China And India Challenge EU Over New Carbon Tax
Both India and China continue to denigrate the Carbon Border Adjustment Mechanism (CBAM), or “carbon tax” as it has come to be known, proposed by the European Union. Meanwhile, the EU claims the new scheme is integral to its plan to achieve zero emissions across six earmarked industries. The new tax regime recently moved into what some experts dub the “transition phase.” Starting on October 1, importers of commodities, including steel, into the EU need to report the carbon emissions of those products. Beginning in 2026, those importers will also be subject to fees. The EU aims to impose the new tax on countries with significant carbon emissions. And while the carbon tax’s stated aim is to put EU producers on an even keel with their counterparts elsewhere, it will also add to the cost of steel, aluminum, and other goods. China’s View On the New Tax Remains Unchanged China has been speaking out against the EU’s carbon tax for some time now. However, several days ago, the country’s state-backed steel association went so far as to dub the tax “a new trade barrier.” Meanwhile, news agency Reuters reported that the China Iron And Steel Association (CISA) wanted more talks with the EU on the issue. According to the representative body, the new tax fails to take into account the different phases of development in different countries. It went on to say that the levy was against the principle of common but differentiated responsibilities. Indeed, some analysts predict that the carbon tax could raise the cost of steel products costs by anywhere from 4 to 6 %, if not more. This would be sufficient enough to render Chinese exports nonviable. India Also Disapproves of the Carbon Tax Like its neighbor, India also disapproves of the new EU tax, claiming that it would hurt its exports. Commerce and Industry Minister Piyush Goyal recently stated that the tax was “ill-conceived,” adding that the EU would realize this in the coming days and have to drop the idea entirely. Already, there have been meetings between the various trade bodies, manufacturers, and the government regarding the tax. As with China, India also pointed out how the CBAM fails to allot different values for different stages of production occurring in separate countries. The Indian minister also stated that the government would find a solution, most likely a domestic tax equivalent to the European tax. They could then use this new revenue for the green energy transition. He pointed out that this solution would indirectly help Indian companies who export bring down their carbon footprint as they move on to cleaner energy production. Eventually, there would be no need for a CBAM. While India may be mulling a domestic tax to get around the problem, China continues to hint at imposing similar trade protection measures to safeguard the interests of its own domestic producers. Either way, the new regime will likely usher in a new period of uncertainty, friction, and risks across the sector. India and China Alternating Between Proactive and Reactive Measures Both countries hope that the EU will re-visit the tax and possibly do away with it entirely. At the very least, they hope the organization will carefully reconsider the costs and operational challenges for downstream consumers due to the change in the import structure. At one point, India even threatened to move the World Trade Organization over the carbon tax. That said, China’s environment ministry recently directed its large industrial polluters to step up on their emissions reporting. According to Bloomberg, this was to prepare the industry for the carbon tax. To remain compliant, producers across seven sectors, including steel and aluminum, that release over 26,000 tons of CO2 annually have to verify their 2022 data by December this year. Conversely, India continues to question the logic of pricing carbon at the same level in India as in Europe. However, the government remains hopeful that if they can tax locally and put that revenue toward the green energy transition, they can negate any noncompetitive edge in Indian exports to Europe.
