China Self Reliance in Energy
Gives Competitive Advantage in Hormuz Chaos
A report examines how the war in Iran
has weighed on Asian economies, but left China in a more advantageous position.
·
The
conflict involving Iran and the disruption of shipping through
the Strait
of Hormuz have
sharply increased global prices of energy, fertilisers and chemicals, hurting
many economies.
·
A
report by The
Asia Group says China has emerged relatively stronger by
avoiding the worst effects of the energy shock.
·
China's
oil
and gas reserves,
expanding clean
energy capacity, and
government intervention helped shield its economy from inflation and supply
disruptions.
·
The
report says Beijing effectively used price
controls, export restrictions, subsidies and currency management to absorb external shocks and maintain
manufacturing competitiveness.
·
The
crisis has also enabled China to project itself as a stable economic partner, while boosting global demand for its solar panels, batteries and electric
vehicles,
sectors in which it is the dominant supplier.
·
Kurt
Campbell said
it is difficult not to conclude that China
has been one of the major beneficiaries
of the crisis.
·
Asia
remains highly vulnerable because around 80% of its oil and 90% of its natural gas
imports pass
through the Strait of Hormuz.
·
Beyond
energy, disruptions have affected supplies of naphtha, helium, and sulfur, which are critical for plastics,
semiconductors, medical equipment, metals and electric vehicle batteries.
·
Although
the Trump
administration
announced a peace agreement, renewed exchanges between the US and Iran have
kept uncertainty high, with higher shipping insurance costs and longer trade
routes expected to persist.
·
China
still depends on imported sulfur, helium and naphtha,
but it has cushioned the impact by drawing on strategic reserves and
restricting refinery exports.
·
China's
oil
imports fell by more than 30% year-on-year in May, leaving additional global oil supplies
available for other countries.
·
The
report says India is facing rising fertiliser, fuel and food prices, increasing political pressure on the
government, while higher fertiliser costs and the possibility of a weak monsoon
threaten the agricultural sector.
·
In Japan, higher energy costs have increased
fiscal pressures, while shortages of aluminium and naphtha have forced
production cuts and delays in the automobile industry.
·
Several
Southeast
Asian
countries have experienced severe economic impacts:
o The Philippines declared a national energy emergency and
witnessed labour strikes.
o Indonesia saw nickel producers cut output due to
sulfuric acid shortages, while tourism in Bali declined because of higher airfares.
·
Many
Southeast Asian countries are increasingly turning to China for solar panels, battery storage systems and
electric vehicles,
driving higher Chinese exports.
·
The
report warns that the energy crisis could weaken Southeast Asia's attractiveness as an
alternative manufacturing base,
slowing efforts by multinational companies to diversify production away from
China.
·
The United States has been less affected due to its
domestic energy production, but supply chain disruptions for semiconductors,
transformers, copper and other critical materials could delay the expansion of AI data centres.
·
The
report concludes that if the Hormuz crisis continues, countries such as Japan and South Korea could face worsening shortages as their
strategic fuel reserves become increasingly depleted.
The
war in Iran and the effective closure of the Strait of Hormuz have inflicted
deep economic pain on many countries and sent some industries into a tailspin
as they struggled with higher prices for energy, fertilizer and chemicals.
It
may also have given China a competitive edge.
While
the energy shocks and supply chain challenges stemming from the war have posed
some challenges for China, the country has largely managed to avoid the kind of
inflation spike and cascading economic and political effects that have
afflicted many other nations.
The
reason: China’s oil and gas reserves and clean energy supplies have allowed it
to avoid the worst of the effects, according to an analysis published Monday by
the Asia Group, a Washington-based consulting firm. That is reinforcing the
country’s position as a competitive place for manufacturing.
The
firm looked at the effects of disruptions in the strait and how it affected
Asian economies and politics. One main takeaway is that the crisis has
demonstrated Beijing’s ability to use prices, export controls, subsidies and a
managed currency to absorb shocks in its economy.
