Oil Stays Thick in China Downturn

March 18, 2014 Leave a comment

Oil Stays Thick in China Downturn

ABHEEK BHATTACHARYABy

March 14, 2014 1:57 a.m. ET

As China’s slowdown becomes clearer, the ground is shaking beneath commodities bulls’ feet. Yet there is one corner of the commodities markets that can relax somewhat easier—oil.

Investors in iron ore and copper are on edge after poor Chinese exports and inflation data, not to mention the default of a local bond. Industrial output in January and February was weaker than expected, while fixed-asset investments rose at their slowest since 2002.

That is bad news for metals. China’s consumes two-thirds of the world’s seaborne iron ore and 40% of its copper. And prices have reacted. Copper slid 8% the past week in London trading to its lowest level since mid-2010.

Oil is a different story. While China accounts for 10% of global petroleum consumption and 40% of its growth, consumption of the black stuff is no longer driven by industrial investment in the way metals rely directly on housing, infrastructure and factories.

Instead, car-adopting consumers power China’s petroleum use. Despite an industrial slowdown the past few months, auto sales grew 11% in January and February. The shift has been going on for a while. Transportation now makes up nearly half of the country’s oil needs from 30% a decade before, according to Sanford C. Bernstein. Passenger cars account for almost two of every three vehicles running on Chinese roads, say consultants at LMC Automotive.

Some say, as the world’s largest net oil importer, a slowdown in China’s industrial production will hammer oil. An IMF report fingers Middle Eastern oil exporters such as Kuwait as among the most exposed economically to a China slowdown. But a rival study by Ludovic Gauvin and Cyril Rebillard at the French central bank raises the possibility that even a hard China landing would have a more modest effect on oil than metals, and thus the pain would radiate less to the Middle East and more to metal exporters such as Peru.

So long as China’s love affair with autos continues, oil should come out the least banged up in a China slowdown.

 

Filed under Macro Trends

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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