CICC: Oil prices may boost China's export share

CICC Research From a macro perspective, the oil price surge caused by the Middle Eastern conflict represents a negative supply-side shock to China's exports. However, from a structural perspective, there are positive demand effects that could lead to an increase in China's export share. Which factor dominates depends on the evolution of the situation. Under a baseline scenario, the structural demand effect is more noteworthy. Firstly, the demand transfer effect, where demand shifts from China's export competitors, could lead to an increase in the export share of some of China's high-energy-consuming products. For instance, during the 2022 Russia-Ukraine conflict, production in Europe's energy-intensive industries was constrained. China, being less affected, saw its export share of high-energy-consuming products like steel, aluminum, chemicals, and building materials increase. In the current Middle Eastern conflict, major Asian economies are more dependent on Middle Eastern energy for their manufacturing sectors than China. Therefore, China's export share of products like steel, chemicals, and glass may rise. Secondly, the demand creation effect, where economies heavily impacted by oil prices accelerate their reduction of reliance on traditional energy and import more new energy products, benefits China's exports of new energy and power equipment. During the 2022 Russia-Ukraine conflict, Europe's energy transition accelerated, effectively boosting China's exports of new energy-related products. In the current Middle Eastern conflict, China's export growth for new energy-related products to some Asian economies may further accelerate. Of course, in extreme scenarios, as global economic adjustment risks rise, China's exports would also face negative demand shocks from a global economic downturn. Detailed quantitative estimates of the growth of major export products are provided in the main text. Comparison of Two Energy Supply Shocks Comparing the 2022 Russia-Ukraine conflict and the potential 2026 US-Iran conflict, they share many commonalities, such as both negatively impacting global energy supply. However, there are also significant differences. Firstly, the primary channel of negative impact on energy supply during the 2022 Russia-Ukraine conflict was the physical disruption of pipeline gas to Europe, while oil supply was mainly affected by financial sanctions. In contrast, the 2026 US-Iran conflict's physical obstruction of oil and gas supply is primarily due to the potential blockade of the Strait of Hormuz. Secondly, the 2022 Russia-Ukraine conflict mainly affected Europe's pipeline gas supply, whereas the 2026 US-Iran conflict negatively impacts the supply of both global oil and natural gas, particularly in Asia. Thirdly, in terms of impact magnitude, the negative impact of the 2026 US-Iran conflict on global crude oil and LNG supply is greater than that of the 2022 Russia-Ukraine conflict. Figure 1: Comparison of Two Energy Supply Shocks Source: CICC Research Department The price performance in commodity futures markets generally aligns with this logic. The marginal impact of the 2026 US-Iran conflict on crude oil prices is significantly higher than that of the 2022 Russia-Ukraine conflict. Conversely, the current marginal impact of the 2026 US-Iran conflict on European natural gas prices is slightly lower than that of the 2022 Russia-Ukraine conflict. Figure 2: Brent Crude Oil Near-Month Futures Price Source: Haver, CICC Research Department Figure 3: Dutch TTF Natural Gas Near-Month Futures Price Source: Haver, CICC Research Department The 2022 Russia-Ukraine conflict prompted the EU to substitute pipeline natural gas with liquefied natural gas (LNG). Following the Nord Stream pipeline disruption in 2022, the EU's pipeline natural gas imports significantly decreased, while LNG imports increased. However, due to the time and cost involved in transforming related energy infrastructure, coupled with price increases, the overall natural gas imports for the EU remained flat compared to 2021, still inflicting considerable negative impacts on the EU economy. Figure 4: EU Energy Product Imports, 2021-2025 Source: Eurostat, CICC Research Department Figure 5: Changes in EU Energy Imports, 2021-2024 Source: Eurostat, CICC Research Department The negative impact of the 2022 Russia-Ukraine conflict on global crude oil market supply was limited. Excluding short-term shocks, although Russia's crude oil exports to the EU decreased significantly, its exports to other economies increased. Consequently, Russia's overall crude oil exports in 2022 saw a slight increase compared to 2021, with no significant negative impact on the global crude oil market supply. Figure 6: Daily Average Russian Oil Exports by Region, 2021-2024 Source: IEA, CICC Research Department This round of energy supply shock primarily affects Asian economies. The physical obstruction in this round of energy supply shock stems from the potential blockade of the Strait of Hormuz. Compared to the 2022 Russia-Ukraine conflict, this round has a more pronounced impact on global energy supply. Asian economies, in particular, are more reliant on oil and natural gas passing through the Strait of Hormuz. Other major Asian economies have a higher net import share of oil and natural gas than China. In 2023, China's net imports of oil and natural gas accounted for 14.9% and 3.1% of