Daniel Zhang: High oil prices bring "clearing," China's midstream share may "rise" - Strategic bullish on midstream manufacturing series four

Author: Zhang Yu, Chief Economist of Huachuang Securities, License No.: S0360518090001 Contact Person: Lu Yinbo (15210860866) 【Strategic Bullish on Midstream Series】 Series One: The Advancing "Midstream," a Shout from Supply Forces — 20260303 Series Two: Top Ten Sectors, Order Growth — 20260309 Series Three: How to Visualize and Track Midstream Manufacturing Prices? — 20260318 Introduction This report explores the possibility of an increase in China's midstream manufacturing share under the sustained high oil price environment. It is mainly based on four logics: First, from the perspective of global manufacturing's dependence on oil and gas imports, China is in a moderate position, with more manufacturing industries that have a higher dependence on oil and gas imports than China. Second, based on the experience from the 2020 pandemic, external shocks often lead to the reshaping of supply chains and an increase in new demand. From the perspective of new demand, the current round of high oil prices may bring new demand concentrated in the energy substitution field, which China is expected to benefit from. Third, looking back at the two oil crises in the 1970s and 1980s, manufacturing powerhouses with relatively low dependence on oil and gas imports (like the United States) saw a significant increase in midstream share during the oil crises. Considering that the U.S. implemented a tight monetary policy to curb high inflation at that time, the current inflation level in China does not require a tight monetary policy, suggesting that the resistance to an increase in China's midstream share may be smaller. Fourth, based on experiences since 2000, every significant rise in oil prices has seen an increase in China's midstream manufacturing export share, possibly related to the fact that China's energy costs (such as industrial electricity) are less affected by oil prices. Report Summary Current Situation: Global Manufacturing's Dependence on Oil and Gas Imports Using data from 2024, we calculate the net oil and gas import amounts required for the manufacturing value added of various countries to observe their dependence on oil and gas imports. The sample includes 50 economies, accounting for 92.5% of global manufacturing value added. Economies accounting for 23.9% of global manufacturing value added are net exporters of oil and gas and do not require oil and gas imports. However, economies accounting for 68.6% of global manufacturing value added are net importers of oil and gas. From the perspective of economies, China's oil and gas import dependency corresponding to manufacturing value added in 2024 is 8.6%. There are 25 economies with a higher dependence on oil and gas imports than China, and these economies collectively account for 30.1% of global manufacturing value added, with a total manufacturing scale exceeding that of China. Historical Experience: Analysis of the Impact of Oil Crises on Midstream Manufacturing The review of the two oil crises reveals the following observations: First, the oil crises were characterized by a rapid rise in oil prices, followed by a decrease in crude oil consumption. Second, during the global reduction in crude oil consumption, the extent of reduction varied among different countries. Third, during both oil crises, the top two countries in global export share were the United States and Germany (both above 10%, with a small gap). However, the U.S. experienced an increase in global share of midstream manufacturing during both crises. Germany saw a decline in midstream share during the second oil crisis, likely related to its greater reliance on crude oil imports The main data is: In 1972 (before the crisis), the share of the U.S. midstream was 19.0%. From 1973 to 1975, the average share of the U.S. midstream reached 19.8%, with an increase of 0.8%. In 1978 (before the crisis), the share of the U.S. midstream was 17.4%. From 1979 to 1981, the average share of the U.S. midstream reached 18.8%, with an increase of 1.4%. Future Outlook: Pathways for High Oil Prices to Elevate China's Midstream Share Pathway One: Restructuring the Supply Chain, Orders Shift to China. Referring to the pandemic, the pandemic had a significant impact on the global supply pattern. Taking machinery and transportation equipment as an example, global total demand decreased in 2020, with a growth rate of -4.8%, the lowest growth rate since 2016. However, China's export growth rate for machinery and transportation equipment reached 5.2%. In terms of share, China's share of machinery and transportation equipment increased from 17.7% in 2019 to 19.6% in 2020. After the pandemic, although the share fluctuated, it remained within the range of 19%-21%, far higher than the 17.7% in 2019. This round of high oil prices and military conflicts may bring significant supply shocks to economies with insufficient energy security, and China may benefit from its strong energy security capabilities, with export shares expected to further increase. 2. Pathway Two: Increased New Demand, China Expected to Benefit. Referring to the pandemic, new demand mainly arose in the field of epidemic prevention, typically in textiles and medical supplies. Although the global total export growth rate in 2020 was -7.2%, the global export growth rate for textile-related products was 7.2%, and for medical-related products, it was 9.7%. China benefited from the increase in global demand. For textiles, China's export growth rate in 2020 was 28.9%, and for medical supplies, the export growth rates for 2020-2021 were 28% and 120.6%, respectively. This round of high oil prices and military conflicts may bring new demand in areas such as energy security, national defense security, and supply chain security. Typical varieties may include new energy, new energy vehicles, grid equipment, ships, and military supplies. 