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Upside Seen for Chinese in Oil Prices

Posted on: Tuesday, 6 September 2005, 09:01 CDT

High oil prices are cutting into profits for many Chinese companies, but some economists are predicting that China's export juggernaut will gain momentum as cheap labor allows Chinese manufacturers to absorb rising energy bills more easily than foreign competitors.

Analysts also expect sustained high oil prices to increase foreign investment as overseas manufacturers switch more production to China. And, with motorists in the United States and Europe paying more at the gas pumps, low-cost Chinese textiles and consumer goods are expected to become even more attractive to cash-strapped consumers.

High oil prices globally have been aggravated by the effects of Hurricane Katrina, which has caused fuel shortages in the United States after shutting refineries and devastating oil rigs in the Gulf of Mexico last week.

"Cheaper is going to be better," said Enzio Von Pfeil, the chairman of Commercial Economics Asia, who is based in Hong Kong. "More expensive, midrange products are going to get hit."

China is the world's second biggest consumer of oil behind the United States and imports now account for almost half of its oil needs. But despite oil prices rising almost 55 percent this year, China's exports are booming.

Chinese customs figures show that exports jumped by 32 percent for the first seven months, to $358 billion

Chinese exports in July alone increased by almost 29 percent compared to the same period in 2004.

"With the world facing historically high crude oil prices, China's labor cost advantage becomes even more precious because no other country can control operating costs and keep them as low," said Ma Shang, an energy industry analyst in Beijing with Fitch Ratings.

Ma said he believed that strong exports and the anticipated inflow of foreign investment should ensure that overall Chinese economic growth remained in excess of 9 percent.

Oil prices fell on Monday after industrialized nations agreed last week to release 60 million barrels of crude from their strategic stockpiles to help stem the U.S. fuel shortage. In London, Brent crude for October delivery fell $1.39 to $64.67 a barrel in afternoon trading. To some analysts, China and other oil importing economies in Asia have been surprisingly resilient this year in the face of rising energy prices.

The Asian Development Bank's president, Harukiku Kuroda, said Friday that rising oil prices would normally be expected to crimp economic growth in Asia. "But, interestingly and surprisingly so far, not much slowdown has been seen, particularly in India and China," Kuroda said in Singapore. "Their economies are continuing to grow."

However, most economists contend that falling profits in China will eventually hurt economic growth.

Sectors dependent on energy, like China's major airlines, have been particularly hard hit by rising fuel costs, with Air China, the country's flagship carrier, expected to report a drop in first-half profit this week.

China Southern, the country's biggest airline, last month reported a first-half loss of 907 million yuan, or $112 million, when the price of jet fuel increased almost 35 percent in the period. This followed a profit of 266 million yuan a year earlier.

Jet fuel costs have continued to climb and reached more than $84 dollars a barrel on Friday, an increase of 74 percent for the year.

Oil refiners and petrochemical industries are also suffering because they buy their oil at international market rates but the price they sell to consumers is tightly regulated.

Chinese oil refiners have this year been lobbying the authorities to impose steeper retail price increases to offset mounting losses.

"For Chinese refineries, every time they sell a ton of gasoline or diesel, they lose 1,000 RMB," Ma said of renminbi, as the yuan is also known. "The whole refining industry is hurting."

Some analysts say they believe that refiners have been cutting back output and deliveries to retail outlets rather than continuing to suffer these losses. This could explain the sudden fuel shortages now affecting some of the booming manufacturing centers in southeastern China.

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OPEC president sees relief

Oil production by OPEC is surpassing demand, and this will eventually bring down prices, according to its president, The Associated Press reported from Kuwait City. Sheik Ahmad Fahad al- Ahmad al-Sabah, who is also Kuwait's energy minister, said that the Organization of Petroleum Exporting Countries' output of 30.4 million barrels a day was more than the prevailing demand and that this was helping to increase stocks of oil, which should eventually calm prices. His comments were reported by Sunday by the Kuwait News Agency.

Source: International Herald Tribune

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