China's influence on global commodity markets is unparalleled. It's a matter of scale.
- China imports more than 60% of domestic demand for oil, gas and iron ore.
- Its imports of oil, LNG and coal account for around a fifth of global seaborne trade.
- The country is now the world's largest consumer of bulk commodities.
Why this story matters across the globe
China drives liquidity and price formation like no other
That's why producers, traders and investors inevitably worry when risks and uncertainties emerge in China. Which is where we are today. Daily headlines feed concerns about the demand slowdown in China and the potential impact on the world economy.
Falling stock markets? Blame it on China’s crumbling GDP (Q4 2018 growth was actually 6.4% instead of 6.5%!) Falling oil prices? That’s because Chinese consumers aren’t spending given economic worries. Tumbling spot LNG prices? Due to Chinese demand being far weaker than anticipated.
The reality of course is more nuanced. Stock markets don’t only move on news from Beijing, short-term oil prices are a consequence of a multitude of global factors and China was far better prepared to meet gas demand through (a milder) winter 2018/19 than 12 months previous. Headlines inevitably only tell part of any story.
What’s different this time?
There are three main reasons why the slowdown in China in 2019 is not a replay of 2008.
1. China’s economy really is slowing
China’s economy is now twice the size it was in 2008. Commodity markets have changed too, with total energy demand doubling since 2008.
Old tricks to stimulate economic growth are unlikely to work this time.
Significant progress has been made to reduce overcapacity and improve the quality of environmental growth. The Chinese government is unlikely to opt for any stimulus packages that could jeopardise its hard-won credibility.
This leaves relatively few options. We expect any stimulus package will look very different from a decade ago.
2. US Trade war highlights vulnerabilities
China’s ongoing trade war with the US has exposed vulnerabilities in the economy. Chief amongst these is China’s dependence on energy imports.
While negotiations between the two countries are continuing, the situation could still escalate. February statistics show an almost 21% year-on-year fall in exports and a slowdown in Chinese manufacturing. The trade war is the primary culprit.
3. Structural supply-side reforms move China towards a less-carbon intensive economy
The Xi administration’s structural supply-side reforms and environmental policies are now having an impact on commodity demand. The reforms are moving China towards a consumption-led, less carbon-intensive economy – with no reverse gear.
Commodity markets in China bear little resemblance to a decade ago. While coal still features heavily, the energy mix is diversifying, and renewable energy supply is growing rapidly. Gas demand growth has been phenomenal, with overall consumption increasing by 17% and LNG demand by 41% in 2018.
Ultimately, new demand patterns will emerge as the country shifts away from traditional and towards transition commodities.
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What does it all mean?
Within China, a slowing economy alongside the US trade dispute is likely to enhance energy security and provide a boost for domestic production.
Any economic slowdown in China will have a knock-on effect globally. Uncertainty around Chinese commodity demand adds to the risks for producers already starting to grapple with the threat posed by the energy transition.
China’s current slowdown is not the same as 2008. The consequences won’t be either. We need fresh thinking to tackle the challenges it poses.
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