Impact Analysis of Emerging Markets:

Oil Demand in China and India Falling: The US Energy Information Administration recently released its report showing oil consumption by country updated through 2012. It appears that at current high oil prices, demand in both China and India is being reduced. In fact, continued high oil prices are a big reason behind the recessionary forces we are now seeing around the world. A big part of China and Indias problems is that they, like the United States and most of Europe, are oil importers. In this post, I also explain why there is a big difference in the impact of high oil prices on oil importing countries compared to oil exporting countries.

Figure 1. Liquids (including biofuel, etc) consumption for China, based on data of US EIA, together with Brent oil price in 2012 dollars, based on BP Statistical Review of World Energy updated with EIA data.

Figure 2. Liquids (including biofuel, etc) consumption for India, based on data of US EIA, together with Brent oil price in 2012 dollars, based on BP Statistical Review of World Energy updated with EIA data.

We can see from Figures 1 and 2 that at $100 per barrel prices, there is a definite flattening in per capita consumption for both India and China. Per capita consumption is used in this analysis, because if total oil consumption is rising, but by less than population is increasing, consumption on average is falling.

Industry Forecast - China

Growth Rates to Hold Steady Petrochemicals Demand Growth Sustained, But Not Dramatic

Source: BMI, National Bureau of Statistics, FAO, OICA, CAAM, China Statistical Yearbook Weak Demand Persists Demand is expected to be muted over our forecast period to 2018: China Worries: China's refined product imports could follow a downward trend - both a result of slower growth and an increase in domestic refining capacity as China slowly becomes a net oil products exporter. As the world's second largest oil consumer, slower Chinese demand would loosen up the global oil products market. Upward Fuel Price Revisions: Fiscal and monetary problems faced by developing countries where subsidies have fuelled a boom in oil consumption - could eventually make subsidies unsustainable. Some of the fastest growing oil markets have already adjusted fuel prices at the pump in order to correct economic imbalances: China, Indonesia, Vietnam, India and Brazil. The removal of subsidies is a trend that is likely to continue. Higher prices are likely to see consumption growth slow, and consequently oil import growth from these countries even as the global supply market loosens. Increase in Global Refining Capacity: The impact of this would be especially strong in the Asian market, thereby keeping margins depressed.

Africa:
Africa will see the fastest rate of regional refining capacity growth between 2013 and 2018 at 43.9%. However, the most significant growth in absolute volume will come from the Middle East - where Saudi Aramco is awaiting the start-up of two other large 300,000 barrels per day (b/d) refineries - and in Asia - where expansions continue apace in China and India. Meanwhile, Russia's refinery modernisation programme will see its plants continue to serve the market to make up for expected closures in Central Europe. Turkey - the fastestgrowing market for oil in Europe will also see significant refinery expansions.

Therefore, most of these markets will be adequately prepared to meet an expected increase in local fuel demand and will have spare capacity for export, especially the Middle East and Russia. Even China, which has overtaken the US as the world's largest oil consumer, is on its way to becoming a net fuel exporter owing to a continued increase in its domestic refining capacity. This will loosen some pressure on global supplies and, in turn, prices. Sub-Saharan Africa: The appeal of Sub-Saharan Africa has grown in tandem with its rising significance as one of the last frontier plays in oil and gas. Unsurprisingly, some of the biggest investments have come from China, which is also one of the largest importers of African crude oil. In 2012, China imported an average of 1.09mn b/d of crude from the region - or about 18.6% of the region's total crude production. Sub-Saharan Africa is China's second largest regional source of crude oil imports, accounting for about 20% of its total imports in the same year. With an oil-for-loans deal struck with Nigeria in July 2013, China's footprint in the region's oil and gas scene will not be shrinking any time soon.

Feeding The Dragon Crude Oil Imports To China By Region, 2009 To Year-To-Date ('000b/d)

*RHS graph: 1.0=100%. Source: China Customs General Administration, BMI

India:
The main challenge facing the petrochemicals industry will be the volatility of the rupee. The currency's recent collapse poses an upside risk to future cost rises, particularly when combined with any crude price rises, and could undermine operating margins. India depends on crude imports for over a third of its energy needs and as petrochemicals feedstock is primarily naphtha reliant, the industry is exposed to exchange rate fluctuations. If sustained, a weaker rupee could see lower output levels as buyers in a slower market will be unwilling to absorb price increases. Indeed, while the rupee was weakening and the cost of crude imports rose in local currency terms, polymer prices did not move significantly. This most recent episode of extreme currency weakness poses a downside risks on our projections for growth. Starting with the sell-off in the rupee, economic headwinds have accumulated quickly in India, forcing us to downgrade our real GDP growth expectations. The rupee's performance and the harsh response it has forced the central bank to enact suggest to us that private domestic demand will be much weaker than previously anticipated. As such, we now see full-year real GDP growth remaining flat at 5.0% in FY2013/14 (April-March). On the upside, industrial growth will strengthen in line with exports, which should support a recovery in petrochemicals over the medium-term, although it will remain below par compared to previous years. Overall, the operating environment in 2014 should be better than the previous year. Over the short-term, the situation will be difficult for domestic producers, although they will be protected to some extent from competition from petrochemicals imports which will moderate. Much of the growth in 2014 will be achieved through increasing domestic capacities. The structure of the domestic market is likely to be affected by the combination of an economic downturn and rupee depreciation.