Huachuang Securities Zhang Yu: High oil prices lead to "clearing," and China's midstream share may "rise"

Zhitong Finance APP learned that Zhang Yu, chief economist at Huachuang Securities, published a research report exploring the possibility of China’s midstream manufacturing share increasing under sustained high oil prices. The report is mainly based on four logics: First, in terms of the global manufacturing sector’s external dependence on oil and gas imports, China is in a moderate position, with more manufacturing; China’s reliance on importing oil and gas is higher than that of China (itself). Second, based on the experience of the 2020 pandemic, external shocks often reshape supply chains and increase new demand. Looking at new demand, the current round of high oil prices may drive new demand that is concentrated in the energy substitution sector, where China is expected to benefit. Third, considering the two oil crises in the 1970s and 1980s, manufacturing powers with relatively low dependence on oil and gas imports (the United States) saw a clear increase in the midstream share during the oil crisis period. Given that the United States then implemented a relatively tight monetary policy to curb high inflation, China’s current inflation level does not require implementing a relatively tight monetary policy; the resistance to an increase in China’s midstream share may be smaller. Fourth, based on experience since 2000, each time oil prices surged significantly, China’s midstream manufacturing export share also rose to some extent; this may be related to the fact that China’s energy costs (such as industrial electricity) are less affected by oil prices.

The main views of Huachuang Securities are as follows:

I. Current situation: Global manufacturing depends on oil and gas imports

Global manufacturing generally relies on oil and gas imports. We use 2024 data to calculate each country’s net oil and gas import value required to produce manufacturing value added. The sample covers 50 economies, accounting for 92.5% of global manufacturing value added.

We find that economies accounting for 23.9% of global manufacturing value added have oil and gas as net exports and do not need to import oil and gas. But economies accounting for 68.6% of global manufacturing value added have oil and gas as net imports.

By economy, China: in 2024, oil and gas imports corresponding to 1 unit of manufacturing value added are 8.6%. There are 25 economies with higher reliance on oil and gas imports than China, including Japan (14.7%) and South Korea (18.6%) in East Asia; Vietnam (12.2%), Thailand (29.3%), Singapore (14.9%), and the Philippines (22.8%) in Southeast Asia; India (20.8%) and Pakistan (33.6%) in South Asia; Germany, France, the UK, Italy, Spain, Portugal, Belgium, Finland, Romania, Austria, the Czech Republic, Poland, and Hungary in Europe; South Africa, Egypt in Africa, and Chile and Peru in South America. The combined share of manufacturing value added of these economies in the world is 30.1%.

II. Historical experience: Analysis of how oil crises affect midstream manufacturing

(1) Review of the first oil crisis: 1973-1975

From the perspective of oil prices and crude oil consumption, the first oil crisis mainly affected the period 1973-1975. Among them, in 1973 and the first quarter of 1974, oil prices surged. Based on the World Bank’s statistics on the global monthly average crude oil price, the crude oil price was $2.08 per barrel in January 1973 and rose to $4.1 per barrel in December 1973. It further rose to $13 per barrel in January 1974, fell slightly to $10.6 per barrel in April 1974, and then, by December 1976, remained in a volatile range of $10–$12 per barrel.

Global crude oil consumption in 1974-1975 fell sharply. According to BP (British Petroleum)’s statistics, the growth rate of global crude oil consumption in 1973 was 7.92%; in 1974 and 1975, it dropped to -1.54% and -0.85%, respectively. In 1976, crude oil consumption returned to normal, with a growth rate of 6.46%.

From global midstream manufacturing (SITC, Category 7) exports in 1973-1975, based on sample data from 68 economies (sample economies account for about 82.4% of total global exports), midstream exports maintained high growth in 1973-1975, with an average annual growth rate of 25.5%, better than 19.7% in 1972 and the data in 1976-1977.

For the manufacturing powerhouses at that time (the United States and Germany, the top two in global export shares with a small gap), both countries’ midstream manufacturing benefited, but the United States benefited more than Germany. In 1972 (pre-crisis), the U.S. midstream share was 19.0%; in 1973-1975, the U.S. midstream share averaged 19.8%, for an increase of 0.8%. For Germany, the midstream share was 19.5% in 1972; in 1973-1975 it averaged 19.8%, for an increase of 0.3%. In terms of crude oil consumption, Germany experienced a larger shock: in the years when global crude oil consumption had negative growth in 1974-1975, Germany’s crude oil consumption growth rate average was 2.62 percentage points lower than that of the United States.

(2) Review of the second oil crisis: 1979-1981

For the second oil crisis, from the perspective of oil prices and crude oil consumption, the main impact was in 1979-1983. However, considering that the U.S. monetary policy was tightened significantly in 1980-1982, the later crude oil consumption impact may have come from the U.S. monetary tightening. We mainly focus on the first three years, i.e., 1979-1981.

