Is the China bubble really coming to a head?
Extraordinarily high interbank rates, of 25%, resulted in the freezing of interbank lending is similar to the pre-Lehman Brothers circumstances in Sept 2008. What will the impact be on the real economy? Already the new Chinese government is trying to rein-in the excessive lending that has occurred and bring about a soft landing. Meanwhile the reaction in the stock markets is predictable!
The forecasts for the economy are being revised downwards. HSBC’s flash PMI for June was reported at 48.3, signalling a contraction and a 9 month low. They also reduced the GDP growth forecast to 7.4%. While the Eurozone would love to have such an elevated rate, 8% has been seen as the growth rate essential to maintain employment.
We should not lose sight that automotive output growth is still 9% year on year albeit down from 14% the previous month! It may be slowing, but it is not yet disastrous!
On the lubricants front, despite initial objections from domestic lubes producers, refineries and automakers, China is beginning to embrace the National IV standard (CN4). At many firms, the technology and capabilities required to produce high-grade lubricants is improving rapidly and exponentially. Convincing consumers to pay a higher premium, however, is a different battle.
Daqing is China’s largest oil field and home to one if its biggest refineries. The field reported that, of the 97,000 tons of crude processed in the first half, almost 80,000 tons were used to produce high-grade base oil for lubricants capable of meeting the National IV standard.
Using a PIC-812 isodewaxing catalyst, a technology it developed jointly with the China Petrochemical Institute, Daqing has been able to significantly improve the yield of quality base oils. Maoming Petrochemicals Corp, a lubes producer, is also boosting its precentage of grade lb (China’s second-highest base oil grade) output and usage.
National IV standard is being implemented partly as a result of complaints from ecologically-minded urban dwellers, in an attempt to curb the stifling pollution in many of China’s biggest cities. While affluent citizens of Shanghai or Beijing may be willing to pay a little extra for greener lubes, costlier products are more likely to have a negative impact on those from low-income, rural provinces. Margins for a Chinese truck driver are razor-thin. After accounting for subsistence, rising fuel costs and extortionate toll fees (which for a 3,000km trip from Guangzhou to Beijing can run above 10,000 yuan ($1,630) a driver might generate only 1,200 yuan ($195) income. When faced with the decision to stump for an expensive, greener lube or grab a cheap tin of low-grade oil, the choice will be obvious.
While many new trucks and motorcycles have API CF-4 equivalent lubes as their factory fill, a recent survey found that only 70% of vehicles were using the National III standard, with less than 50% of diesel-powered commercial vehicles using the same specification. The long-term, destructive pattern of low-quality service fills and top-ups is well understood by lubes producers and marketers, but still requires considerable consumer education.
The pattern will be a hard habit to break. If the price of oil continues to drop, as it has been for the last month on poor manufacturing data from China, lubes producers could pass the savings on to their customers. This is unlikely.
Chinese producers will need to work hard to convince consumers that better lubes are an investment, not a cost. But, there is also a role for China's legislators in offering incentives for using better lubes, rather than crippling the companies who produce them with increased costs against a backdrop of low inflation. The overall benefits to the environment, vehicles and the health of the nation's population will provide a more than adequate return on investment.
As always, to comment on anything you have read in this month's Bulletin, or to discover more about the ways OATS is helping to enhance the quality of lubricants production and marketing, please don't hesitate to contact Diana Shen. We look forward to hearing from you.
Please feel free to share the OATS China Bulletin with your colleagues and contacts.
Sebastian Crawshaw
Chairman