Concerns over the extent of the Chinese economic slowdown have long dogged the income prospects of the world’s major mining and energy companies.
The Asian powerhouse posted its slowest rate of growth for almost a quarter of a century in 2014, at 7.4%, and economists expect things to get worse as policymakers attempt to rebalance the economy. Indeed, the Asian Development Bank (ADB) commented just this week that it expects Chinese growth to clock in at just 7.2% in 2015, before falling to 7% in the following year.
Oil revenues stuck in a puddle
Expectations of a prolonged slide in Chinese economic activity bodes ill for the likes of Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US), Vedanta Resources (LSE: VED) and Tullow Oil (LSE: TLW), as the country’s export-driven model makes it responsible for around 30% of the world’s total oil consumption.
These businesses have already seen their revenues whacked during the past year as a worsening supply/demand balance in the black gold market has driven crude prices to rattle to multi-year lows. With industry cartel OPEC vowing to keep the pumps switched on, even if Brent collapses as low as $20 per barrel, and US shale production expected to remain plentiful despite reductions in the rig count, a backdrop of subdued consumption is likely to prove catastrophic for earnings across the oil sector.
Chinese dragon out of puff?
China’s worrying demand signals were also exacerbated this week by HSBC/Markit manufacturing PMI numbers for March which came in at 49.2, slipping back into contraction after last month’s readout of 50.7. This is also the lowest reading since last April.
Beijing has been busy pumping more money into the system since the turn of the year in order to get economic growth marching higher again. In January the People’s Bank of China chucked $1.1bn at a raft of infrastructure projects, and followed this up last month by slashing the reserve requirement ratio of local banks in order to stimulate lending.
But whether these measures will be enough to stimulate commodities demand remains to be seen, particularly as finished goods exports to key markets like the eurozone continues to drag. And there is only so much stimulus that the Chinese central bank will be prepared to embark upon given the stratospheric debt levels in the country. As a consequence, I believe that the world’s major oil and metals suppliers are in severe danger of experiencing prolonged bottom-line pressure.