China’s economic deceleration to hit GCC exports

The chinese economy has been decelerating throughout 2013. A year ago, GDP growth was close to eight per cent, reaching 7.5 per cent in the summer. The third quarter saw a rebound to 7.8 per cent, which is likely to be short-lived. This slowdown has impacted the world’s economy, in particular exporters of commodities. Chinese demand drives prices of many key commodities such as copper, aluminium, and soyabeans, which have fallen by 10.3 per cent, 12.1 per cent and 10.7 per cent, respectively, since the beginning of 2013. Oil is no exception: China became the world’s leading energy consumer in 2010, making up a fifth of global demand. Even though most of this energy comes from coal, Chinese needs for oil and gas are still massive. It currently uses around 10.6 million barrels of oil per day, a number that has been increasing by approximately six per cent every year since 1995. More than half of that consumption, around 6.3 million barrels per day, is imported and the GCC provides a third of that oil.

According to IMF data on exports by value (which have a delay of about three months), the region as a whole exported $90 billion to China in the 12 months ending in June. Fiftytwo per cent of the total (around $48 billion) came from Saudi Arabia. Second was Oman, accounting for 18 per cent of the total, more than $16 billion. The UAE, Kuwait and Qatar followed, with 11.5 per cent, 9.5 per cent and eight per cent of total exports, respectively, while Bahrain’s role in trading was irrelevant.

The trend in the commercial relationship between China and the GCC has been impressive: only in the last five years exports have grown 240 per cent. However, the flow of exports has been clearly affected by the gradual deceleration of the Chinese economy over the last year. A year ago, total regional exports to China were growing 40 per cent year-onyear. This growth rate has been steadily decreasing, reaching zero per cent growth in June. This deceleration hides two diverging trends within GCC exports. A group of countries is rapidly losing momentum. Oman exports are still growing although decelerating rapidly: a year ago growth rate was over 50 per cent and it has come down to six per cent. Kuwait is faring even worse: exports to China have been in contraction since February and, according to the most recent data, are now falling around 10 per cent on a yearly basis. Similarly, Saudi Arabia exported six per cent less in the 12 months ending in June than in the previous 12 months.

The Saudi case is slightly different because the kingdom plays the role of emergency supplier and its exports might be explained by changes in global supply affecting China. But, even though deceleration is taking place in the region as a whole, not all countries are being affected equally. Exports from both Qatar and the UAE are still rising fast, registering rates of 30 per cent and 20 per cent, respectively. The recent slowdown is partially readjusting market shares in the region, and Qatar and the UAE are the winners so far, due to a combination of appetite for gas and expanding resources.

One of the explanatory factors in this reduction of exports is simply the price of oil: between January and June of this year, Brent prices fell around 10 per cent. But demand in real terms from China was also softening, and this in turn was one of the main reasons for the reduction in prices. China represents only about 10 per cent of the GCC’s exports, which are very diversified geographically. But, in the same manner that Saudi Arabia sets world oil prices with only 12 per cent of global production, China drives demand. Another explanatory factor behind this trend could be Chinese efforts to diversify energy sources. For instance, aware of the rigidity of oil production in Kuwait, Chinese state-owned refinery Sinochem cancelled a preliminary agreement to supply its new refinery in Quanzhou, and signed a new deal with Iraq instead. Energy security is crucial for China and it has actively avoided developing a relationship of dependence with any country or region in the world. Saudi Arabia remains its leading source, followed by Angola, Iran, Russia, Oman, Iraq, Sudan, Venezuela, Kazakhstan and Kuwait. In terms of geographic diversification, it is impossible to do better.

The Chinese slowdown is not temporary. The country is in dire need of structural reforms that will require a reduction in its growth rate over the next few years. Chinese demand for oil will not contract any time soon, but it will grow less rapidly than it is generally assumed. China will prevent prices from plummeting in the next decade, but, with falling demand from the United States, the only factor explaining ongoing high prices is to be found in countries like Libya and Nigeria. In a more stable world, GCC countries would have to face serious fiscal problems and structural reforms in the very short term.