its total domestic energy supply, respectively. While higher than the US and Russia, this is lower than other major Asian economies and the EU. In 2023, ASEAN, the EU, Japan, and South Korea had net oil imports accounting for 29.7%, 38.9%, 40.0%, and 42.0% of their total energy supply, respectively. Their net natural gas imports accounted for -3.3%, 18.8%, 20.6%, and 19.6% of their total energy supply, respectively. Figure 7: Ratio of Net Oil and Natural Gas Imports to Total Energy Supply Source: IEA, CICC Research Department Manufacturing sectors in other major Asian economies are more dependent on Middle Eastern energy than mainland China. According to the ADB International Input-Output Table, the manufacturing sectors of India (3.4%), South Korea (2.9%), Japan (2.2%), China (Taiwan) (2.0%), and ASEAN (1.5%) have a higher coefficient of total consumption of the mining industries in the three Middle Eastern countries (Saudi Arabia, UAE, Kuwait) compared to mainland China (0.8%) and the EU (0.5%). In contrast, during the 2022 Russia-Ukraine conflict, the EU (1.3%) had a higher coefficient of total consumption of Russia's mining industry than mainland China (0.7%). Figure 8: Coefficient of Total Consumption of Mining Industries in Russia (2022) and Three Middle Eastern Countries (2024) by Manufacturing Sectors in Major Regions Note: The three Middle Eastern countries include Saudi Arabia, UAE, and Kuwait. Source: ADB, CICC Research Department By industry sector, in 2021, the sectors in mainland China's manufacturing that had a lower coefficient of total consumption of Russia's mining industry compared to the EU included: coke, refined oil and nuclear fuel; non-metallic mineral products; basic metals and fabricated metal products; chemicals; rubber and plastics. In 2024, the sectors in mainland China's manufacturing with a lower coefficient of total consumption of the mining industries of the three Middle Eastern countries compared to Japan and South Korea included: coke, refined oil and nuclear fuel; basic metals and fabricated metal products; chemicals; non-metallic mineral products; rubber and plastics. Figure 9: Coefficient of Total Consumption of Russia's Mining Industry by Manufacturing Sector, 2021 Source: ADB, CICC Research Department Figure 10: Coefficient of Total Consumption of the Mining Industries of Three Middle Eastern Countries by Manufacturing Sector, 2024 Source: ADB, CICC Research Department Demand Transfer: Export Share of Some High-Energy-Consuming Products in China May Rise The energy supply shock may slightly suppress the overall volume of China's exports. The current oil price increase is a typical supply shock driven by geopolitical conflicts, which will bring a "stagflation" effect to the global economy. The IMF states [1] that a 10% increase in energy prices sustained for a year will raise global inflation by 40 basis points and slow economic growth by 0.1%-0.2%. Similar to previous research [2], our SVAR model, which distinguishes between supply and demand shocks, indicates that a 20% oil price increase caused by a supply shock could reduce China's total exports by 0.8 percentage points over the next 12 months. Figure 11: Impulse Response Function of China's Export Seasonally Adjusted Quarter-on-Quarter Growth Rate to a 20% Oil Price Increase from Supply Shock Source: Wind, CICC Research Department The export share of some high-energy-consuming products may increase. The 2022 Russia-Ukraine conflict led to production constraints in Europe's energy-intensive industries. The index of industrial production for energy-intensive industries in Germany saw a more significant decline compared to the overall industrial production index. This corresponds to a decrease in the Eurozone's export market share and an increase in China's export market share after the 2022 Russia-Ukraine conflict, while other regions remained largely stable, indicating China's export substitution for Europe. Figure 12: German Industrial Production Index Source: Destatis, CICC Research Department Figure 13: Actual Export Share Source: CPB, CICC Research Department Looking at broad industry categories, this substitution relationship is mainly concentrated in high-energy-consuming sectors. The smaller the difference in reliance on Russia's mining industry between mainland China and the EU in 2021 (i.e., sectors where mainland China had an energy advantage over the EU in the context of the 2022 Russia-Ukraine conflict), the greater the difference in the change of China's and the EU's export shares in 2022 compared to 2019 (i.e., the larger the increase in China's export share relative to the EU), especially in high-energy-consuming sectors such as non-metallic minerals and basic metals and fabricated metal products. Figure 14: Difference in Reliance on Russia's Mining Industry between Mainland China and the EU vs. Difference in Export Share Change Note: Bubble size represents China's export share in 2022, excluding coke, refined oil and nuclear fuel, and other manufacturing and recycling. Source: ADB, CICC Research Department Analyzing specific sub-sectors, we have identified HS4 level products where China's substitution of the EU's market share was significant in 2022. The selection criteria include: export shares of both China and the EU exceeding 20% in 2021; China's export share increased while the EU's decreased in 2022; and China's export value exceeded 1 billion USD in 2021. The