Your editor spent yesterday morning at the Platts LNG Forum in Sydney.
The audience contained a mixture of industry professionals and investment analysts.
Anyone who turned up hoping for a healthy dose of ‘China will spur growth in the Asian energy market for years to come’ was sorely disappointed.
In fact, we walked away even more convinced of what we had already started to think – that China (and India) won’t have the same influence over the global energy market as they’ve had over the metal markets.
But if that’s so, what does it mean for natural gas, oil, and Aussie energy stocks?
Despite what you may think, we’d say it means a very bright future indeed. And with the recent hammering taken by energy stocks, we’d say now could be the best chance you’ll ever get to buy energy stocks on the cheap. Here’s why…
China’s Energy Demands
Yesterday I showed you a chart of China’s share of global natural gas demand. As of 2009 it was about 4%. But what we didn’t have were the numbers for the last two years.
Had China’s demand for natural gas taken off like a gas-fired rocket? Was it in control of 50%, 60% or even 70% of global demand?
Not quite.
Hong Chou Hui, managing editor of Platts’ Asia LNG gave us just the info we were after.
In 2010, China’s natural gas demand was 4.8% of global demand. And in 2011 it was 5% of global natural gas demand.
In growth terms, China’s share has increased 25% in two years. But so what? It was starting at a low base. And when you think about it, given that the Chinese economy has grown so quickly, and the fact it’s consuming more raw materials than you can possibly imagine…it still only accounts for 5% of the world’s energy demand.
Again, compare those numbers to the chart we showed you yesterday, where China is by far the biggest consumer of iron ore, coal and copper.
When Chinese demand for iron ore, coal and copper drops, related commodities and stocks will drop too. In the case of BHP Billiton [ASX: BHP], Rio Tinto [ASX: RIO], and Fortescue Metals [ASX: FMG], they already have.
Inelasticity of Energy Demand
So what does this tell us?
It tells us that the energy market isn’t a China-driven market.
For that matter, it’s not necessarily an American, European or Australian market either. The energy market right now is probably the closest you’ll get to a fully diversified commodity.
But, what’s happened?
China’s economy has slowed, the Europeans look as though they’re heading for recession, the oil price has tanked and Aussie oil and gas stocks have taken a bath.
It doesn’t make sense. And we’ll show you two charts to explain why. The first is a chart of world oil consumption from 1980 to 2010:
The second chart is world dry natural gas consumption between the same dates:
You see the same pattern on both charts. A steady increase. Yes, there are some peaks and troughs, but even during 2008-2009 (the biggest global recession since the Great Depression), oil and gas consumption barely dropped.
That’s because there’s an ‘inelastic demand’ for energy. In other words, the demand is reasonably stable regardless of economic conditions.
Power stations need oil, gas and coal to produce electricity (even with the advent of alternative energy supplies).
Industry and individuals need to drive to work, or use public transport that relies on an electricity supply powered by oil, gas and coal.
And people and businesses need to warm or cool their premises…and cook meals…and do all sorts of other things that require fuel.
Yet when China shows signs of slowing down, energy prices and energy stocks take a hit along with every other resources stock.
(Not quite every resources stock. Our old pal, Diggers & Drillers editor, Dr. Alex Cowie was dancing on his desk on Wednesday as his recent stock pick clocked up a huge gain. You can check out the Doc’s investment advisory service and the stock he reckons has further to run by clicking here…)
Why China Doesn’t Matter to the Energy Market
And let’s say China’s economy slows down. What kind of impact will this have on energy markets? Yes, there will be an impact. But it won’t be energy Armageddon.
According to Martin Daniel, editor of Platts Power in Asia, industry accounts for 75% of China’s electricity generation.
This is twice as much as in Japan and most other western economies where less than 35% of electricity demand is for industry.
Based on that, Chinese industry accounts for 3.75% of global natural gas demand. And even we aren’t predicting that Chinese firms will switch off all their machines when the economy crashes.
Firms will carry on making stuff. And sure they may not use quite as much electricity and natural gas, but as the charts above show, the impact of even major economic slowdowns only has a negligible effect on oil and gas demand.
You don’t get many opportunities in your lifetime to buy unfairly beaten-down stocks. This is one of those times.
Cheers,
Kris
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