All Eyes On India, Not China, For Future Oil Demand
For decades, China has been the leading driver of global oil demand growth thanks to an economy that maintained a blistering growth clip for a long stretch. China’s economy managed to expand at nearly 10% annually ever since Beijing embarked on economic reforms in 1978, ballooning from $1.2 trillion by the turn of the century to nearly $18 trillion in 2021. But as the law of large numbers dictates, that era of exemplary growth could be in the rearview mirror. Economic pundits have predicted that China’s growth rate will slow down to between 2 and 5 percent in the coming years thanks to a declining population and slowing productivity. Further, analysts warn that China is set to give up its status in global oil markets to India, which is fast becoming the key driver of global demand growth. Over the past decade, the Asia-Pacific region accounted for 79% of global oil demand growth with China alone accounting for 58%. “China’s role as a global oil demand growth engine is fading fast,” Emma Richards, senior analyst at London-based Fitch Solutions Ltd, has told The Times of India. According to the analyst, over the next decade, China’s share of emerging market oil demand growth will decline from nearly 50% to just 15% while India’s share will double to 24%. Over the medium-term, commodity analysts at Standard Chartered have predicted that China’s oil product demand growth will slow to 516 kb/d in 2024 from 819 kb/d in 2023, the result of a fall in GDP growth to 4.8% in 2024 (from 5.4% to 2023). They have also forecast India’s demand growth will increase to 331 kb/d in 2024 from 268 kb/d in 2023, helped by favorable base effects and only a slight slowing in GDP growth (6.0% in 2024 from 6.1% in 2023). A rapidly growing population, which has likely surpassed China’s, is expected to be the main driver of consumption trends in India. Meanwhile, the country’s transition from traditional gasoline and diesel-fueled transport is expected to lag other regions, in sharp contrast to China’s skyrocketing adoption of electric vehicles and clean energy in general. “India was always going to exceed China in a matter of time in terms of being the global demand growth driver, mainly due to demographic factors like population growth,” Parsley Ong, the head of Asia energy and chemicals research at JPMorgan Chase & Co. in Hong Kong, has told Bloomberg. China’s adoption of electric vehicles has been lightning fast, a trend that does not bode well for gasoline demand in the world’s biggest car market. EV sales in China nearly doubled to 6.1 million units in 2022, compared with just 48,000 units sold in India, according to BloombergNEF. BNEF has revealed that EVs are already displacing over 1.4 million barrels a day of oil use globally. On its part, India is in no hurry to abandon traditional fossil fuels. Earlier in the year, India’s coal minister Pralhad Joshi announced that coal will continue to play an important role in the country’s energy sector until at least 2040, referring to the fuel as an affordable source of energy for which demand has yet to peak in India. “Thus, no transition away from coal is happening in the foreseeable future in India,” Joshi said, adding the fuel will continue to play a big role until 2040 and beyond. However, India is unlikely to replicate the mammoth scale of China’s expansive oil network any time soon, with the latter currently consuming three times as much oil. India’s oil consumption grew by ~255,000 barrels per day (bpd) during the first seven months of the current year, helping to grow total consumption to 135 million metric tons in the first seven months of 2023 compared to 128 million metric tons for last year’s corresponding period. However, that growth clip was considerably slower than 415,000 bpd posted in 2021/22 as economies rebounded from the coronavirus pandemic and lockdowns. By way of comparison, U.S. consumption growth was 1 million bpd in the first five months of this year; however, it is important to note that the U.S. typically consumes nearly 4 times the amount of oil as India does. Robust Commodity Demand That said, fresh data coming from the Middle Kingdom suggests that the economy still has enough momentum to remain the leading consumer of critical commodities such as oil and copper for years to come. Wall Street investment bank Goldman Sachs has reported that China’s demand for many major commodities has actually been growing at “robust rates,” thanks in large part to its booming clean energy sector. According to GS, China’s demand for copper is up 8% Y/Y, while demand for iron ore and oil are up by 7% and 6%, respectively, exceeding the bank’s full-year expectations. China’s green copper demand rose 71% in July from a year ago. China is the leading importer of oil and the largest consumer of copper, iron ore and aluminum in the world. “This strength in demand has largely been tied to a combination of strong growth from the green economy, grid and property completions. The most significant strength has come on the renewables side where related copper demand is up 130% y/y year-to-date, led by surging solar related demand,” the Goldman report has observed. China’s hegemony in global clean energy markets does not appear in any imminent danger. A June report by the Global Energy Monitor revealed that the country’s operating solar capacity has hit 228 GW, more than the rest of the world combined. China is now on track to double its wind and solar capacity a good five years ahead of its 2030 target.
