrepancy between high international crude prices and artificially low domestic retail prices, making refiners reluctant to operate at full capacity.

Zhang Jian, an analyst specializing in the petroleum and petrochemicals industry at China Securities, expressed his disbelief:

"I doubt the accuracy of the figure as both China's domestic crude production and crude imports are up by around 4% year-on-year in the first six months of this year," he said. "Moreover, oil product consumption in H1 was also growing."

In any case, Zhang said, "I guess crude consumption should not decrease from that in the corresponding period of last year. I think the change in consumption should be an average of the rise in domestic crude production and the rise in crude imports, which is also around 4% for the first half of this year."

According to figures released this week by China's Customs, the growth in crude oil imports in the first half stood at 3.9% from last year, reaching 63.42 million tonnes. However, the rate for the first five months stood at 5.1%, suggesting a significant fall in the month of June.

A revival is likely, said Zhang. "For the whole 2005," he concluded, "I guess crude consumption would grow around 6% on an annual basis. " The IEA has also based its annual global consumption estimates on a turnaround in China in the second half of the year.

Deng Yusong, the Vice Division Chief of Research Institute of Market Economy under Development Research Center of the State Council, also expressed some scepticism about the figures.

"I don't fully believe the figure as the growth in oil product consumption, which usually follows crude consumption, was positive in the first half. But I do know that the rate of consumption growth is definitely falling."

"But one possibility is that crude stockpiles may have digested some of the domestic crude consumption," he noted.

"As for consumption growth for the whole of 2005, I guess it will be positive, though obviously less strong than that of last year."

Li Guohong of Yinghe Securities was more in accord with the IEA report. "The figures are not really that surprising since we can see some indications from the crude oil import growth rate in the first half, which dived from 34.8% the last year to 3.9% this year," he said.

"And the main reason, based on my preliminary investigations, is that the soaring global oil prices have cut consumption from downstream domestic end-users, such as rubber producers," said Li.

"Local oil refineries have already been up to their limits [as a result of the] soaring global oil prices, and have experienced great losses in the first five months," Li continued.

"Many oil refineries have even been selling oil overseas to take advantage of higher prices on the global market compared with the domestic market, which is also a factor to take account of," said Li.

Li stressed that the underlying reason behind the phenomenon was the domestic oil pricing system. The country has liberalized crude oil prices but still controls finished oil product prices, leading to heavy losses at its refineries.

"The central government has failed to adjust the finished oil product prices in accordance with its own rules," said Li, referring to the policy of the National Development and Reform Commission (NDRC) to adjust domestic oil product prices on the basis of average monthly price changes on the Singapore, Rotterdam and New York markets. "Also even if the country did lift prices, it didn't lift them by a sufficient scale."

"The government's mistake has created misery for the whole refining industry," said Li.

Concurring with the IEA, Li said that the fall in oil consumption would not last long since the country was expected to raise oil prices very soon, giving refineries a much needed boost.

"But the awkward oil pricing system is not going to be changed immediately and the poor prospects [for refiners] might last for some time," he warned.

Li predicted that global oil prices would have no impetus to rise significantly further until September when the summer in the northern hemisphere comes to an end.

(c) InterFax-China 2005. For more intelligence on Chinese metals and mining, or call Alison Crawford in London on +44 (0) 20 7256 3919.

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