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A recurring theme from many of our recent meetings and engagements is around the role of China in energy markets going forward. Here are nine China-related thoughts in the context of our Geopolitical Super Vol macro framework.
* China’s massive trade surplus with the rest of the world is not sustainable.
* Industrial diversification away from China is inflationary, and at least in the short-term, higher in energy intensity than the status quo.
* From the perspective of energy, peak trade surplus by China likely coincides with peak energy usage in the country. A plateau in its oil and coal demand seems possible in coming years under the assumption that the rest of the world makes headway diversifying manufacturing away from China.
* Whether China can transition to more of a consumer market from a heavy industry, export oriented economy is a question that is beyond our ability to intelligently comment as an energy specialists and is the key to its long-term energy growth potential.
* We do not believe peak or plateauing oil demand in China means peak global oil demand is here, as the other 6 billion people on Earth outside of China still have massive unmet energy needs.
* China is still building coal plants even as it is meaningfully ramping solar, wind, batteries, and nuclear. This is a real lesson the U.S., Canada, and Europe ought to embrace. Build and definitely don’t close baseload power generation as you are adding renewables and other new technologies.
* Increased volatility in China oil imports likely mutes the extreme ends of the oil price trading range, as we expect the country to add to strategic stocks on pullbacks toward $50/bbl or lower with reduced imports when oil is trading above $90/bbl.
* For companies in the oil value chain in particular, cash is king.
* For the power value chain, higher inflation means higher borrowing costs. All the turmoil in the world creates supply chain risk.
Let us conclude with this takeaway: China did not matter to energy analysis prior to 2004 and may become less relevant within the next few years (to be clear, China will remain important but may no longer be the top driver is our point). The Asia Tigers stopped mattering in 1998. Japan and Western Europe stopped mattering a few years before that. So if we think about macro eras, which countries are the driver evolve as well.
There is only one long-term direction of travel for the world and that is one of more prosperity and progress over time, even as the path can sometimes be rocky. There are still at least 6 billion people ready to move up and to the right economically. The 2030s may well be more about some or all of those other 6 billion people than it will be about China.
📜 Credits
* Intro & Outro music: Wolf Hoffman: Concerto for 2 Cellos in G Minor, Rv 531: I. Allegro Moderato.
* This episode of Super-Spiked Videopods was edited and produced by Veriten Productions.
⚖️Disclaimer
I certify that these are my personal, strongly held views at the time of this post. My views are my own and not attributable to any affiliation, past or present. This is not an investment newsletter and there is no financial advice explicitly or implicitly provided here. My views can and will change in the future as warranted by updated analyses and developments. Some of my comments are made in jest for entertainment purposes; I sincerely mean no offense to anyone that takes issue.
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