China’s energy commodity imports diverging

Energy commodity imports into China have grown enormously over the past decade, boosting global demand for shipping capacity. But a dramatic change in the mixture is emerging. Key elements are sharply diverging. During most of the past ten years the upwards trend of China’s energy imports was supported by strong advances in all the main elements, oil, gas and coal. In the past eighteen months, this pattern has showed signs of a fundamental shift, with coal imports falling steeply and much greater uncertainty about future volumes arising.

Slowing growth in economic activity, a changing pattern among the chief components, and moderating demand from major energy consuming industries are contributing to the changing picture of energy commodity imports in China. Another factor is political: strenuous efforts by the leadership to drastically reduce pollution emanating from ‘dirty’ fuels, coal in particular. This aim involves moving towards cleaner energy sources, especially gas, nuclear power and renewable sources.

The changes under way, and likely to continue, have huge implications for several sectors of the global shipping industry. The tanker and gas carrier markets arguably can look forward to increasing support fromChina’s import trends in the commodities carried by these ships. By contrast, while coal is set to remain the country’s predominant energy commodity used, its relative position is diminishing and previously envisaged import growth prospects have faded. More cautious coal import assumptions imply receding advantages for the bulk carrier market.

Oil, gas and coal imports ups and downs

How have energy commodity imports into China evolved, and what is happening currently? Last year the total was slightly (by 2%) down from the previous year, which had seen the highest volume so far attained. Another sizeable reduction, perhaps as much as 5%, could occur in 2015 if present signs prove reliable.

During the past decade as a whole, from 2004 to 2014, China’s overall seaborne energy commodity imports – comprised of coal (including lignite), oil (crude and products) and gas (liquefied natural gas, LNG and liquefied petroleum gas, LPG) – grew more than three-fold, despite last year’s slight weakening. The total rose from 176m tonnes to 604mt, a 243 percent expansion, according to calculations derived from Clarkson Research trade data. This vigorous performance was more rapid than seen in other countries as a group, resulting in China’s share of world seaborne energy trade rising from 5 percent to 14 percent.

Coal imports were the most strongly growing element. Until the mid 2000s China still had a surplus of coal from its massive domestic production and was a major supplier to the world market. Foreign purchases arriving by sea were relatively minor and, in 2004 these totalled just under 17mt. Over the next four years this volume more than doubled, followed by very fast expansion up to 302mt in 2013, after which there was a downturn to 268mt in 2014. Meanwhile, during the decade, coal exports fell to small quantities. In the past couple of years coking coal (mainly for steel industry use) comprised about one-fifth of imports, with the remaining four-fifths consisting of steam coal (chiefly power station fuel, but also used by other industries including cement).

Oil started the decade as by far the largest element of energy commodity imports into China and, although overtaken by coal in 2013, regained the top slot last year. The graph below illustrates these trends. Seaborne oil imports more than doubled from 153mt in 2004 to 309mt in 2014. The majority was crude oil, 85-90 percent of the total in the past few years. Oil products (refined oil) volumes were relatively flat, mostly within a 35-40mt range, falling to 29mt last year after extra refining capacity was introduced.

Gas imports by sea, the smallest energy commodities component, have shown rapid expansion, more than quadrupling from over 6mt in 2004, to over 27mt in 2014. At the beginning of this period China’s liquefied gas purchases were entirely LPG. These fluctuated over the decade, mostly within a 3-6mt annual range, but strengthened at the end to over 7mt last year. LNG imports began in 2006, when the first regasification plant was installed, growing swiftly from under 1mt to almost 19mt in 2014.

Prospects for 2015 suggest that the mixed pattern of changes emerging in the preceding twelve months will persist. Higher oil imports could be accompanied by increased gas imports, but the new weakening coal imports trend looks set to continue, possibly with another large reduction.

Gigantic demand for energy

Among national and regional energy markets, China’s market serving a population of more than 1.3 billion people is characterised by its gigantic proportions, augmented by great expansion since the early 2000s. For much of this period, until 2012, the Chinese economy was still growing very vigorously, boosting demand for energy. Since then, a slowing economic growth trend has become well established, with noticeable moderating effects on energy consumption. Economic expansion has been underpinned by coal, the largest proportion of which is derived from indigenous mines.

