China Insight: Petroleum demand to slow in 2012 on economic growth slowdown

07 May 2012 00:00  [Source: ICB]

Industrial players are already feeling the effects of deceleration in China's economic growth

China has set a slower economic growth estimate of 7.5% for 2012 and this will translate into a slowdown in various industries including manufacturing, infrastructure and transportation. A slower expansion will undermine demand growth in petroleum products such as gasoil and fuel oils, industry sources said.

The nation's economic slowdown is likely to translate into a similar downside in chemicals Copyright: RexFeatures

The world's second-largest economy posted 8.1% GDP growth in the first quarter of 2012, down from 9.2% in 2011 and 8.9% in the fourth quarter of 2011. Amid the deceleration in the overall economy, operating rates of many factories in industries such as smelting, mining and construction have remained low since the beginning of this year, sources said.

GASOIL DEMAND SLOWS
China's gasoil demand is ­expected to rise by 4-6% in 2012, down from double-digit rates for the previous two years, according to forecasts by ICIS C1 Energy.

The country will have ­sufficient supply of gasoil, reversing a supply shortage that has lasted 18 months since the ­second half of 2010.

ICIS C1 Energy forecasts that China will have an excess 2m tonnes of gasoil supply in 2012.

Gasoil end-user demand was lackluster during China's Lunar New Year holiday in late January and its recovery was much slower than expected after the traditional Lantern Festival on February.

In the first two months of this year, Sinopec recorded a 10-15% year-on-year drop in its gasoil direct supply to major end users at Hebei province in north China, where a large number of ­industrial and mining enterprises are located.

"According to our research, steel manufacturers and mining enterprises in Hebei province are running at only 50% of capacity," a source from Sinopec said. "At Handan city [in Hebei province], for instance, the number of our major downstream buyers in the industrial and mining sectors has fallen to 11 from 29, while 18 end users have suspended production due to a slowing economy."

In east and south China, low operating rates at infrastructure construction projects also put a lid on gasoil consumption.

In Guangdong province, gasoil demand began to show signs of shrinking since late last year, as the gloom in the real estate market dampened construction activity, according to some state-owned oil giants.

FUEL DEMAND TO SHRINK
China's fuel oil demand from the shipping fuel bunker market, ­industrial end users and ­independent refiners may shrink further this year, in tandem with softer economic growth.

"Transport demand for bulk cargoes such as steel, cement, coal may drop sharply. If so, fuel oil demand from the bunker market will undoubtedly weaken further," a fuel-oil trader said.

China's 180CST fuel oil demand has been weak since early this year because of low throughput for dry and bulk cargo shipping. In the industrial sector, fuel oil demand is also expected to fall amid decreasing run rates at steel manufacturers, chemical plants, ceramics factories and glass ­factories. "A downturn in the economy plus quickly rising ­operational costs have largely eroded profit margins [of industrial enterprises]. That could explain their lower operating rates this year," said a source from Shanghai Fuel.

Softer economic growth will also add uncertainties to independent refiners' fuel oil purchases in 2012 because their buying interest depends on performance in the domestic gasoil market. An expected easing supply shortfall in the domestic gasoil market will hit these refiners' enthusiasm in processing straight-run fuel oil, industry sources said.

NATURAL GAS USE TO FALL
Industrial users' demand for ­natural gas is also expected to ­decline in 2012.

The ceramics industry, for ­instance, which is a major consumer of natural gas, has cut purchases of the fuel because companies received fewer orders from overseas markets.

"Ceramics producers at Foshan and Chaozhou cities in Guangdong are badly hit by the global economic crisis and ­frequent anti-dumping investigations initiated by the European Union," said a liquefied natural gas (LNG) ­trader based in south China.

Guangdong province is an ­important ceramics manufacturing base, which exported nearly $400m worth of household ­ceramics to Europe last year, according to local customs data.

Author: Sarah Wang, Whitney Shi and Alfa Li

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