06:04 GMT +316 December 2017
Listen Live
    Workers repair pipes at the Yanlian Oil Refinery in Yan'an, 25 May 2005, north of Xian in western China's Shaanxi province

    Mainland China's Rising Manufacturing Profits Brighten Oil Demand Outlook

    © AFP 2017/ FREDERIC J. BROWN
    Business
    Get short URL
    1133

    Expansion in the Chinese manufacturing sector will drive international oil prices in the near-term, and as industrial profits rise, mainland China is well-positioned for domestic reinvestment, further gains in industrial output and demand for energy.

    Kristian Rouz – Despite the lingering worries about the slowing economic growth and the mounting debt problems, mainland China enjoyed a windfall in industrial profits in April, suggesting the nation's manufacturing sector is in for a sustainable pace of expansion. Global demand for manufactured goods has improved since the 2015 low, and the pickup in economic and consumer sentiment in both advanced and developing economies has brightened the outlook for the Chinese manufactured exports.

    These trends are also encouraging the oil bulls. After the OPEC and other major oil producers extended their output cuts through March 2018 this outgoing week, the projected shortages of crude oil in Asia have produced the expectations of higher oil prices in the near-term. The rebound in Chinese manufacturing further supports these expectations as mainland China's manufacturing is one of the key drivers behind Asia's energy market.

    Chinese manufacturing enterprises earned 14 percent more in April than a year ago, according to an official report released on Saturday. Albeit the Chinese industrial sector still finds itself amidst the ongoing slowdown, the robust gains in profits are an optimistic sign for the global producers of raw materials and energy.

    Earnings increased to 572.78 bln renminbi ($83.59 bln), according to a National Bureau of Statistics report. In March, Chinese manufacturing profits rose by 23.8 percent year-on-year, whilst year-to-date profits as of the end of April reached 2.28 trillion renminbi, which is 24.4 percent above the previous year's result. In 1Q17, manufacturing profits added 28.3 percent year-on-year.

    Mainland China's manufacturing activity, however, slowed in April, according to a separate report from the National Bureau of Statistics, with the manufacturing Purchasing Managers' Index (PMI) having dropped to its six-month lowest at 51.2 in April from the previous month's almost five-year high of 51.8. PMI readings above 50 indicate expansion.

    "Slowing growth of China's industrial profits is reasonable considering the fast growth experienced earlier this year," He Ping of the National Bureau of Statistics said. The reasons behind the slowdown in April's manufacturing activity are the contraction in manufacturing goods' prices and therefore factory gate deflationary pressures, the decline in raw material prices, rendering the finished product less expensive, and the slowing earnings in steel, chemical, and automotive industries.

    The growth in earnings, however, still remains impressive, whilst the overall manufacturing activity remains sustainable, rendering the Asian energy market more attractive in terms of profits. Oil prices have gained a boost on the news, even though mainland China's manufacturing could have performed better.

    The nation is currently experiencing a massive expansion in its construction sector, financed by the governmental investment and taking profits off the sky-high property prices. These developments are driving the demand for construction materials, including steel and cement, also driving the expansion in the industrial sector.

    The mounting debt issues and slow progress on a structural economic reform are still stirring some concern in the market. This week international credit rating agency Moody's Investors Service downgraded mainland China's credit ratings for the first time in almost three decades, citing the destructive effects of debt accumulation to economic growth.

    Still, after the 6.9-percent GDP expansion in 1Q17, mainland China is confidently heading for a 6.5-percent full-year growth.

    "We are now less pessimistic about short-term growth than we were just two months ago," analysts of the Tokyo-based financial enterprise Nomura Holdings wrote. Nomura expects the Chinese economy to expand by 6.7 percent this year and 6.2 percent in 2018.

    In line with the deleveraging efforts that the Chinese government has commenced undertaking recently, such a pace of growth boosts the near-term outlook for oil and other raw material prices. Yet, a stronger global growth and significant further improvements in consumer sentiment in the advanced economies are necessary to push the outlook for oil price to above $70/bbl.

    Related:

    Mexico Gives Green Light to Russia’s Rosneft, Lukoil to Bid on Oil Contracts
    Belarus Proposes Establishing Common Gas, Oil Market in Eurasian Economic Union
    Tags:
    Oil, GDP, industry, economy, OPEC, China
    Community standardsDiscussion
    Comment via FacebookComment via Sputnik
    • Сomment