MNI INTERVIEW: Long Conflict A Risk To China Chemical Output

While China’s 1.4-billion-barrel strategic oil reserve has over 100 days’ supply, more extended disruption to crude shipments due to the Middle East conflict could prompt reductions in Chinese chemicals production, and suspensions of refined oil exports, with Beijing likely to use its ties with Iran to push for peace talks, the director of the Department of International Commodities under the Chinese Academy of Social Sciences told MNI.

Two of China’s three major crude pipelines, bringing oil from Russia and Kazakhstan, are shielded from Middle East disruptions, Wang Yongzhong noted in interview. Though the scope for sourcing additional crude supplies is limited, as Russian oil is still under Western sanctions while production in Latin America and Africa is already near capacity, Wang still saw it as unlikely that China would be forced to switch some of its energy consumption from oil to coal in the near future. (See MNI INTERVIEW: Chinese Oil Reserves Enough For Short Iran War)

“China has perfected the diversification of its oil imports, and the importing pattern is unlikely to change significantly,” said Wang. The conflict will further encourage Beijing to expand its own energy exploration and production efforts, while accelerating its green transition, he added. 

Wang said he was cautiously optimistic that the macroeconomic hit to China from the conflict would be manageable. Should international oil prices exceed USD130/bbl, a scenario he saw as unlikely, domestic refined oil prices in China will be capped, he said, though consumers could begin to shift from using petrol cars to electric vehicles and public transport. Any reduction in chemicals production could have a knock-on effect on other areas, such as textiles and agriculture, he said.

INFLATION IMPACTS

Inflation will increase only moderately even if the conflict in the Middle East pushes crude oil over USD100 a barrel in coming weeks, with energy security a more pressing matter for China, Wang said. Analysts from Societe Generale estimated that a sustained increase in oil prices of about 10% would lift China’s PPI by around 0.4 percentage points and CPI by about 0.2pp, while shaving just 0.1–0.2pp off GDP growth.  

“China will also leverage its ties with Iran to play a role in promoting peace talks and de-escalating the situation,” said Wang. China’s foreign ministry this week called for an immediate cease to military operations and guarantees for shipping through the Strait of Hormuz, which carries about 20% of global oil and LNG supply.

Other Asian countries are likely to apply considerable pressure to Iran to reopen the Strait, Wang said, adding that U.S. President Donald Trump may also be influenced by fears that rising fuel prices could hurt Republican chances in midterm elections.

Supply disruption could persist even if the conflict ends quickly, he said.

“Middle East oil producers may have to shut down production a few weeks after the closure of the Strait of Hormuz due to limited storage facilities, and restarting production facilities is a complex and expensive process that will take at least several days,” said Wang.

China is well placed to cope with any disruption to LNG supplies, with decreasing heating demand at the end of winter and rapid expansion of domestic production, according to Wang.