Oil Demand In Doubt As Saudis Extend Production Cuts
Last weekend, Saudi Arabia said it would extend its voluntary production cuts of 1 million barrels daily of crude until the end of the year. At the same time, the kingdom left its official selling prices for Asia unchanged for deliveries in the last month of the year as refiners’ margins weakened. The two moves have prompted fresh doubts about the outlook for oil demand, with some expecting Saudi Arabia’s behavior might indicate uncertainty about it. Oil demand and its future has become one of the great conundrums of our time. Earlier this week, Saudi Arabia’s state energy major Aramco reported a 23% decline in profits for the third quarter, citing lower oil prices and lower sales—the latter a result of the voluntary cuts. The result was expected, and, in fact, it was better than analysts had predicted. Yet, it did raise doubts about the robustness of oil demand down the road. Reuters’ energy columnist Clyde Russell has become the latest to express these doubts, saying in a column this week that “The extension of the additional 1 million bpd cut is perhaps a tacit admission that crude oil demand isn’t as strong as OPEC has been expecting.” It may well be the case that OPEC had overestimated oil demand, yet it is also possible that it is impossible for any player on the oil market to keep stock and hold sway over all the factors influencing prices. The latest price decline, for instance, is taking place amid weakening doubts about Middle East supply disruption because of the Israel war with Hamas. Initially, the so-called war premium added a few dollars to the benchmarks, but as time passed and no disruption occurred, that premium began to run out of steam. Meanwhile, the oil market’s fixation with Chinese economic data yielded a result again when Beijing reported a contraction in exports in October. Despite a simultaneous increase in oil imports, the data apparently made traders think China is slowing down. They sold oil. “The data signals the continued decline in the Chinese economic outlook driven by deteriorating demand in the country’s largest export destination: the West,” City Index analyst Fiona Cincotta told Reuters this week. That’s an interesting comment, given that on Tuesday, the International Monetary Fund upgraded China’s economic growth outlook for both this year and next. The IMF now expects China’s GDP to grow by 5.4%, up from 5% in previous forecasts. As regards demand for oil in the West, the European Union recently held an emergency meeting to discuss the unenviable state of its fuel inventories and the possibility of setting up something like a strategic reserve of diesel. This does not exactly suggest a lower demand for oil and its products but rather a lower-than-desired supply. At the same time, however, OPEC exports are on the rise, which has pressured prices as it might suggest there is ample supply, quenching fears about a shortage. “OPEC crude exports are up by about 1 million barrels per day (bpd) since their August low as a result of seasonally lower domestic demand in the Middle East. It seems it is too much supply to be absorbed by oil consuming nations,” UBS analyst Giovanni Staunovo told Reuters this week. It might be more than just supply volumes, though. Chinese refiners are reducing their run rates because of declining margins, but also because the government has not issued additional fuel export quotas, Reuters reported on Monday. Phrased like this, the information suggests there’s healthy demand for fuels outside China, but Beijing is keeping the lid on quotas. The topic of oil demand and its outlook is definitely a fascinating subject of discussion. When the IEA last month predicted it would peak before 2030, it cited the mass adoption of EVs as a primary reason for it. In the weeks since then, it has emerged that the makers of these EVs are not exactly optimistic about their electric bet. Lower than expected demand is plaguing the industry, and so are various challenges ranging from higher insurance premiums to insufficient chargers, to weather-dependent performance. OPEC, meanwhile, continues demonstrating confidence in the health of demand for oil. This is, admittedly, nothing more than what one would expect from an oil-producing club, so in itself, it does not really matter. It does matter in the context of OPEC—and its OPEC+ partners—accounting for about 40% of global oil production. Maybe Saudi Arabia is worried about demand, and that’s why it extended its production cuts. Maybe it was because Riyadh wants even higher oil prices so it can keep building its fantastical $500-billion Neom project. It doesn’t matter, however. What matters is that should it want to, Saudi Arabia can remove more barrels from the market if need be. Such a hypothetical move could send the opposite of the desired message, namely, reinforcing uncertainty about demand, but ultimately, it’s the physical and not the futures market where actual demand is revealed as opposed to projections from often biased sources. And if the physical market is tight, prices will go up. Because whether or not it’s nearing a peak, right now, oil demand is on its way to another annual record—per the IEA, no less.
