China's output growth at lowest in 7 years
Saturday, 15 November 2008
Geoff Dyer, FT Syndication Service
BEIJING: The extent of the slowdown in the Chinese economy became clearer yesterday when the government disclosed that the rate of increase of industrial production had dropped to the lowest level in seven years.
Four days after unveiling a massive fiscal stimulus programme, the government said that industrial production increased by 8.2 per cent in October - well below forecasts and following on from an increase of 11.4 per cent the month before and 17.8 per cent in March.
While the slowdown was evident in every sector apart from oil, steel production dropped 17 per cent compared with October last year. Power generation fell for the first time in a decade.
Ken Peng, an economist at Citibank, said that the slowdown in production growth was even more rapid than during the Asian financial crisis a decade ago.
"The data underscore why risks of 5.0 per cent GDP growth remain real. We need to see evidence in the coming months that fiscal easing has gained traction to avoid 5.0 per cent from becoming a reality," he said.
The Chinese economy grew at double-digit rates in each of the past five years. In the past week, however, the government has said that house prices dropped relatively sharply in October, the pace of increase in imports slumped and retail sales also showed signs of weakening demand.
Economists said that it was these figures that had prompted the government to announce its fiscal stimulus plans earlier than had been expected. Last Sunday, the government said it would spend Rmb 4,000bn ($587bn) on infrastructure and social welfare over the next two years, in an effort to restore consumer confidence and prevent the economy from slowing even more dramatically. Last Wednesday, the government cut taxes on a large number of exports.
Ha Jiming, an economist at China International Capital Corporation, said the slowdown in production reflected weakness in both the export sector and real estate, two of the economy's main engines of growth.
"The pattern of development in China, which has been focused on heavy industry, has caused severe overcapacity. Both the production of basic materials and power generation will suffer a hard landing once the economy slows down," he said.
The government also said that fiscal revenues, which increased by 33 per cent in the first half of the year, decreased by 0.3 per cent in October, the first time that had happened since 1996. Weaker fiscal revenues would likely force the government to use substantial bond issuance to finance its fiscal spending plans, economists said.
The eventual impact of the fiscal package remains highly uncertain, in part because the government has given little detail on how exactly the money will be spent and because it is not clear how much of it will be extra investment that would not otherwise have been spent.
Economists say it is also unclear how quickly some of the spending on infrastructure will begin to have a real economic impact.
Another FT Syndication Service report by Carola Hoyos adds: In the state of Gujarat, north-west India, lies Jamnagar, the world's biggest oil refining complex, which covers 7,400 acres.
As Reliance Petroleum, the Indian company, prepares to send the first barrel of oil through the complex's 4,000km of snaking piping, its newly-built second refinery on the site will become the most visible symbol yet of the shift in an industry that is moving east after a century of western dominance.
While refineries in Europe and the US in particular suffer from a collapse in fuel demand, and big integrated oil companies such as BP and Royal Dutch Shell sell one facility after another, Asia and the Middle East are emerging as the new centres of the industry.
Two thirds of the world's new refining capacity to be built over the next two to seven years is expected to be located in the Middle East and Asia, according to a new report by Wood Mackenzie, the Edinburgh-based industry consultants.
The biggest projects will be led by state-owned national oil companies such as Saudi Aramco, of Saudi Arabia, China's Sinopec and Kuwait Petroleum.
The reasons were made clear this week by the International Energy Agency (IEA), the watchdog agency of the world's developed countries.
The World Energy Outlook, the IEA's annual flagship report, published last Wednesday, predicted that oil supply would grow in developing countries and shrink in developed ones. "We think OECD oil demand has peaked," said Fatih Birol, the report's author.
"The OECD countries' role in the energy world is becoming less and less important."
All the growth in oil demand to 2030 is expected to come from developing countries, with China contributing 43 per cent and India and the Middle East each about 20 per cent.
The rest will come from other emerging economies in Asia. As a result, the share of rich countries in global demand will drop from last year's 59 per cent to less than half of the total in 2030.
But much of the diesel from the new Jamnagar plant is likely to head to Europe. Other refineries in Asia and the Middle East also supply countries beyond their local markets.
Alan Gelder, the author of the Wood Mackenzie refining report, said: "New refineries in Asia and the Middle East are competitive in terms of earnings per barrel because they use sophisticated technology to convert very low quality, cheap crude oil into high-end products such as petrol and diesel.
"This can outweigh the additional cost of transporting the products to markets far away. On top of that, refineries in Europe and US are more difficult and expensive to build."
In the Middle East, the boom in refinery building illustrates not only the increased demand from the region, but also the ambition of oil-producing countries' and others to benefit from more of the value chain by building plants that can process their particular oil.
However, this is not the best time to be building a new refinery, even in India and Saudi Arabia.
Wood Mackenzie's report concludes that only 30 of the 160 construction projects announced since 2005 will now go ahead, because demand has collapsed and credit has become scarce.
Asia and the Middle East are far from immune.
Neil McMahon, analyst at Sanford Bernstein, sees the refining malaise spreading well past US borders.
"European refining earnings in 2009 could well emulate the steep decline in US refining earnings seen this year, as much weaker economic conditions spread from the US to the rest of the world, particularly with a slowdown in non-OECD demand growth and manufacturing activity," he said in a recent report.
With such prospects, Jamnagar, which will be able to process 1.2m barrels of oil a day when completed, may well remain the giant of its kind for some years yet.