3. Pathway Three: Increased Cost Advantages, Supporting Share Growth The third pathway may be related to costs. China benefits from a high proportion of coal and non-fossil energy in its energy structure, resulting in less impact on electricity prices when oil prices fluctuate significantly. However, electricity prices in Europe and the U.S. are greatly affected by fluctuations in crude oil prices. For example, in 2022, due to the impact of the Russia-Ukraine conflict, the average oil price rose significantly throughout the year. European electricity prices (PPI basis, representing industrial electricity, the same below) rose by 61% for the year, while U.S. electricity prices rose by 90.5% for the year. China's electricity prices only rose by 5.1% for the year. Since 2000, using oil price data and China's midstream manufacturing share data, it has been found that in years of significant oil price increases (e.g., over 30%), China's midstream manufacturing share continued to rise (compared to the previous year). Risk Warning: Prolonged high oil prices may have a significant impact on global demand; global monetary policy tightening may be substantial Report Directory Report Body I. Current Situation: Global Manufacturing Relies on Oil and Gas Imports Global manufacturing generally relies on oil and gas imports. We use data from 2024 to calculate the net oil and gas import amounts required for the manufacturing value added of various countries, covering a sample of 50 economies that account for 92.5% of global manufacturing value added. We found that 23.9% of the economies contributing to global manufacturing value added have net oil and gas exports and do not require oil and gas imports. However, 68.6% of the economies have net oil and gas imports. In terms of economies, China's oil and gas import corresponding to manufacturing value added in 2024 is 8.6%. There are 25 economies that are more dependent on oil and gas imports than China, including East Asia's Japan (14.7%), South Korea (18.6%); Southeast Asia's Vietnam (12.2%), Thailand (29.3%), Singapore (14.9%), Philippines (22.8%); South Asia's India (20.8%), Pakistan (33.6%); Europe's Germany, France, the UK, Italy, Spain, Portugal, Belgium, Finland, Romania, Austria, Czech Republic, Poland, Hungary; Africa's South Africa, Egypt, and South America's Chile, Peru. The combined manufacturing value added of these economies accounts for 30.1% of the global total. II. Historical Experience: Analysis of the Impact of Oil Crises on Midstream Manufacturing (1) Review of the First Oil Crisis: 1973-1975 The first oil crisis, from the perspective of oil prices and crude oil consumption, mainly impacted the period from 1973 to 1975. During this period, oil prices surged significantly from Q1 1973 to Q1 1974. According to the World Bank's statistics on global crude oil monthly average prices, the price of crude oil was USD 2.08 per barrel in January 1973, rising to USD 4.1 per barrel by December 1973, further increasing to USD 13 per barrel in January 1974, and slightly retreating to USD 10.6 per barrel in April 1974, before fluctuating in the range of USD 10-12 per barrel until December 1976. Global crude oil consumption saw a significant decline from 1974 to 1975. According to BP's statistics, the growth rate of global crude oil consumption was 7.92% in 1973, dropping to -1.54% and -0.85% in 1974 and 1975, respectively. Crude oil consumption returned to normal in 1976, with a growth rate of 6.46%. From the perspective of global midstream manufacturing (SITC, Category 7) exports from 1973 to 1975, based on sample data from 68 economies (which account for approximately 82.4% of global export totals) From 1973 to 1975, the export of intermediate goods maintained high growth, with an average annual growth rate of 25.5%, better than the 19.7% in 1972 and the data from 1976 to 1977. For the manufacturing powerhouses of that time (the United States and Germany, the top two in global export share with a small gap), both countries benefited from intermediate manufacturing, but the United States benefited more than Germany. In 1972 (before the crisis), the U.S. intermediate share was 19.0%, and from 1973 to 1975, the average U.S. intermediate share reached 19.8%, an increase of 0.8%. For Germany, the intermediate share in 1972 was 19.5%, and from 1973 to 1975, it averaged 19.8%, with an increase of 0.3%. In terms of crude oil consumption, Germany was impacted more significantly; during the years of negative global crude oil consumption growth in 1974-1975, Germany's crude oil consumption growth rate was 2.62 percentage points lower than that of the United States. (2) Review of the Second Oil Crisis: 1979-1981 Regarding the second oil crisis, the main impact on oil prices and crude oil consumption occurred from 1979 to 1983. However, considering the significant tightening of U.S. monetary policy from 1980 to 1982, the later impact on crude oil consumption may stem from U.S. monetary tightening. We mainly focus on the first three years, specifically the situation from 1979 to 1981. In 1979, oil prices surged significantly. According to the World Bank's statistics on global monthly average crude oil prices, the price of crude oil was $14.5 per barrel in December 1978, rising to $39.75 per barrel by December 1979, maintaining that high level in December 1980, and then trending downward after 1981. From 1980 to 1983, the global crude oil consumption growth rate declined. According to BP (British Petroleum) statistics, the global crude oil consumption growth rate in 1979 was 1.26%, with growth rates of -4.33%, -3.67%, -3.08%, and -0.55% from 1980 to 1983. For four consecutive years, the global crude oil consumption growth rate was negative. From the perspective of global intermediate manufacturing (SITC, category 7) exports from 1979 to 1981, based on sample data from 68 economies (which account for about 82.4% of global export total). The global intermediate