In 1979, the oil price rose sharply. Based on the World Bank’s statistics on the global monthly average crude oil price, the crude oil price was $14.5 per barrel in December 1978 and rose to $39.75 per barrel in December 1979. In December 1980, it stayed at the high level of $39.75 per barrel; after 1981, it began to fall. Global crude oil consumption growth slowed in 1980-1983. According to BP’s statistics, global crude oil consumption growth was 1.26% in 1979; in 1980-1983, the growth rates were -4.33%, -3.67%, -3.08%, and -0.55%, respectively. Global crude oil consumption growth was negative for four consecutive years.

From global midstream manufacturing (SITC, Category 7) exports in 1979-1981, based on sample data from 68 economies (sample economies account for about 82.4% of total global exports), global midstream exports’ growth rate in 1979-1981 declined somewhat, with an average growth rate of 11.7%, slightly lower than the level in 1977-1978. The main reason is that starting in 1981, global midstream export growth slowed significantly, to 3.1%, while 1980 was 16.4%.

For the manufacturing powerhouses at that time, the U.S. midstream manufacturing share increased, while Germany was harmed. In 1978 (pre-crisis), the U.S. midstream share was 17.4%; in 1979-1981, the U.S. midstream share averaged 18.8%, for an increase of 1.4%. For Germany, the midstream share was 19.2% in 1978; in 1979-1981 it averaged 17.9%, falling in share. In terms of crude oil consumption, in the years of negative global crude oil consumption growth in 1979-1980, Germany’s crude oil consumption growth rate average was 1.75 percentage points lower than that of the United States.

III. Outlook: Scenario analysis of how high oil prices lift China’s midstream share

(1) Path 1: Supply chain reshuffling, shifting orders to China

In reference to the pandemic, it had a major impact on the global supply pattern. Taking machinery and transportation equipment as an example: in 2020, global total demand decreased, with a growth rate of -4.8%, the lowest since 2016. However, China’s exports of machinery and transportation equipment grew at 5.2%. When reflected in shares, China’s share of machinery and transportation equipment increased from 17.7% in 2019 to 19.6% in 2020. After the pandemic ended, although the share fluctuated, it remained in the 19%-21% range throughout—far higher than the 17.7% in 2019.

In this round, high oil prices and military conflicts may create large supply shocks for economies with insufficient energy security capacity; China may benefit due to its stronger energy security capacity, and its export share is expected to rise further.

(2) Path 2: Increased new demand—China is expected to benefit

In reference to the pandemic: the new demand generated was mainly in the field of epidemic prevention, with typical examples including textiles and related supplies (such as masks) and pharmaceuticals (such as antipyretics). Although global total export growth in 2020 was -7.2%, global export growth of textile-related goods was 7.2%, and global export growth of pharmaceutical-related products was 9.7%.

China benefits from increased global demand. For textiles and related goods: in 2020, China’s export growth was 28.9%, and the global share rose from 38.4% in 2019 to 46.1% in 2020. For pharmaceutical products: in 2020-2021, China’s export growth was 28% and 120.6%, respectively. The global share rose from 2.7% in 2019 to 5.8% in 2021.

In this round, high oil prices and military conflicts may bring new demand in areas such as energy security, national defense security, and supply chain security. Typical categories may include new energy, new-energy vehicles, power grid equipment, ships, and defense/military-related goods.

(3) Path 3: Increasing cost advantages to support share gains

The third path may be related to costs. China benefits because in its energy structure, the proportions of coal and non-fossil energy are relatively high; when oil prices fluctuate significantly, the impact on electricity prices is smaller. But in Europe and the United States, electricity prices are heavily influenced by crude oil price fluctuations. For example, in 2022, affected by the Russia-Ukraine conflict, the oil price benchmark rose significantly throughout the year. In Europe, electricity prices (PPI basis, representing industrial electricity, the same below) increased 61% for the full year. In the United States, electricity prices rose 90.5% for the full year. In China, electricity prices rose only 5.1% for the full year.

Since 2000, using oil price data and China’s midstream manufacturing share data, comparisons show that in years when oil prices surged significantly (for example, more than 30%), China’s midstream manufacturing share continued to move upward (compared with the previous year). A typical year is 2022: using the World Bank’s口径, the oil price benchmark rose 40.6% over the full year, and China’s midstream export share continued to increase by 0.1%. Considering that in 2020-2021, the midstream export share had already risen by a large margin due to the pandemic impact, it was relatively hard for 2022 to sustain further upward movement. Other years when the oil price benchmark rose by more than 30% during the full year also include 2021, 2011, 2008, 2005, 2004, and 2000. In all these years, China’s midstream manufacturing global export share moved upward.

In addition, considering that overseas gross margin rates for midstream manufacturing enterprises are much higher than those at home, and that midstream manufacturing enterprises have even greater cost advantages abroad compared with local overseas production capacity (as oil prices rise), the increase in share may be even smoother (with both the motivation for proactive exports and cost advantages for market expansion).