The gift and the curse of China's energy demand

The gift and the curse of China's energy demand
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Last year, China became the world’s largest and second-largest importer of crude oil and liquefied natural gas (LNG), underscoring that the driver of global growth and energy demand has moved from west to east.

While energy consumption in the U.S. and Europe has never recovered to the levels seen before the global financial crisis, China’s demand has surged by a third in the decade since.

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Although this is reflective of the dynamism of China’s economy, it’s also the country’s Achilles heel. Demand growth might have slowed to single digit figures, but energy imports have grown on average by over 10 percent every year over the last decade with China increasingly reliant on imports of not just oil and natural gas but even coal to meet the country’s ever-increasing energy needs.

 

Part of the reason China’s energy consumption is so large is due to the size of China’s industrial sector. In developed economies, industry uses slightly over one-fifth of all energy. In China, it consumes over a half.

The source of this is primarily coal, not only in the form of coal-fired electricity generation but also direct burning by heavy industry like ceramics and steel.

China’s push to be a global leader in electric vehicles and renewables might have grabbed the headlines, but one of the largest factors in constraining the seemingly inexorable rise of China’s energy demand will be the move away from an economy built on industry and manufacturing.

In the future, consumption and services, which need less energy for every unit of economic growth, will be the drivers of rising productivity required for long-term economic success.

This is not to say that industry will play no role in China’s future. It will. It’s just that it will be less energy intensive. Everyone is aware of China’s ambitions to become a global leader in advanced information technology, robotics and electric vehicles as part of its “Made in China 2025” industrial masterplan.

Less discussed is the upgrading of basic manufacturing, which aims to reduce industrial energy intensity by a third over the decade 2015–2025 so that basic manufacturing will be efficient as that of advanced economies.

Even with a more energy-efficient industry and innovation and digitization as the new drivers of growth, energy demand will still expand with the government aiming for 2030 energy consumption to be no more than a third higher than it is today.

At the same time, policies tackling the environment and China’s chronic air pollution will see the share of cleaner fuels like natural gas and renewables rise from just over 20 percent today to around 35 percent of total consumption by 2030.

In the short term, the focus on the environment has offered plenty of opportunities for LNG exporters. Imports into China are up 60% on 2017 and the average spot price of LNG sold to Asia as represented by Platts JKM is up a third on 2017. But this may not last forever.

A new natural gas pipeline from Russia scheduled to come online in 2020 and another planned for a few years later may make life a lot more competitive for LNG into China in the next decade.

Even with the push toward the use of gas and renewables, coal will still dominate China’s energy landscape with analysis by S&P Global Platts Analytics suggesting that coal’s share of China’s total energy consumption will fall from around 60 percent last year to around 44 percent of the total by 2030.

Coal consumption actually rose last year on the back of strong industrial production and it may be well into the middle of the next decade before we start to see any significant reduction in total coal consumption. However government leadership means that this coal will be burnt more efficiently.

Policies mandating the upgrading of existing coal-fired power plants and use of advanced coal-power-generation technology in new plants will mean that by 2020 coal-fired electricity generation will be more efficient and produce fewer emissions.

It’s easy to forget that as recently as 2014, China was the world’s fourth-largest crude oil producer behind Saudi Arabia, Russia and the U.S. But with domestic production in decline, China is more and more reliant on overseas crude, around 70 percent of which was imported last year.

Unlike other fuels, there are few substitutes for oil, and while the development of electric vehicles is a strategic priority for China’s leadership, this is in many ways driven as much by a desire to capture a position of global leadership in new technologies as it is by energy security.

With strong policy support, it may be possible for electricity to displace oil as the fuel in much of China’s road transport, but this will take decades not years, and there is still no technology to substitute for oil in the aviation and petrochemical sectors, which will be driving oil demand as China moves to that consumption led economy.

Sebastian Lewis is S&P Global Platts' content director for China. He has over 10 years' experience analyzing commodity markets and capital-intensive industries across Asia and the Middle East.