Chinese factories face headwinds in post-lockdown recovery

Chinese factories could struggle to keep up momentum as pent-up demand wanes and exports struggle. (AFP)
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Updated 09 July 2020

Chinese factories face headwinds in post-lockdown recovery

  • China’s passenger car retail sales fell 8 percent in June from a year earlier

BEIJING: Orders for infrastructure materials and equipment have helped industrial output recover faster in China than most places emerging from COVID-19 lockdowns, but further expansion will be hard to attain without stronger broad-based demand and exports.

Prices of copper and steel have surged and share prices for Chinese blue chips struck five-year highs, as state-funded infrastructure projects drove up production of cement, steel and non-ferrous metals.

Railway investment, for example, soared 11.4 percent in April-June from a year earlier versus a 21 percent drop in the first quarter.

Industries gained from pent-up demand for autos and electronics. The property sector, a pillar of growth, also showed signs of rebounding, with real estate investment expanding and sales quickening.

China’s factory-gate prices, still in deflation territory this year, may have turned positive on a monthly basis in June, said Yating Xu, senior economist at IHS Markit, in a sign of recovering demand for manufactured goods.

The optimism also led investment bank ING to forecast no more policy interest rate cuts from the central bank for the rest of the year. “We started to return to thin profit in May and became a bit better in June,” said an official at a state-owned steel mill in central China, declining to be named due to company policy.

“Our demand mainly comes from infrastructure so far this year, especially for steel rebar and medium plates,” he said. Steel rebars are mostly used in construction, and medium steel plates in ships and excavators.

Underpinned by robust infrastructure demand from China, the Baltic dry index, which tracks rates for ships ferrying dry bulk commodities and reflects rates for capesize, surged 257 percent in June from a low struck in May due to the freeze in global trade as a result of the lockdowns.

The rosy outlook stands in stark contrast to the dismal industrial landscapes of other economies still fighting COVID-19. Factory output plunged further in May from a year earlier in Japan, South Korea and the US. Euro zone manufacturing output fell by a record 28 percent in April.

The industrial recovery is expected to help China’s economy post a positive growth rate in the second quarter after contracting for the first time in decades due to COVID-19.

But analysts warn that factories could struggle to keep up momentum even as early as this quarter as pent-up demand wanes, exports struggle and heavy floods take their toll on industries and businesses in the Yangtze Delta.

The surge in demand for automobiles has been released and the auto market entered a traditional lull in June, said the China Passenger Car Association (CPCA) last week. China’s passenger car retail sales fell 8 percent in June from a year earlier.

In May auto sales rose for the first time after a two-year slump, fanning expectations of a strong V-shaped recovery in a pillar industry, supporting the broader economy. Auto deliveries to dealers also rose for the second straight month in May.

Exports, a sector that provides about 200 million urban jobs, are forecast to come under pressure in the third quarter, analysts say, as sales of COVID-19-related medical supplies slow and global demand stays soft.


China’s niche LNG buyers plan billion-dollar investments, double imports amid reforms

Updated 23 October 2020

China’s niche LNG buyers plan billion-dollar investments, double imports amid reforms

SINGAPORE: A group of niche Chinese gas firms is set to make waves in the global market with plans to invest tens of billions of dollars and double imports in the next decade as Beijing opens up its vast energy pipeline network to more competition.

The companies, mostly city gas distributors backed by local authorities, are ramping up purchases of liquefied natural gas (LNG) as newly formed national pipeline operator PipeChina begins leasing third parties access to its distribution lines, terminals and storage facilities from this month.

The acceleration in demand in what is already the world’s fastest-growing market for the super-chilled fuel is a boon for producers such Royal Dutch Shell, Total and traders like Glencore faced with oversupply and depressed prices.

Just last month, UK’s Centrica signed a 15-year binding deal to supply Shanghai city gas firm Shenergy Group 0.5 million tons per year of LNG starting in 2024.

“They’re very, very interested in imports — we’re talking to a lot of them already,” said Kristine Leo, China country manager for Australia’s Woodside Energy, which signed a preliminary supply deal with private gas distributor ENN Group last year.

China could buy a record 65-67 million tons of LNG this year and is expected to leapfrog Japan to become the world’s top buyer in 2022. Imports could surge 80 percent from 2019 to 2030, according to Lu Xiao, senior analyst at consultancy IHS Markit.

State-owned Guangdong Energy Group, Zhejiang Energy Group, Zhenhua Oil and private firms like ENN were quick to take advantage of the market reforms and low spot prices for LNG, said Chen Zhu, managing director of Beijing-based consultancy SIA Energy.

Their imports will reach some 11 million tons this year, up 40 percent versus 2019, more than 17 percent of China’s total purchases, said Chen.

For years such companies have worked to expand a domestic consumer base among so-called “last mile” gas users like tens of millions of households, shopping malls and factories, but they had to rely on state majors for supplies.

With greater access to distribution networks, they are now incentivized to build their own import terminals that could account for 40 percent of the country’s LNG receiving capacity by 2030, versus 15 percent now, Chen said.

Frank Li, assistant to president of China Gas Holdings, a private piped gas distributor, said his company has been in talks with PipeChina for infr structure access as it prepares to import LNG next year.

In Southern China’s industrial hub Guangdong, companies like Guangzhou Gas, Shenzhen Gas and Guangdong Energy hold small stakes in LNG facilities operated by China National Offshore Oil Company. They imported their first cargoes from these terminals last year.

Guangzhou Gas is set to import 13 LNG shipments this year, up from five last year, after “tough negotiations” with CNOOC won it access to terminals, said Vice President Liu Jingbo.

“The reform is bringing us diversified supplies, helping us cut cost,” Liu said.

Some companies also plan to beef up trading expertise by opening offices overseas, such as in Singapore, executives said.

“Naturally, companies will be thinking of growing into a meaningful player globally,” said a trading executive with Guangdong Energy, adding that his firm looks to Tokyo Gas , Japan’s top gas distributor and trader, as a model.

The rise of niche players will erode some market share held by state giants CNOOC, PetroChina and Sinopec, prompting them to scale back gas infrastructure investment and focus on global trading, while extending into retail gas distribution at home, officials said.