results can be broadly categorized into three groups: first, high-energy-consuming products, such as inorganic acid salts, flat-rolled steel, steel wire mesh, etc.; second, mechanical and electrical products, such as batteries, air pumps, automotive parts, etc.; and third, consumer goods, such as knitted garments, bags, lamps, etc. Figure 15: HS4 Level Products Where China's Substitution of EU Market Share Was Significant in 2022 Note: Bubble size represents total global export value in 2022. Source: UN Comtrade, CICC Research Department We focus primarily on high-energy-consuming products. Among these: Steel has 11 HS4 level products, with a total export value of 82.28 billion USD in 2022. Representative products include steel structures, screws, and other steel wire products. Copper and aluminum have 5 HS4 level products, with a total export value of 29.48 billion USD in 2022. Representative products include aluminum plates, aluminum foil, and other aluminum products, which aligns with the logic of rising electricity prices in the EU due to natural gas supply issues squeezing aluminum smelting production. Fabricated metal products have 10 HS4 level products, with a total export value of 34.96 billion USD in 2022. Representative products include furniture fittings, locks, and hand tools. Chemicals have 12 HS4 level products, with a total export value of 45.45 billion USD in 2022. Representative products include other organic and inorganic compounds, oxygen-containing amino compounds, polycarboxylic acids and their derivatives, etc. Non-metallic building materials have 8 HS4 level products, with a total export value of 25.74 billion USD in 2022. Representative products include stone and stone products for construction, glassware, and tempered glass, etc. Figure 16: Substitution of China's Market Share for Major High-Energy-Consuming Products in the EU in 2022 Note: The number of items listed represents the count of HS4 level products classified into the respective broad categories. Source: UN Comtrade, CICC Research Department We employ a similar methodology to identify potential sectors for China's export share substitution in this round of energy supply shock. The main criteria include: the coefficient of total consumption of the mining industries of the three Middle Eastern countries by the country and sector is higher than that of the corresponding sector in China; and the export shares of both the country's sector and China's sector exceed 10%. From the broad industry categories in the ADB Input-Output Table, excluding coke, refined oil, and nuclear fuel, Japan's basic metals and fabricated metal products, South Korea's and Japan's chemicals and electrical and optical equipment, and ASEAN's rubber and plastics and electrical and optical equipment sectors have potential spaces for substitution by corresponding Chinese sectors. Figure 17: Potential Sectors for China's Export Share Substitution Amidst the Current Energy Supply Shock Source: UN Comtrade, CICC Research Department Most competitive industries in Japan and South Korea compete with China. In 2024, Japan had 96 HS4 level product categories with an export share exceeding 10%, of which 63 also had a Chinese export share exceeding 10% and 77 exceeding 5%. South Korea had 44 HS4 level product categories with an export share exceeding 10%, of which 27 also had a Chinese export share exceeding 10% and 34 exceeding 5%, indicating a high degree of overlap. Japan's competitive industries are mainly concentrated in fine chemicals, metal or non-metallic products, machine tools and equipment, automobiles and parts, etc. South Korea's competitive industries are mainly concentrated in metal manufacturing, chemicals, and electronics. Taking Japan's chemical industry as an example, Japan has strong export competitiveness in some higher value-added fine chemical products, such as photographic materials, pigments, and chemicals for the electronics industry. China can compete with Japan in certain areas, but has almost no exports in categories like films, photographic paper, etc. Figure 18: Export Shares of Major Chemical Products in Japan and China, 2024 Note: Bubble size represents Japan's export value in 2024. Source: UN Comtrade, CICC Research Department In terms of basic metals, China and South Korea have significant competition in steel exports, primarily in various flat-rolled products. Figure 19: Export Shares of Major Metal Products in South Korea and China, 2024 Note: Bubble size represents South Korea's export value in 2024. Source: UN Comtrade, CICC Research Department We estimate that the export share substitution of high-energy-consuming related products under this round of energy supply shock may slightly boost overall export growth. We selected major high-energy-consuming products where China has high competitive intensity with Japan, South Korea, India, and ASEAN (selection criteria: China, Japan, South Korea, India, and ASEAN all have export shares greater than 15%, and HS4 level high-energy-consuming products with China's export value exceeding 1 billion USD). Using the increase in China's share in 2022, we estimate that the export growth of related high-energy-consuming products could increase by 20%, thus driving overall export growth by 0.9 percentage points. Figure 20: Calculation of Export Growth Driven by China's Share Substitution in High-Energy-Consuming Related Products Note: We selected HS4 level high-energy-consuming