China to buy a larger share of GCC’s exports
China to buy a larger share of GCC’s exports
China’s future depends on the capacity of the Gulf Cooperation Council (GCC) to provide a steady flow of oil for the next decades, and the Gulf countries will not find an similar source of rising demand in the years to come.
The deal announced in mid-August between Kuwait Petroleum Corp. (KPC) and China’s Sinopec to double the amount of daily exports constitutes a clear step in this direction.
More will come in Kuwait, Saudi Arabia, Qatar and the UAE.
The new deal secures 300,000 barrels per day (bpd) of Kuwaiti oil for China over the next 10 years, almost twice the amount of the existing contract, which is about to expire.
Under the new agreement, more than 10 percent of the Kuwaiti production will be destined to China.
Additional increases are expected and the local media quoted KPC’s executives suggesting that exports would increase to between 500,000 and 800,000 bpd in three years.
Saudi Arabia is already the leading source of oil for China, exporting 1.2 million bpd, or about 20 percent of the Chinese imports of oil.
Over the last 12 months, the share of Qatar’s exports heading to China grew from 5.5 percent to 6.6 percent of the total, and also UAE saw an increase in exports to China albeit more modest.
Paradoxically, these two regions do not consider each other preferred partners. Given the large amounts that China buys from the GCC, the country has a sizable negotiating power and imposes tough conditions on its providers.
Kuwait, for instance, has been trying to gain access to the distribution business in the Chinese domestic fuel market.
With that idea in mind, an agreement between KPC and Sinopec to build a refinery in southern China was signed in 2004.
However, the process has been fraught with difficulties and at this stage there are doubts about the involvement of Kuwait in the project.
Chinese authorities are reluctant to open strategic markets to foreign investors, even to strategic partners.
Similarly, the GCC does not offer the best conditions for Chinese importers.
Traditionally, China favors agreements with oil producers that allow the country to enter in the equity structure of the oil firms, or to get involved directly in the production process.
Gulf countries, with nationalized industries, professional management and abundance of resources to invest in exploration, do not need to offer these conditions to their clients.
Furthermore, China’s energy strategy is based on diversification of suppliers, and the Gulf is already the source of a third of China’s imports.
Finally, stability is a central concern for China, and the Middle East is going through a complicated period of geopolitical instability.
However, in spite of all these caveats, the commercial links between them is bound to increase. China requires vast amounts of energy to facilitate the ongoing transition to a consumer-oriented economy.
Oil deposits are already at full capacity and the ambitious plans to tap its large shale gas deposits are proving unrealistic.
The government last month acknowledged this reality by revising down its targets of shale and coal seam gas for 2020 from 160 billion cubic meters to just 60.
So, imported oil will remain the main solution to growing energy needs.
Competition to supply China is fierce.
Saudi Arabia is expected to lose share of Chinese imports in 2014 as other exporters like Iraq, Kazakhstan and Russia have been offering better conditions.
But, as the International Energy Agency forecasts in its latest energy outlook, global supply will be weak in the next decade.
Many fields are close to exhaustion, others are becoming increasingly expensive to operate, and the geopolitical situation in a number of producers is deteriorating.
Despite China’s reluctance, no other region in the world offers the combination of spare capacity and political stability that the Gulf countries have. — Prepared by Francisco Quintana, head of research at Asiya Investments, an investment firm investing in Emerging Asia.
Turkish lira hits record low, down 20 pct against dollar this year
ISTANBUL: The Turkish lira tumbled more than 5 percent on Wednesday before recovering some ground, the latest drop in a sell-off that reflects growing investor alarm over the direction of monetary policy under President Tayyip Erdogan.
The decline, exacerbated by stop-loss selling by Japanese retail investors overnight, brings the lira’s losses to more than 20 percent so far this year and puts it on track for its worst monthly performance since the 2008 financial crisis.
The sell-off has also increased expectations that the central bank may be forced to call an extraordinary meeting to raise interest rates before its next scheduled policy-setting meeting on June 7, as it has done in previous years.
“We expect the MPC to hold an interim meeting over the coming days to raise interest rates by at least 200bp,” Jason Tuvey of Capital Economics said in a note to clients.
“If policymakers refrain from tightening monetary policy, the risk of a disorderly adjustment and a sharp economic downturn (possibly recession) will mount.”
The lira was at 4.8500 at 0855 GMT from its close of 4.6746 on Tuesday. It earlier touched a record low of 4.9290. It also fell against the Japanese yen, amid talk Japanese retail investors were selling the lira as it hit stop-loss levels.
“We are bearish on the lira and always have been given its very weak external balances and with macroeconomic policy moving in the wrong direction as well,” said Kiran Kowshik, emerging markets forex strategist at UniCredit.
A self-described “enemy of interest rates,” Erdogan wants borrowing costs lowered to spur credit growth and construction, and he said last week he would seek greater control over monetary policy after elections set for June 24.
Economy officials told Reuters the government’s economic management team met at the start of this week to discuss potential measures, including possible steps by the central bank. Deputy Prime Minister Mehmet Simsek and Central Bank Governor Murat Cetinkaya attended the meeting.
Ratings agencies sounded alarm about monetary policy. S&P Global senior sovereign analyst Frank Gill told Reuters government finances could deteriorate rapidly if authorities failed to stem pressure on the currency and government borrowing costs .
Investors want to see decisive rate increases to rein in double-digit inflation, and Erdogan’s comments have reinforced long-standing worries about the central bank’s ability to do that.
Borsa Istanbul Group, the Istanbul stock exchange company, said in a statement on Wednesday it had converted its foreign currency assets into lira, aside from its short-term needs, in a step to support the Turkish currency.
The lira’s weakness was exacerbated by dollar gains against a basket of currencies, with investors awaiting the minutes of the Federal Reserve’s last policy meeting for hints on the pace of monetary tightening.
The yield on the benchmark 10-year bond rose to 15.30 percent at the opening from a last trade of 14.92 percent on Tuesday.
The main BIST 100 share index fell 0.22 percent to 103,105 points on Tuesday.