Here's why China's demand for diesel is poised to hit record levels

With signals that China's economic recovery is gaining traction, demand for diesel is expected to rise significantly - powered by trucks and excavato
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File photo - Vehicles travel over a highway as a bridge stands under construction over the Yangtze River in downtown Chongqing, China. (Bloomberg)
File photo - Vehicles travel over a highway as a bridge stands under construction over the Yangtze River in downtown Chongqing, China.

China's diesel demand is likely to hit a record this year powered by trucking activity, as Beijing's aggressive stimulus fuels a construction and delivery boom and a speedy recovery in heavy machinery sales, analysts say.

The stimulus measures have helped to reverse the damage from the coronavirus crisis and a revival in diesel consumption is a signal that China's economic recovery is gaining traction.

Diesel, which accounts for some 30% of total Chinese oil demand, will likely expand around 2% in 2020 and is outperforming gasoline and aviation fuel, both of which have been harder hit by travel curbs and look set to contract, according to analysts at SIA Energy and FGE.

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"Diesel is the star performer supported by a slew of factors working in synergy...government stimulus spending on infrastructure, robust mining activities and e-commerce boom," said Seng-Yick Tee, senior director at SIA Energy.

A 2% growth will translate into 60,000 to 90,000 barrel-per- day growth in total diesel consumption this year, to a record of 3.8 to 4.1 million bpd, exceeding the previous record in 2019, according to Tee and Chen Jiyao, head of China client advisory with FGE.

Reuters' analysis of truck sales, road freight, newly constructed floor space and express deliveries shows strong demand for diesel that powers trucks, excavators and cranes.

The rebound began in March/April, shortly after China contained its worst coronavirus outbreaks and reopened the economy.

Truck sales in the world's largest freight market are set to hit a record of around 3.76 million vehicles in 2020, up nearly 18% from 2019, IHS Markit analysts said.

"Heavy-duty trucks turned out to be a dark horse," said Cassie Liu, IHS' Beijing-based specialist on heavy vehicles, who estimates that heavy-duty truck sales will top 1.4 million units this year following growth of more than 50% each month between April and June.

Apart from a ramp-up in building railways, homes and telecom networks, official regulation to retire a million older trucks with higher emissions by the end of 2020 and a crackdown on overloading for road safety also spurred sales, Liu said.

Booming online shopping during the lockdown also boosted diesel use. Express deliveries in June alone hit a record 7.47 billion, or nearly 3,000 deliveries every second, statistics bureau data showed.

That's a key driver for an estimated 18% growth this year in sales of light trucks, widely used for deliveries and moving of construction materials, said Shanghai-based Tao Gao, IHS Markit's light vehicle expert.

GASOLINE, JET FUEL

In contrast, IHS predicted that sales of passenger vehicles, 95% powered by gasoline, would drop 13% this year over 2019 in their third annual contraction.

Coupled with a slower expanding car fleet and a nearly 9% fall in gasoline use in the first half of the year, SIA Energy's Tee pegged annual growth at 0.7% while FGE's Chen and Wood Mackenzie's analyst Yuwei Pei forecast a 4% decline.

However, gasoline is expected to play catch-up next year to post 1-2% growth over 2019, due to the economic recovery and as purchasing power shifts to central and western regions from the wealthier coastal provinces.

Huge falls in global passenger traffic and concerns about a resurgence in infections have led analysts to predict a 22-30% fall in jet fuel demand in 2020 despite a recovery in domestic flights.

Other risks to oil consumption trends were geopolitical tensions that could affect trade, shifts in consumer behavior and a relapse in domestic coronavirus cases.

First Published Date: 15 Aug 2020, 09:00 AM IST
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