products where China, Japan, South Korea, India, and ASEAN all have export shares greater than 15%, and China's export value exceeds 1 billion USD. Source: UN Comtrade, CICC Research Department The logic of increased export share in high-energy-consuming sectors should focus more on structural aspects. It is worth noting that our above calculations only consider the marginal driving effect of share increases and do not account for potential demand decreases. Furthermore, based on the experience of the 2022 Russia-Ukraine conflict, although the year-on-year export price growth of high-energy-consuming sectors generally exceeded PPI, on the one hand, due to the decline in global demand in 2023, both turned negative. On the other hand, the ratio of export delivery value to operating revenue in high-energy-consuming sectors is generally low. For example, in 2022, the ratio of export delivery value to operating revenue in the ferrous metal smelting and rolling processing industry was 2.3%. Even a simple export growth would provide limited support to the overall operating conditions of the industry. The prosperity of high-energy-consuming sectors is more dependent on domestic demand such as real estate and infrastructure investment. Therefore, the logic of increased export share in high-energy-consuming sectors should focus more on its sub-sectors. Figure 21: Year-on-Year Growth of Export Price Index and PPI for Some High-Energy-Consuming Sectors Source: Wind, CICC Research Department Figure 22: Ratio of Export Delivery Value to Revenue for Industrial Enterprises Above Designated Size Source: Wind, CICC Research Department Demand Creation: New Energy and Power Equipment Sectors In the context of energy supply shocks, the energy structure transformation in overseas economies may accelerate, which could also drive increased export demand in certain sectors, most typically those related to new energy. Recalling the 2022 Russia-Ukraine conflict, although the EU used LNG to replace pipeline natural gas, the overall share of natural gas in the EU's energy supply decreased from 24% in 2021 to 22% in 2022. Even with falling natural gas prices in 2023 and 2024, the downward trend in natural gas share continued. Simultaneously, the share of renewable energy in the EU's energy supply accelerated its upward trend, becoming almost equal to the share of natural gas by 2024. Figure 23: Share of Natural Gas and Renewable Energy in EU Energy Supply Source: Eurostat, CICC Research Department China's exports of new energy-related products to the EU increased significantly in 2022. Against the backdrop of the 2022 energy supply shock, China's exports of new energy-related products to the EU rose from 67.5 billion USD in 2021 to 107.7 billion USD. Specifically, power equipment increased from 19.9 billion USD to 25.4 billion USD, new energy vehicles from 17.1 billion USD to 26.0 billion USD, lithium batteries from 10.6 billion USD to 22.6 billion USD, photovoltaics from 12.8 billion USD to 25.5 billion USD, and wind power from 7.0 billion USD to 8.3 billion USD. In 2023, China's exports of new energy-related products to the EU further increased to 113.7 billion USD, with power equipment, new energy vehicles, and lithium batteries being the main contributors. Figure 24: Value of China's Exports of New Energy-Related Products by Region Source: UN Comtrade, CICC Research Department Figure 25: Value of China's Exports of New Energy-Related Products to the EU Source: UN Comtrade, CICC Research Department China holds a high export share of power equipment and wind power to some Asian economies. Based on China's export shares of new energy-related products to some Asian economies in 2024, China's exports of power equipment (18.0%) and wind power (15.1%) to ASEAN, lithium batteries to South Korea (8.8%) and Japan (4.7%), and photovoltaics to India (8.0%) account for a relatively high proportion of overall exports, and may benefit more from demand pull driven by the energy supply shock. Figure 26: Destinations of China's Major New Energy-Related Product Exports, 2024 Source: UN Comtrade, CICC Research Department Figure 27: Export Shares of China's New Energy-Related Products to Some Asian Economies, 2024 Source: UN Comtrade, CICC Research Department We estimate that under this round of energy supply shock, the demand pull from new energy-related product exports may also provide some support to overall export growth. We use the export growth rate of China's new energy-related products to the EU in 2022 and the increase in CAGR from 2017 to 2021 as the enhancement factor for China's export growth rates of new energy-related products to the EU, Japan, South Korea, India, and ASEAN under the current shock. The results show that China's exports of new energy-related products may increase by 10.5%, thus driving overall export value by 1.3 percentage points. Figure 28: Calculation of Export Demand Pull from New Energy-Related Products Source: UN Comtrade, CICC Research Department Risk Disclosures and Disclaimer Markets are subject to risk, and investment requires caution. This document does not constitute personal investment advice, nor does it consider the specific investment objectives, financial situation, or needs of individual users. Users should consider whether any opinion, view, or conclusion in this document is suitable for their particular circumstances. Investment based on this is at your own risk.