MNI INTERVIEW: China’s Energy Costs To Jump As Growth Rebounds

China’s energy prices will jump once the economic recovery gathers steam, but that won’t deter foreign industrial companies from investing more capital to tap prospective growth in domestic demand, Joerg Wuttke, President of the European Union Chamber of Commerce in China, told MNI.

Despite wariness among some European nations about their exposure to China’s economy, Wuttke said Asia’s largest economy is too big to ignore as an investment destination given the strong demand outlook for industrial sectors like chemicals, machinery and vehicles.

Pandemic-related disruptions to the economy have temporarily depressed energy costs, said Wuttke, who is also the Chief Representative for BASF China.

“China’s energy costs will jump up once the economy recovers” he told MNI in an interview, noting the property sector slowdown had reduced energy prices due to less demand from the aluminium and concrete sectors.

“Energy is sometimes cheaper, but you also get more blackouts, or you don’t have any water supply”, he said. He said firms often needed to invest in expensive backup solutions such as onsite generators, offsetting apparently cheaper energy prices.

DEMAND STORY

The threat of higher energy costs, ongoing Covid-lockdowns and concerns of an over-reliance on China won't deter large scale investment in China because the revenue potential is too great, he said.

“China is the market demand story. The energy story is the US, which has cheaper and more reliable supplies than Europe and China,” he said.

Wuttke is sceptical when it comes to talk of foreign companies decoupling from China.

“In terms of demand, there is simply nowhere else to go. China is 50% of the world chemicals market, 35% of automobiles and the largest machinery market by far,” said Wuttke.

“Where else can you get customers to fund your R&D? Where else is there enough demand to justify the large-scale investment needed in these types of industry?” he asked, saying only China could satisfy these criteria.

“Even if GDP growth slows down, it's still better than anywhere else. Industrial firms cannot afford to side-step the world’s second largest economy” he said.

BIG FIRMS FAVOURED

Wuttke is concerned about Beijing's preference for large European companies over small and medium-sized enterprises, which lack the brand power and resources to prove their value to Chinese authorities.

“Bigger players can open up innovation centres, showrooms, and do R&D activity, which gives them leverage and impresses decision makers,” he said. “SMEs can’t do this,” he said, noting SMEs also struggle to obtain financing and approvals.

ECONOMIC RECOVERY

It was too early to judge the impact of US sanctions on China. “Currently our members are analysing their supply chains and assessing the situation. There is no direct impact yet, only a lot of uncertainty”

Wuttke said there were few signals on economic policy following last month’s Party Congress, which focused more on ideology and leadership changes.

“After next month's Central Economic Work Conference meeting we should see some solid growth policies. We cannot wait until the People’s Congress next March” he said.