The
disruptions spurred by the United States have also helped Beijing to promote
itself to other countries as the stable partner of choice, and accelerated
global demand for clean energy technology like solar panels, batteries and
electric vehicles, industries that China dominates.
“It’s
hard not to come to the conclusion that China is a winner here,” said Kurt
Campbell, the chairman and co-founder of the Asia Group and a former deputy
U.S. secretary of state in the Biden administration.
Disruptions
to energy production and shipping stemming from the war in Iran have raised the
cost of oil and gas globally over the past three months. Asia, the world’s
biggest manufacturing hub, is particularly dependent on the Middle East for
energy and industrial products. Asia sources 80 percent of its oil and 90
percent of its natural gas through the Strait of Hormuz.
But
the impacts have gone far beyond the energy market. The war has also impeded
the production and movement of certain critical products — like naphtha, used
to make plastics and chemicals; helium, used in semiconductor factories and
M.R.I. machines; and sulfur, which is needed to
refine copper, nickel and critical minerals needed in electric vehicle
batteries and electrical systems.
The
Trump administration says it has reached a peace deal, and traffic had been
picking up in the Strait of Hormuz. But over the last few days, Iran and the
United States have traded new attacks and threats. Even if the cease-fire were
to get back on track, many analysts expect the consequences of the war to
linger. The threat of future closures or damage to ships that traverse the
strait will push up insurance costs for shippers, and encourage companies to
find longer and more expensive routes to avoid it.
In
China, factories that make products like chemicals, metals and synthetic fibers are still heavily dependent on foreign sources of sulfur, helium and naphtha that come through the Strait of
Hormuz.
But
China has managed to avoid the brunt of many other impacts from higher global
energy prices by drawing on its energy reserves and imposing export
restrictions and quotas on its oil refineries. China’s oil imports were down by
more than 30 percent annually in May, leaving a large supply of global oil for
other countries to purchase.
Recent
supply chain disruptions pose much more significant challenges for other Asian
countries, according to the report, which used A.I. to model numerous scenarios
for how governments, companies and other actors would respond to various
outcomes in the strait.
In
India, rising prices for fertilizer, fuel and food have stoked political
opposition to the government. Higher fertilizer costs, combined with prospects
for a weak monsoon season, could weigh on the more than 40 percent of India’s
work force that are employed in agriculture.
In
Japan, where fuel subsidies are already equivalent to about half the defense budget, higher energy prices could also increase
fiscal pressures on the government. Rising prices and shortages of aluminum and naphtha, which are used to make auto parts,
have led to production cuts and delays for Japanese carmakers.
The
political and economic repercussions are even keener in Southeast Asia, where
many countries are net energy importers, and governments have turned to
emergency borrowing and extended subsidies to buffer their economies.
The
Philippines has seen labor strikes and declared a
national energy emergency. In Indonesia, nickel producers short of sulfuric
acid have cut their output, while tourism in Bali has fallen because of higher
airfares.
Amid
the energy shock, many Southeast Asian countries are looking to China to
provide solar panels, battery energy storage systems and electric vehicles, and
China’s exports of those products have soared.
The
energy crisis could also erode the perception of Southeast Asia’s manufacturing
competitiveness, slowing a trend where companies have tried to move their
factories out of China and set up facilities in other markets, the group’s
analysts said.
The
closure of the Strait of Hormuz has had a much more limited impact on the
United States, given its energy production. But it could have some negative
consequences in sectors like A.I. The Hormuz crisis has stressed Asian supply
chains that make semiconductors, transformers, energy systems, copper and other
materials, which are used to build U.S. data centers,
the report said.
The
biggest question now is how long the crisis persists.
Mr.
Campbell said the impact on many countries and supply chains had been “deep and
profound,” and could worsen if the crisis continues. Japan, South Korea and
others have worked through many of the reserves that have so far buffered them
from the economic effects.
“In
many capacities, from jet fuel to a lot of diesel oils, we are basically almost
running on empty,” he said.