Getting China back on track

China’s economic slump gathered pace in 2024, heightening concerns over commodity demand growth in the world’s biggest energy market. In response to a stagnant housing market, tightening credit and a faltering manufacturing outlook, the Chinese government recently announced its most far-reaching monetary and fiscal stimulus since the pandemic.

Can the stimulus package deliver for the domestic economy and bolster commodity markets? Gavin Thompson, Vice Chair EMEA, spoke to our China team about the expected impact on three key sectors.

First, oil demand

Conflict in the Middle East has inevitably spooked traders, but weakness in China’s economy is one of the factors keeping oil prices subdued amid wider threats to supply. Sentiment in H2 has been weighed down partly by expectations that Chinese oil demand won’t grow at all this year and may have peaked already.

WoodMac does not hold this view. Monetary easing should swiftly increase liquidity in the economy, helping manufacturers and property developers to access credit. This supports our forecast of a 0.4 million b/d increase in Chinese liquids demand in 2024, the largest global increase by any country. With similar levels of growth forecast for next year and 2026, Chinese peak oil demand doesn’t arrive until 2027.

Even so, risks to this outlook are skewed more to the downside. To succeed, China’s stimulus package must boost private property sales, currently at a five-year low across major cities, and reverse a manufacturing PMI that’s moving to contraction. Ongoing weakness in both sectors has contributed to a fall in diesel demand by 150,000 b/d, contributing to our downward revision in diesel demand in 2024.

Electrification is also cooling gasoline demand. EV sales in China have soared to over one million vehicles a month in the second half of 2024 – equivalent to around 30% growth over last year – as battery costs have continued to fall. As a result, gasoline bears the brunt, slowing to just over 40,000 b/d in H2 2024 year-on-year.

Second, LNG imports

China remains firmly at the wheel of rebounding Asian LNG demand. Despite economic headwinds, LNG demand is expected to exceed the 2021 record high of 80 Mt by 2025. Buyers continue to enter the market as China’s second-tier companies secure deliveries for Q4 as an anticipated La Niña weather system brings colder winter weather across Northeast Asia.

This shouldn’t underplay the inherent price sensitivity in China. If stimulus fails to adequately address the dents to industrial output and consumer confidence, tenders for LNG into 2025 will likely soften. With forward prices for both TTF and JKM rising, Chinese buyers have retreated from the spot market. Rising domestic production and Russian pipeline gas are also tempering LNG demand.

Looking forwards, we are closely watching both trucked LNG demand and Chinese hydro performance. Total trucked LNG volumes have recovered to 34 Mt, equivalent to 12% of total natural gas demand, but offtakers remain on edge over prices. Meanwhile, poor hydro performance boosted gas demand in southern China this summer, but improvements in reservoir-levels are already underway heading into winter.

Finally, China’s solar manufacturing sector

Chinese companies dominate global value chains across clean energy and electric vehicles, supported by policies aimed at increasing the world’s reliance on low-cost Chinese hardware.

Solar exemplifies this. Backed by government incentives and cheap finance, China’s staggering 1,500 gigawatts of annual module manufacturing capacity is equal to about 80% of the global total, Wood Mackenzie data shows. But despite installations of around 300 GW at home last year, the pace of growth is now slowing, and average utilisation remains ominously low.

Government support for grid infrastructure and battery storage investments is critical, while the recent cut to interest rates and looser capital and credit provisions will be welcomed by the sector. Stimulus and policies to support domestic module price increases can also help.

Beijing has announced policies to boost domestic demand by encouraging higher utilisation of solar and wind. In a move to boost the country’s green equipment sectors, renewable energy targets have been set for major consumers such as aluminium producers, known as “electricity-eating tigers” due to their huge power demand.

Accessing overseas markets is also getting harder as China’s solar manufacturers chase exports to resolve overcapacity and realise higher prices. Import tariffs on Chinese solar technology are increasing in the US, Europe and elsewhere as governments seek to protect domestic producers. Unsurprisingly, China’s solar manufacturers have just been through a bloodbath of an earnings season.

Many have argued that even its most ambitious economic stimulus since China closed its borders in 2020 is insufficient to address the underlying structural challenges the country faces. Rivalling China’s low-cost clean tech dominance is a monumental challenge for the rest of the world. Overcoming its own galactic levels of industrial overcapacity remains Beijing’s own greatest economic hurdle.

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