Oil imports decline 29% in April-September
India’s crude oil imports fell 29% year-on-year to $63.4 billion in the first half of 2023-24, with a declining trend in the average monthly oil import bill since the September peak of $93.54 per barrel, providing some relief to the exchequer amid ongoing elections and deteriorating geopolitical situation, according to official data. Import volumes rose in the same period. The average cost of imported oil fell about 20.6% to $82.34 a barrel in the six months to September from $103.68 in the same period last year, according to provisional data by the Petroleum Planning and Analysis Cell. The monthly average of import prices of crude oil in the current financial year started with $83.76 per barrel in April, then moderated below $75 in May and June. It firmed up again in July ($80.37) and peaked in September ($93.54) before dipping to $90.08 in October. The average price in the first seven days of November was $87.4 a barrel, below the previous month’s average. India’s gross petroleum imports – crude and products taken together – also fell year-on-year by over 28% in the first half of current financial year to $74.1 billion, compared to $103.2 billion a year ago.
IndianOil to expand its LNG terminal at Kamarajar Port in Chennai
Indian Oil Corporation Ltd. (IOCL) has proposed to expand the capacity of its liquefied natural gas (LNG) terminal located inside the Kamarajar Port, in Ennore, Chennai. At present, the terminal has the capacity to process and store 5 million metric tonnes per annum (MMTPA) of LNG. The company aims to double this capacity. This is because projected demand for LNG from the Ennore LNG Terminal is expected to increase beyond its present 5 MMTPA by 2025–26. No additional land would be required for this proposed project, since all facilities are to come up within the existing terminal complex area of 128 acres. The estimated cost of the project is around ₹30 billion. Construction of the import, storage and regassification terminal, which is situated inside the Kamarajar Port in Ennore, began in 2015, and commenced operations in 2019. The proposed project is expected to be completed in 54 months from the date of the Board’s approval. The proposed facility will have LNG storage tanks, regasification systems, LNG pumps and vapourisers. The existing terminal at present, receives imported LNG through ships at a dedicated LNG Berth constructed inside the Kamarajar Port and stores the gas in two tanks with capacities of 1,80,000 cubic metres each. The gas is stored at minus 162 Degree Celsius. The expanded LNG import and regasification terminal is expected to supply clean energy to help industrial growth in Tamil Nadu, Andhra Pradesh and Karnataka. The re-gasified LNG will be distributed to power generation plants, fertiliser plants and other industrial units. The gas will also be made available for city gas distribution, supply to vehicles, and piped natural gas to homes. The Ministry of Environment and Forests has prescribed Terms of Reference to Indian Oil LNG Pvt Ltd., a joint venture company of IOCL, to prepare the Environment Impact Assessment Report and to obtain environmental clearances.
GAIL alleges ArcelorMittal made misleading statements to seek additional LNG supplies
State-run GAIL (India) has alleged that ArcelorMittal Nippon Steel India (AMNS) made misleading statements to seek additional liquefied natural gas (LNG) supplies and has asked the Delhi High Court to dismiss a plea by the latter regarding supply disruptions. In a response to ArcelorMittal’s petition which Moneycontrol has accessed, GAIL said the steel manufacturer has not disclosed the complete facts of the case but sought to wriggle out of an agreement alleging economic duress. The statement by the Public Sector Undertaking (PSU) comes after AMNS moved the Delhi High Court seeking a stay on GAIL’s terminated LNG supply for its steel plant in Hazira, Gujarat. In the response dated November 6, GAIL said that the petition deserves to be dismissed and no interim relief, as sought for by the petitioner AMNS ought to be granted.
Cheaper Russian oil helped Indian refiners save $3.3 billion in first half of FY24
Indian refiners are estimated to have saved around $3.3 billion in the first half of the current financial year (FY24) through their purchases of discounted Russian crude oil, shows an analysis of India’s official trade data for April-September. Russia, which used to be a marginal supplier of crude to India before the war in Ukraine, was New Delhi’s largest source of oil in April-September, accounting for almost 39 per cent of India’s overall oil imports by volume and nearly 36 per cent by value. India is the world’s third-largest consumer of crude oil and depends on imports to meet over 85% of its requirement. Crude oil also tops the list of India’s merchandise imports by value. With Western buyers cutting oil imports from Russia in the wake of its February 2022 invasion of Ukraine, Moscow started offering deep discounts on its crude. Indian refiners have been lapping up these discounted barrels.