Over many years coal has dominated energy sources. In 2012 coal supplied almost two-thirds (66 percent) of total energy consumption, followed by oil at 20 percent. Other large contributors were hydro power (8 percent) and natural gas (5 percent). Renewables, mainly wind power, at over 1 percent and nuclear power, at nearly 1 percent added relatively small amounts. These figures illustrate the most recent period for which a breakdown (US Energy Information Administration data) is available. In the past two years a diversification policy, prompted by energy security and pollution concerns, has resulted in coal’s estimated share decreasing to 64 percent in 2014.

The largest usage of energy in China is in power stations generating electricity, which are predominantly coal-fired. Power generation absorbs about half of coal consumed. Other fuels used in this sector are gas and uranium, while hydro-power is another feature. Renewable energy sources, especially wind power, are also a significant contributor. Most of the remaining coal usage, about forty percent of the total, occurs in the steel and cement industries, with the remaining ten percent or so taken by residential and other consumers. In the steel industry, mills based on the blast furnace production method produce pig iron, using coking coal (converted into coke) together with iron ore, for transformation into steel.

Consumption of oil is mainly related to transport fuel usage, in road vehicles, aircraft and ships. Oil-fired power generation is small. Natural gas currently also has a minor role in electricity production, accompanied by substantial usage in industrial processes and some consumption in the transportation sector.

Domestic supplies v imports

A very large part of China’s energy market is supplied by domestic producers – coal mines, oilfields and gas fields. Domestic output of all three fuels increased over the past decade, at varying rates. This growth was insufficient to match rapidly expanding demand from consumers, however, resulting in greater reliance on foreign suppliers and rising import trends.

Coal dominates the energy commodity production scene in China and is mined on a huge scale. Since 2000 output has almost tripled and, in the past ten years’ period it has risen by 82 percent, reaching a colossal 3,874mt in 2014, although that figure was more than 2 percent below the peak volume attained in the previous twelve months. Whether or not this slightly reduced output, at the period’s end, marks the start of a downwards trend is not yet clear. Declining future volumes could be a consequence of changes in the energy market reflecting government regulations and incentives to bolster use of cleaner fuels and renewable energy.

Domestic crude oil production has also strengthened, reaching over 211mt last year, about 21 percent above the volume seen a decade earlier. A majority of China’s output is derived from mature oilfields, where it is difficult to improve well yields, explaining why growth has been quite slow. In other locations, both onshore and offshore in coastal waters, production is evolving positively. In the natural gas sector, production has more than tripled in the past ten years, to 134 billion cubic metres in 2014, aided by official policy promoting gas usage. Gas output from shale deposits is small but growing.

Another factor affecting energy commodity imports, besides consumption volumes and domestic output volumes, is the geographical location of domestic output in relation to where it is used. In the coal market, the positive effect of this influence on imports has been particularly noticeable. Rail transport for domestic coal over long distances from mines in northern China to consumers in the south, or to the coast for onwards transhipment, is expensive and there are capacity limitations. When international coal prices or ocean freight rates or both are relatively low, the delivered cost of imported supplies may be very competitive with domestic coal.

Other influences affect seaborne imports. In the coal market, quality is an issue: any shortage of domestic high-grade coking coal used in the steel industry has favourable implications for import demand. Conversely, when land movements of coal from adjacent Mongolia rise, there are adverse implications for seaborne imports. Pipeline flows of oil and gas into China, from adjacent countries, compete with volumes arriving by sea routes.

Future energy market trends

Some of the broad outlines of China’s future seaborne energy commodity imports are discernible, although attempts to forecast precisely are hazardous. An example of the effect of incorrect assumptions (best guesses?) adopted is the expectation, until last year, of a continued upwards trend in coal imports over a long period ahead. The reasoning seemed soundly based, but now appears to be proving wrong. Consequently all predictions, especially for several years ahead, must be viewed as speculative.

What can be realistically foreseen, based on current indications of how China’s energy market is likely to evolve? Assumptions about the rate and pattern of overall economic growth are clearly a crucial aspect. Many independent forecasters predict an extended slowing trend in economic activity, an expectation reinforced by signs that this change is an official policy aim. Already annual GDP growth has cumulatively slowed by over two percentage points in the past three years, to 7.4 percent in 2014, and seems set to decelerate further to below 7 percent this year, and perhaps to nearer 6 percent in 2016. Manoeuvering the economy to a more sustainable expansion rate, together with rebalancing the pattern of growth, is an outcome intended by the Chinese government.