BEIJING: The extent of the slowdown in the Chinese economy became clearer yesterday when the government disclosed that the rate of increase of industrial production had dropped to the lowest level in seven years.
Four days after unveiling a massive fiscal stimulus programme, the government said that industrial production increased by 8.2 per cent in October - well below forecasts and following on from an increase of 11.4 per cent the month before and 17.8 per cent in March.
While the slowdown was evident in every sector apart from oil, steel production dropped 17 per cent compared with October last year. Power generation fell for the first time in a decade.
Ken Peng, an economist at Citibank, said that the slowdown in production growth was even more rapid than during the Asian financial crisis a decade ago.
"The data underscore why risks of 5.0 per cent GDP growth remain real. We need to see evidence in the coming months that fiscal easing has gained traction to avoid 5.0 per cent from becoming a reality," he said.
The Chinese economy grew at double-digit rates in each of the past five years. In the past week, however, the government has said that house prices dropped relatively sharply in October, the pace of increase in imports slumped and retail sales also showed signs of weakening demand.
Economists said that it was these figures that had prompted the government to announce its fiscal stimulus plans earlier than had been expected. Last Sunday, the government said it would spend Rmb 4,000bn ($587bn) on infrastructure and social welfare over the next two years, in an effort to restore consumer confidence and prevent the economy from slowing even more dramatically. Last Wednesday, the government cut taxes on a large number of exports.
Ha Jiming, an economist at China International Capital Corporation, said the slowdown in production reflected weakness in both the export sector and real estate, two of the economy's main engines of growth.
"The pattern of development in China, which has been focused on heavy industry, has caused severe overcapacity. Both the production of basic materials and power generation will suffer a hard landing once the economy slows down," he said.
The government also said that fiscal revenues, which increased by 33 per cent in the first half of the year, decreased by 0.3 per cent in October, the first time that had happened since 1996. Weaker fiscal revenues would likely force the government to use substantial bond issuance to finance its fiscal spending plans, economists said.
The eventual impact of the fiscal package remains highly uncertain, in part because the government has given little detail on how exactly the money will be spent and because it is not clear how much of it will be extra investment that would not otherwise have been spent.
Economists say it is also unclear how quickly some of the spending on infrastructure will begin to have a real economic impact.
Another FT Syndication Service report by Carola Hoyos adds: In the state of Gujarat, north-west India, lies Jamnagar, the world's biggest oil refining complex, which covers 7,400 acres.
As Reliance Petroleum, the Indian company, prepares to send the first barrel of oil through the complex's 4,000km of snaking piping, its newly-built second refinery on the site will become the most visible symbol yet of the shift in an industry that is moving east after a century of western dominance.
While refineries in Europe and the US in particular suffer from a collapse in fuel demand, and big integrated oil companies such as BP and Royal Dutch Shell sell one facility after another, Asia and the Middle East are emerging as the new centres of the industry.
Two thirds of the world's new refining capacity to be built over the next two to seven years is expected to be located in the Middle East and Asia, according to a new report by Wood Mackenzie, the Edinburgh-based industry consultants.
The biggest projects will be led by state-owned national oil companies such as Saudi Aramco, of Saudi Arabia, China's Sinopec and Kuwait Petroleum.
The reasons were made clear this week by the International Energy Agency (IEA), the watchdog agency of the world's developed countries.
The World Energy Outlook, the IEA's annual flagship report, published last Wednesday, predicted that oil supply would grow in developing countries and shrink in developed ones. "We think OECD oil demand has peaked," said Fatih Birol, the report's author.
"The OECD countries' role in the energy world is becoming less and less important."
All the growth in oil demand to 2030 is expected to come from developing countries, with China contributing 43 per cent and India and the Middle East each about 20 per cent.
The rest will come from other emerging economies in Asia. As a result, the share of rich countries in global demand will drop from last year's 59 per cent to less than half of the total in 2030.
But much of the diesel from the new Jamnagar plant is likely to head to Europe. Other refineries in Asia and the Middle East also supply countries beyond their local markets.
Alan Gelder, the author of the Wood Mackenzie refining report, said: "New refineries in Asia and the Middle East are competitive in terms of earnings per barrel because they use sophisticated technology to convert very low quality, cheap crude oil into high-end products such as petrol and diesel.
"This can outweigh the additional cost of transporting the products to markets far away. On top of that, refineries in Europe and US are more difficult and expensive to build."
In the Middle East, the boom in refinery building illustrates not only the increased demand from the region, but also the ambition of oil-producing countries' and others to benefit from more of the value chain by building plants that can process their particular oil.
However, this is not the best time to be building a new refinery, even in India and Saudi Arabia.
Wood Mackenzie's report concludes that only 30 of the 160 construction projects announced since 2005 will now go ahead, because demand has collapsed and credit has become scarce.
Asia and the Middle East are far from immune.
Neil McMahon, analyst at Sanford Bernstein, sees the refining malaise spreading well past US borders.
"European refining earnings in 2009 could well emulate the steep decline in US refining earnings seen this year, as much weaker economic conditions spread from the US to the rest of the world, particularly with a slowdown in non-OECD demand growth and manufacturing activity," he said in a recent report.
With such prospects, Jamnagar, which will be able to process 1.2m barrels of oil a day when completed, may well remain the giant of its kind for some years yet.