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Tuesday, July 20, 2010

Energy Demand and China: One Picture is Worth a Thousand Words

According to preliminary calculations from International Energy Agency (IEA), China surpassed the U.S. as "the world's largest energy user." Multiple media outlets covered the story, including the WSJ:
  • China Tops U.S. in Energy Use: China has passed the U.S. to become the world's biggest energy consumer, a milestone that reflects both China's decades-long burst of economic growth and its rapidly expanding clout as an industrial giant.
Bloomberg Businessweek also covered the story, including skepticism from Chinese authorities around IEA data.

Here is the meat of the IEA press release:
  • IEA calculations based on preliminary data show that China has now overtaken the United States to become the world's largest energy user. China's rise to the top ranking was faster than expected as it was much less affected by the global financial crisis than the United States.
  • For those who have been following energy consumption trends closely, this does not come as a surprise. What is more important is the phenomenal growth in demand that has taken place in China over the last decade; also prospects for future growth still remain incredibly strong. Since 2000, China’s energy demand has doubled, yet on a per capita basis it is still only around one-third of the OECD average. Prospects for further growth are very strong considering the country’s low per-capita consumption level and the fact that China is the most populous nation on the planet, with more than 1.3 billion people.
  • China’s demand today would be even higher still if the government had not made such progress in reducing the energy intensity (the energy input per dollar of output) of its economy. It has also very quickly become one of the world’s leaders in renewable energy, particularly wind power and solar energy, and paved the way for a big expansion of nuclear power.
The IEA release includes the below telling graph (very interesting, but this is NOT our "one picture"):

Here's one more tid bit from an AP article with commentary from Peabody Energy (BTU) regarding China's demand for coal:
  • China also has just announced a $30 billion investment in the nation's transmission grid system to further expand electricity availability. China's power demand growth in June was double-digit again, and year-to-date generation is up a robust 19 percent.
How can we quickly understand what's happening in China with respect to energy demand and potential impacts on global commodities/trade?

We can again look to the shipping sector, but this time to drybulk sector. Navios Maritime Holdings (NM), a company we've been tracking, included the below slide in a March investor presentation (click to enlarge):

We think this "picture" is worth a thousand words and, therefore, won't add too much more, aside from answering the next question that naturally follows from the picture: where is all of this coal coming from and which countries are coal rich?

Thanks to Wikipedia we have the following on "coal production trends" -- coal reserves:

AND, production and exports by country (click to enlarge):

Finally, for good measure, we'll throw in one more slide from the Navios deck:

As we conveyed in our "Big Bad Wolf" post last weekend, we think the Chinese train left the station (quite some time ago) and expect continued development to bring incremental demand for imports from the U.S., Europe, and many other regions. This should be support global GDP growth, while raising questions for the global environment (a whole other topic). One caveat: as some observers point out, we acknowledge that some areas of the Chinese economy -- such as real estate -- are arguably overheated and present some risk to China's growth profile.

As a brief aside, the IEA Web site has a plethora of helpful energy data and information for those interested. We used some IEA data in our Alternative Energy presentation from last September.

Happy investing,

Jeffrey Walkenhorst

Disclosure: none.

© 2010 Jeffrey Walkenhorst
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