In the face of a global slowdown, China is hoping to bolster its domestic market with a continued urbanisation drive. The new government hopes that, by 2020, 60% of its population will be urban residents and is set to invest 40 trillion yuan ($6.4 trillion) between now and 2030 in new roads, houses and infrastructure to achieve this target.
Fresh from the China Development Forum, and buoyant on the promise of massive infrastructure spending, Doug Oberhelman, Chairman and CEO of Caterpillar Inc, was optimistic. “We saw some very specific statistics on urbanisation”, said Oberhelman, who remains “committed to manufacturing” in China.
Producers of OEM-specific lubricants should take notice. Ramping up urbanisation around 270 cities will require an army of off-highway and construction vehicles which, in turn, will mean a surge in demand for coolants, gear oils, greases, hydraulic and transmission fluids.
China has had urbanisation drives before, contracting large projects out to domestic companies like XCMG and Zoomlion. Typically, these companies have used lower level base stocks for engine oils and greases as emissions standards were relatively lax.
However, this urbanisation drive is almost certain to be 'cleaner' for a number of reasons: access to better technology through joint ventures; heavy investment in plants capable of producing Group’s II and III oils from Sinopec and PetroChina and tougher emissions standards.
Chinese OEMs are cleaning up their act both at home and abroad. Many heavyweight OEMs are becoming more export-oriented, sending machinery to developing nations such as South Africa or Brazil, both of which are introducing new emissions standards.
The Communist Party plans to raise the funds it needs for the program through a major overhaul of its bond market. The reforms, championed by premier Li Keqiang, will allow the government to sell municipal bonds, boost corporate and high-yield bond issuance and properly utilise foreign capital.
A potential downside to the glut of infrastructure spending is the worrying amount of local government debt, which some brokerages estimate will hit 16.3 trillion yuan this year – equivalent to 29% of GDP. Moody’s have already cut China’s governments Aa3 bond rating to stable from positive.
Local government debt is worrying because it is not guaranteed by the central government and the vast number of off-balance sheet loans makes it difficult to know what the true non-performing-loan ratio is. If a local government were to default, the debt would be monetised, leaving the people to foot the bill. This could be China’s very own subprime mortgage crisis in the making.
Massive infrastructure spending works well when your country is industrialising rapidly, but if debt outpaces growth too quickly the government could be painfully exposed to a serious debt implosion and that is bad news for every industry, including the lubes sector.
As ever, if you would like to comment on anything you have read in this Bulletin, or discuss how OATS can help you effectively market your lubricants to the China markets - simply contact Diana at DShen@oats.co.uk. We look forward to hearing from you.
Sebastian Crawshaw
Chairman, OATS