A senior Chinese official has claimed that its economic stimulus policies will drive a rise in global commodity prices this year – triggering fears of further price volatility for oil-importing Asia.
China’s deputy finance minister Li Yong said at a seminar in Bali at the weekend that markets should expect “commodity consumption and prices will rise” this year, on the back of the country’s resurgent growth prospects.
His belief that China’s economy has bottomed out has added fuel to a debate over whether the world’s production house can drive an upswing in oil prices.
The unexpected collapse in oil prices at the end of last year, as the world economy came crashing down, inflicted massive losses for many firms worldwide with imbalanced commodity hedging positions. China Eastern Airlines reportedly revealed last week a realized oil hedging loss of $122 million in the first quarter of this year.
But this year problems could be compounded by a recovery in commodities prices. As Emerging Markets went to press, crude oil prices were $53 per barrel – rising last week on back of renewed optimism about the global economy.
Lower oil prices have given businesses and consumers in Asia some breathing space. The region is a net oil importer and lower oil prices have partly compensated for slowing revenues in the teeth of the downturn. Tim Condon, chief Asia economist at ING Barings in Hong Kong, said Asian nations have budgeted for oil prices of around $60 per barrel.
China’s sky-high growth levels – and the weak US dollar – helped contribute to the commodity super-cycle even as the global economic outlook darkened in 2007 to mid-2008.
Yet Chinese oil demand only fell by 4.8% in the first quarter of 2009 compared with the same period of 2008, according to Platt’s, the energy information agency. By March, oil demand was essentially flat with 2008 – a time of high global demand.
Li’s outlook on commodities is bullish compared with the consensus among analysts. China’s growth-at-all-costs fiscal stimulus package will fuel demand for oil imports but low inflation, slow US growth and the strength of the US dollar will stabilize oil prices to between $40 to $60 per barrel this year, Condon said.
The prevailing view sees a prolonged period of depressed oil prices in contrast to the super-cycle of the global bull run. “We think [the super-cycle] is over – definitely, for a couple of years”, said Ruchir Kadakia, associate director at the Cambridge Energy Research Associates’ (Cera) Global Oil Group.
According to Paul Horsnell, head of commodities research at Barclays Capital, “a lot of very dangerous things are happening at the moment” as firms and policy-makers may assumptions based on low prices and companies stop developing new energy sources.
“We are taking precisely the actions that are likely to lead through to a full-blooded energy crisis in the next few years,” Horsnell said.