This background provides some general clues to foreseeable energy demand trends. Energy intensity (energy consumption per unit of economic output) probably will decrease, amid a gradual shift from industry towards services, part of the rebalancing. Together with slackening overall economic growth rates, decelerating energy demand is implied. However, because China’s economy is a vast size, incremental energy usage each year can be expected to remain large. Since additional energy commodity supplies from domestic sources are unlikely to be sufficient to satisfy requirements, further import expansion is likely and a high proportion almost certainly will be seaborne trade.

Differing prospects for imports

A positive outlook for seaborne oil imports, especially crude oil, is evident. Consumption of oil in China is growing moderately, boosted by increasing usage in the transportation sector where surging road vehicle numbers are resulting in robustly rising demand for gasoline. Diesel demand, by contrast, seems to be faltering. Contributing to restraints on oil products demand growth are greater vehicle propulsion efficiency and increased use of natural gas fuel.

Potential for further seaborne crude oil imports growth into China is enhanced by more refining capacity being added at coastal locations. Recently there has been a large surplus of refining capacity compared with domestic demand for oil products, resulting in rising exports and falling imports of products. Another influence which is strengthening crude oil imports is the plans being implemented, by the Chinese government, to greatly expand both state-owned strategic and commercial crude oil reserves. New strategic tankage is opening this year, although a proportion may be filled by domestic oil. Seaborne imports look set to grow, despite large pipeline imports through land routes from Russia and Kazakhstan.

The outlook for seaborne imports of natural gas seems bright. Consumption of natural gas in China could grow vigorously, benefiting from the government’s support for this fuel with its environmental advantages. Supplies from domestic sources are growing, while large pipeline import volumes from neighbouring countries are rising rapidly, including through the new huge-capacity pipeline linking China with Myanmar which opened in 2013. Seaborne gas deliveries are also expanding, facilitated by twelve LNG regasification terminals already operating at ports, which are not yet fully utilised, accompanied by several more under construction.

Shale gas overshadows a positive view of LNG imports. China has enormous gas reserves in shale deposits. If output can be ramped up very rapidly to a massive scale, gas import demand almost certainly will weaken. But this possibility seems remote in the near- or even medium-term. Exploitation of shale gas is highly problematical in China. The geology of shale deposits is complex and the terrain difficult, requiring multiple well drilling and impeding equipment movements. A service industry with expertise and equipment on the scale necessary for very fast progress is not yet available. In some areas there are shortages of water, needed in large amounts for hydraulic fracturing (fracking). Moreover, essential pipeline connections are still under development. All these features point to restrained expansion of domestic shale gas output.

Prospects for coal imports contrast with prospects for other fuel imports. Coal probably will remain China’s dominant energy source over many years, but its relative position is likely to be eroded. Slackening economic expansion and reducing dependence on heavy industry with high energy usage are general economic influences. Greater emphasis on the environmental aspects of fuel burning, and a continuing shift towards less polluting energy sources (gas, nuclear and renewables) is an accompanying political influence. These factors imply limited growth in coal demand. Although the relationship between domestic coal supplies and imports is difficult to estimate, great uncertainty about future coal import volumes in now evident, and a negative trend has become more likely.

Specific directives and measures having adverse or potentially adverse effects on coal imports have been introduced by the Chinese government. Towards the end of last year new regulations restricting consumption of steam coal with high ash and sulphur content, and introducing a tariff on coal imports to support the domestic mining industry, were announced. Standards for other polluting trace elements (such as phosphorous) also were introduced. Power utilities were required to reduce reliance on imported coal.

As a consequence of these changes, it is clear that previous expectations of vigorous expansion in all the principal seaborne energy commodity imports into China, albeit at varying growth rates, are no longer valid. The vista of future patterns has become more diverse, with coal imports in particular facing much greater headwinds. This conclusion is especially significant for the global bulk carrier freight market, where a chronic shipping capacity surplus has been an enduring feature.
Source: Article by Richard Scott, Visiting Lecturer, China Maritime Centre and MD, Bulk Shipping Analysis, as arranged with Hellenic Shipping News Worldwide