China's problems worsen Asian oil demand slump

China's problems worsen Asian oil demand slump

LONDON (Reuters): China's oil demand growth has slumped, dragging Asian consumption down, after the worst floods in 60 years amid currency worries, analysts said.

"The current plight of China does not help the region. Asia is already experiencing a sharp decline in oil demand growth," said Kang Wu, a China energy analyst at the Hawaii based East West Center.

He added that China and India combined were likely to see oil demand grow by 1 to 2 percent in 1998 while Japan was likely to see a fall in its oil imports.

Japan accounts for nearly a third while China a fifth of total Asia Pacific oil demand.

China, India, Japan and South Korea combined account for 70 percent of Asia Pacific demand.

Dennis Eklof, Senior Director for Asia Pacific, at Cambridge Energy Research Associates in London, said Asian oil demand in 1999 was forecast unchanged or even 100,000 barrels below the 1998 forecast.

"Prior to the Asian currency crisis, projections for 1998 were in the order of million barrels per day," he said.

"But during the crisis, forecasts were down to no growth or even a decline of around 100,000 bpd on growth rates." The floods in China would also hit demand growth, Eklof added.

Ken Miller, an analyst at Purvin and Gertz, projected demand growth in China to slow to 3 percent this year, down from last year's 15 percent. The company's latest estimate showed 1998 oil demand at 4.15 million bpd, up slightly from 4.02 million in 1997.

Next year, oil demand was expected to rise by only 1.2 percent to 4.20 million bpd.

Miller projected demand in the Asia Pacific region, including China to fall to 19.25 million bpd in 1998 from 19.64 million bpd in 1997 but to rise slightly to 19.77 million bpd in 1999.

China customs data released recently showed that crude imports in the period January to July were up by 7.9 percent on a year earlier at 19.12 million tonnes.

But the figures represented one of the sharpest drops in the rate of increase in year-on-year import growth since China became a net crude importer in 1996.

"The fall in the growth rate is placing doubts on whether China can achieve its 8 percent GDP target for this year," said Kang. "I think the government should revise its growth targets," he added.

China's state statistical Bureau said recently China's 1998 economic growth target of 8 percent remained attainable.

In the first half of 1998, Chinese economic growth fell to 7 percent, compared to the projected 8.8 percent per annum growth, analysts said.

"Asia has lost about four to five years of growth," said Eklof.

The Chinese floods have forced oil wells to shut, depriving it of oil revenue and putting more pressure on the economy, already slowing from a high exchange rate compared to its more competitive Asian neighbors.

Official figures from China showed that the floods have cost China $20 billion worth of damage, but some economists put the figure at $30 billion to $36 billion.

More than 1,800 wells were shut in Daqing, China's largest oil-producing region, and daily output was cut by 3,240 metric tons during the floods.

In Liaoning, site of China's third largest oilfield, Liaohe, daily output was cut by 750 tons. A total of 20,930 tons were lost since August 10.

China said it did not need to import more oil as domestic inventories were high. But the closure of oil wells meant a cut in oil exports to neighboring countries and a lucrative source of income.

"We have lost some oil revenues because of the floods which would curtail our expenditure on imports," said a senior official at state owned China National Petroleum Corp from Beijing.

"In addition, some plants and factories are closed and this has also curtailed imports," the senior official said.

A contracting Japanese economy also threatens to punish Asian oil demand growth further.

Miller at Purvin and Gertz forecast demand in Japan in 1998 to drop to 5.45 million barrels per day and at 5.59 million bpd in 1999 -- a far cry from demand in 1996 at 5.75 million bpd reached at the heights of its economic boom.

Oil demand in India has stayed relatively steady, analysts said. But they said political uncertainties caused by economic sanctions imposed by the United States and Japan following India's nuclear tests in May may push demand forecasts down.

Hong Kong's economic troubles and South Korea's poor appetite for oil would stem demand growth for the region further. But longer term there could be light at the end of the tunnel.

"Next year, the situation may improve a little with recovery expected in South Korea and Thailand but uncertainties in Japan, China and India may offset the projected growth," Eklof said.