What Chinese oil consumption says to Latin America

 

China, the world's largest oil importer, imported record volumes last year, a feat that seems unlikely to be repeated in 2024 given the decline in arrivals in the first seven months.

So far, the market consensus is that the weakness in 2024 will be temporary, and that China's crude imports will resume an upward trend once the world's second-largest economy regains momentum.

The question remains whether there are structural changes in China's oil demand that could alter the trajectory of its fuel consumption in the future.

China's oil imports increased for 19 consecutive years from 2001, when they were just 1.2 million barrels per day (bpd), to 2020, when they reached 10.85 million bpd, the second highest total on record. Crude oil imports reach an all-time high of 11.29 million bpd in 2023. However, in the first 7 months of 2024, arrivals fell to 10.90 million barrels per day (bpd), some 320,000 bpd below the level of the same period last year.

This weakness is likely due in part to several structural changes that are altering the dynamics of China's fuel consumption. These factors and some other booming structural changes have the potential to reduce the growth of China's crude oil imports now and in the foreseeable future. However, before reaching such a conclusion, it is necessary to consider that the speed of production and consumption of the Chinese economy has not been the same in recent months, according to various indicators. Therefore, it is necessary to wait before drawing a conclusion.

If anything, perhaps the most important factor that could weigh on crude oil imports in 2024 and the years to come is China's transition to all-electric and hybrid cars and trucks. This month, Beijing announced an expanded trade-in program that will offer payments of 20,000 yuan ($2,805) to anyone who scraps an older car and replaces it with an electric vehicle. The subsidy is designed to get more gasoline and diesel cars off the road and replace them largely with electric vehicles, of which China is the world's largest producer.

On the other hand, China's diesel demand is also weakening, falling 11% to 3.9 million bpd in June from the same month in 2023. This is due to two factors: the slowdown in construction and the switch to LNG in trucks.

While construction and China's economic activity in general are likely to recover in the coming months, the trend towards LNG in trucks is also likely to accelerate. The issue poses a risk to the LNG market in the event of conflict at major global shock points.

China would prefer to move quickly toward using electricity in its transportation system, even if most of that power is generated from coal, which is more polluting, but it is also building a robust renewable grid and large battery factories that could help with residential stabilization and mobility.

It also helps China, which is working with sanctioned Russian, Iranian and Venezuelan crudes that are being imported at discounts, and that is partly what is affecting the markets.

Can imports rise?

Looking at it another way, i.e. looking for causes that could increase hydrocarbon consumption, the most important is the potential for China's economic growth to accelerate markedly, which would increase demand for diesel for transport, industry and construction despite the switch to LNG. Chinese refiners could also receive higher quotas to export refined products and increase crude oil imports to boost fuel production. More importantly, the trends that could potentially increase crude imports are largely speculative. The factors limiting the need for additional crude imports are already in place and are likely to intensify.

Impact on Latin America

The dynamics of Chinese oil consumption has a clear downward trend, as in many other countries, and this would ultimately affect the main crude oil exporters in Latin America, such as Brazil, Colombia, Ecuador and even the recovering Venezuela, which is indebted to China, but they would also benefit from a decrease in crude oil prices on the consumer side and from inflation. Governments with large revenues from crude oil and derivatives would benefit the least from this dynamic, especially those of Lula and Maduro, who want to rely on petro-rent as a stabilizing element. On the other hand, the booming electric vehicle and battery industry would reactivate other primary sectors in the region, but the Chinese surplus would also reach the Latin American market sooner rather than later.