In recent days, China has released details of its new 5-year plan (its 12th such plan).
A key theme has been — in the words of Bernstein’s Neil Beveridge — “quality over quantity.”
Indeed, much of the rhetoric has been about making the boom more equitable, and taming surging prices.
In a report on the impact of the plan on the global energy market, Beveridge notes the declining GDP growth target (from 7.5% to 7%) and notes:
For energy investors there are two key points. Firstly, that GDP growth will slow over the coming 5 years and secondly that the energy mix will become lighter. As a result of slower projected GDP growth, energy growth is also projected to be slower. Despite planned improvements in energy efficiency, the ratio of planned energy growth to planned GDP remains close to the historic average of 0.6x. Ultimately energy demand will remain a function of GDP growth. Within the energy mix, there will be a continued move towards lighter fuels. By the end of the next 5 year plan, renewable will increase from 8% to 11.2% of the mix. Hydro, wind, nuclear and natural gas will continue to grow at double digit rates (12%) relative to fossil fuels which will decline as a percentage of the energy mix.
Ultimately, the latest XII plan has not impacted our thinking on gas which should continue to enjoy double digit growth over the next 5 years and be a positive for gas related companies. For oil demand, there is a little more uncertainty. Oil demand in China remains sensitive to GDP growth. While slower GDP growth will slow demand for oil, increasing disposable income, domestic consumption and expanding highways remain key parts of the plan and will encourage auto sales. While there is a move to encourage alternative fuel cars, this will have little impact over the next 5 years given technology gaps. As such China’s oil dependency will continue to grow which will continue to be supportive of the long term secular growth cycle for oil demand and oil prices.