export growth rate declined from 1979 to 1981, with an average growth rate of 11.7%, slightly lower than the levels of 1977-1978. The main reason was that starting in 1981, the global intermediate export growth rate saw a significant slowdown, dropping to 3.1%, while it was 16.4% in 1980. For the manufacturing powerhouses of that time, the U.S. intermediate manufacturing share increased, while Germany was adversely affected. In 1978 (before the crisis), the U.S. intermediate share was 17.4%, and from 1979 to 1981, the average U.S. intermediate share reached 18.8%, an increase of 1.4%. For Germany, the intermediate share in 1978 was 19.2%, and from 1979 to 1981, it averaged 17.9%, showing a decline in share From the perspective of crude oil consumption, during the years of negative growth in global crude oil consumption from 1979 to 1980, Germany's crude oil consumption growth rate was on average 1.75 percentage points lower than that of the United States. III. Future Outlook: Pathways for High Oil Prices to Elevate China's Midstream Share (1) Pathway One: Restructuring Supply Chains, Shifting Orders to China Referring to the pandemic, it had a significant impact on the global supply landscape. Taking machinery and transportation equipment as an example, global total demand decreased in 2020, with a growth rate of -4.8%, the lowest growth rate since 2016. However, China's export growth rate for machinery and transportation equipment reached 5.2%. In terms of share, China's share of machinery and transportation equipment increased from 17.7% in 2019 to 19.6% in 2020. After the pandemic, although the share fluctuated, it remained within the range of 19%-21%, significantly higher than the 17.7% in 2019. The current high oil prices and military conflicts may bring significant supply shocks to economies with insufficient energy security. China may benefit from its strong energy security capabilities, and its export share is expected to further increase. (2) Pathway Two: Increased New Demand, China Expected to Benefit Referring to the pandemic: the new demand generated was mainly in the field of epidemic prevention, with typical products being textile goods (such as masks) and medical supplies (such as antipyretics). Although the global total export growth rate in 2020 was -7.2%, the global export growth rate for textile-related goods was 7.2%, and for medical-related products, it was 9.7%. China benefited from the increase in global demand. For textile goods, China's export growth rate in 2020 was 28.9%, and its global share increased from 38.4% in 2019 to 46.1% in 2020. For medical supplies, China's export growth rates for 2020-2021 were 28% and 120.6%, respectively. The global share increased from 2.7% in 2019 to 5.8% in 2021. The current high oil prices and military conflicts may generate new demand in areas such as energy security, national defense security, and supply chain security. Typical products may include those in the fields of new energy, new energy vehicles, grid equipment, ships, and military supplies. (3) Pathway Three: Increased Cost Advantages, Supporting Share Growth The third pathway may be related to costs. China benefits from a high proportion of coal and non-fossil energy in its energy structure, resulting in less impact on electricity prices during significant oil price fluctuations. However, electricity prices in Europe and the United States are greatly affected by fluctuations in oil prices For example, in 2022, affected by the Russia-Ukraine conflict, the annual oil price center significantly increased. European electricity prices (PPI basis, representing industrial electricity, the same below) rose by 61% for the whole year, while U.S. electricity prices increased by 90.5% for the entire year. In China, electricity prices only rose by 5.1% for the whole year. Since 2000, using oil price data and the share data of China's midstream manufacturing, it has been found that in years of significant oil price increases (for example, over 30%), China's midstream manufacturing share continued to rise (compared to the previous year). A typical year is 2022, where according to the World Bank's criteria, the oil price center rose by 40.6%, and China's midstream export share continued to increase by 0.1%. Considering that the midstream export share had already risen significantly due to the pandemic in 2020-2021, maintaining this upward trend in 2022 was relatively challenging. Other years where the oil price center rose by more than 30% for the entire year include 2021, 2011, 2008, 2005, 2004, and 2000. In these years, China's global export share in midstream manufacturing all increased. In addition, considering that the gross profit margin of midstream manufacturing enterprises overseas is significantly higher than that domestically, coupled with the greater cost advantage of midstream manufacturing enterprises overseas compared to domestic production capacity (with rising oil prices), the share increase may be smoother (with both the motivation for proactive exports and the cost advantage in market expansion). For specific content, please refer to the report published by Huachuang Securities Research Institute on March 26, titled “【Huachuang Macro】High Oil Prices Bring 'Clearing', China's Midstream Share May 'Rise'—Strategic Outlook on Midstream Manufacturing Series Four.” According to the "Measures for the Management of Suitability of Securities and Futures Investors" and supporting guidelines, this material is only intended for professional institutional investors among Huachuang Securities clients. Please do not forward this material in any form. If you are not a professional institutional investor among Huachuang Securities clients, please do not subscribe to, receive, or use the information contained in this material. This material is difficult to set access permissions for, and we apologize for any inconvenience this may cause. Thank you for your understanding and cooperation