China is now emerging from its worst period for low economic growth since the Asian crisis in the late 1990s, and the impact on domestic and international energy markets will be significant.
The expansion of China’s GDP in 2009 was limited to a mere 8.7%, down from 9.6% in 2008 and 13.0% in 2007, but safely above the threshold of 8% set by the government. Statistics from the last few months of 2009 show clearly that economic growth is accelerating: GDP grew at 10.7% in the last quarter of 2009; industrial output grew by about 19% in November and December, compared to a rate for the year of 11%; and implied oil demand in November was up 18.7% year-on-year, whilst electricity consumption in December was up 30% year-on-year.
These statistics demonstrate clearly the ‘success’ of the economic stimulus package. Though exports fell by 16% over the year, the economy was kept running by a surge of fixed-asset investment in infrastructure of some 45% compared to the previous year, financed by massive lending by the state banks. This investment was a key component of the government’s economic stimulus package. As I observed in my column written at the end of 2008, this investment was bound to lead to an acceleration in the demand for energy unless drastic measures were taken to sustain improvements in the energy efficiency of the energy intensive industries such as steel, cement and plate glass.
The rates of growth of consumption of all forms of energy seem have risen faster in 2009 than in 2008, as shown in the table below, though statistics for 2009 are necessarily provisional at this stage.
This surge of demand for energy has caused immediate challenges for China’s domestic energy sector, as discussed in last month’s column. Just keeping the lights on and the homes heated has required administrative measures to constrain energy supplies to industry in the short-term. To keep up with the underlying growth in demand for energy over the coming years will require ever higher levels of investment in new energy infrastructure. Coal production rose from 2,630 million tonnes in 2008 to 2,960 million tonnes in 2009, and is set to rise to as much as 3,300 million tonnes in 2010. China already accounts for 42% of world coal output, and this increase in output between 2008 and 2010 is equivalent to the total annual production from two major coal producers, Australia and Indonesia.
Demand for coal in China is driven mainly by the electrical power sector where coal provides more than 80% of the primary energy. The generating capacity of the power sector continues to grow at a rate of about 80 GW per year and is set to exceed 1,000 GW in the year 2011, when it will match that of the USA.
This sustained growth of demand for coal has tested to the limit China’s ability to expand its capacity to extract coal and to deliver coal to where it is needed. The last few years have seen a dramatic change in China’s status on world coal markets. In 2001, before the economic growth started to accelerate after the Asian crisis, China was a net exporter of coal, delivering a net 88 million tonnes onto world markets, about 9% of total internationally-traded coal. In 2007 and 2008 China’s coal exports and imports were approximately in balance. By 2009 China had become a net importer of about 85 million tonnes of coal per year, equivalent to about 7% of internationally-traded coal. The bets placed by Rio Tinto and BHP-Billiton a few years ago, when they decided to expand their coal mine capacity in Australia, are now paying off. Predicting the future is always dangerous, but provided China’s economy keeps growing at the current rate, we should expect the country to maintain its status as a net importer of coal for several years to come.
Crude oil imports also grew in 2009, 14% up on 2008. With total crude oil imports averaging about 4.1 million barrels per day over the year, and rising to 5 million barrels per day in December 2009, China has now overtaken Japan to become the world’s second largest importer of oil, after the USA. Domestic crude oil production fell marginally and imports now account for 52% of the country’s oil consumption. Total crude oil imports are set to rise by a further 10% in 2010 as vehicle sales continue to grow. Though 2009 saw a 53% growth in sales of cars and a 46% growth in overall sales of road vehicles, these figures are unlikely to be directly reflected in oil demand as the fuel efficiency of new vehicles is showing continuous improvement.
Natural gas consumption continues to grow rapidly as new domestic fields are brought into production and as new pipelines from western China are completed. Between 2005 and 2009 demand for natural gas doubled from 45 billion cubic metres per year to 90 billion cubic metres. The coming years are almost certain to see an acceleration in consumption as new import infrastructure is completed. The pipeline from Turkmenistan was commissioned in December 2009 with a planned capacity of 40 billion cubic metres per year. Another line is being built from Myanmar, and a number of LNG import terminals are under construction to add to the two already commissioned in Guangdong and Fujian Provinces. Possible gas import pipelines from Russia continue to be under discussion, but no confidence can be placed on any agreement being reached in the near future.
Thus the evidence from recent months shows that China’s economic stimulus plan has indeed led to a resurgence of economic growth and, more importantly in the context of this column, to a resurgence in the rate of increase in energy consumption. Given the constraints on domestic capacity to produce and deliver energy to end-users, this growth in demand is driving a rise in requirement for imported oil, gas and coal.
In 2005, the government set the target to reduce energy intensity by 20% between 2006 and 2010. Official statistics showed a decline in energy intensity of about 10% in the first three years, though some commentators suggest that this reflects an over-optimistic interpretation of the data. In the first half of 2009 official data showed a further 3.3% decline. Critical to appreciating whether China may indeed achieve its target for 2010 will be the data for the second half of 2009 which will show the extent to which the recent surge of economic growth is being achieved in an energy efficient manner. This in turn will affect perceptions of the viability of China’s recently declared ambition to reduce energy intensity by 40% over the fifteen years between 2005 and 2020.
Whatever the statistics show about short-term trends in energy intensity and emissions, there can be no doubt that China continues to take great strides in building new capacity to generate ‘lower carbon’ electricity: a further 10 GW of wind power was installed in 2009 and the target for 2020 has been raised to from 100 GW to 150 GW; at least five nuclear power plants are under construction and the target for 2020 has been raised from 40 GW to 70 GW; and more super-critical and ultra-supercritical coal-fired plans are being planned and built in China than anywhere else in the world.
Philip Andrews-Speed is Professor of Energy Policy at the Centre for Energy and Mineral Law and Policy at the University of Dundee, Scotland.