Zhang Yu: High oil prices lead to "clearing," and China's midstream share may "rise"—Strategic Bullish on Midstream Manufacturing Series Four

Ask AI · How can high oil prices become a chance for China’s manufacturing sector to rebound and overtake?

Text:****Hua Chuang Securities Chief Economist Zhang Yu Practicing license No.: S0360518090001

****Contact:****Lu Yinbo (15210860866)

【Strategic Bullish View: Upstream-to-Midstream Series】

Series 1: The drive of the “midstream”—a call from supply-side strength——20260303

Series 2: Ten major sectors, order growth——20260309

Series 3: How to concretely capture and track the pricing of midstream manufacturing?——20260318

Preface

This report discusses the possibility of China’s midstream manufacturing share increasing under a sustained high-oil-price environment. It is mainly based on four lines of logic: first, in terms of the global manufacturing sector’s dependence on oil and gas imports, China is positioned in the middle; China has more manufacturing, and thus its dependence on imported oil and gas is higher than China’s. Second, based on the experience from the 2020 pandemic, external shocks often lead to reshaping supply chains and an increase in new demand. In terms of new demand, the current high oil prices may bring added demand that is concentrated in the energy substitution area, where China is expected to benefit. Third, based on the two oil crises of the 1970s and 1980s, for manufacturing powers that also have relatively low oil and gas import dependence (the United States), during the oil crises the midstream’s share did in fact rise significantly. Considering that at that time the United States implemented relatively tight monetary policy to curb high inflation, China’s inflation level today does not require implementing a similarly tight monetary policy; the resistance to a rise in China’s midstream share may be smaller. Fourth, based on experience since 2000, whenever oil prices surge significantly, China’s midstream manufacturing export share has increased; this may be related to the fact that China’s energy costs (such as industrial electricity) are less affected by oil prices.

Report Summary

I. Current situation: Global manufacturing depends on oil and gas imports

Using 2024 data, we calculate the net oil and gas import amount required for each country’s manufacturing value added to observe each country’s oil and gas import dependence. The sample covers 50 economic entities, accounting for 92.5% of global manufacturing value added. Economic entities accounting for 23.9% of global manufacturing value added have oil and gas as net exports and do not need oil and gas imports. But economic entities accounting for 68.6% of global manufacturing value added have oil and gas as net imports.

Looking at the economic entities: for China, in 2024 the share of oil and gas imports corresponding to 1 unit of manufacturing value added is 8.6%. There are 25 economic entities whose dependence on oil and gas imports exceeds China. Combined, their manufacturing value added as a share of the global total is 30.1%, and their overall manufacturing scale exceeds China.

II. Historical experience: Analysis of the impact of oil crises on midstream manufacturing

For a recap of the two oil crises, the following observations are mainly made: first, the oil crisis is, in the first place, characterized by the rapid rise in oil prices, and second by a reduction in crude oil consumption. Second, during the period when global crude oil consumption declines, the extent of reduction differs across countries. Third, during the two oil crises, the top two countries in global export share ranking are the United States and Germany (both above 10%, with a relatively small gap). However, in both crises the United States saw a rise in its midstream manufacturing share. Germany experienced a decline in its midstream share during the second oil crisis. Considering that Germany’s decline in crude oil consumption is larger than that of the United States, this may be related to Germany’s relatively higher dependence on crude oil imports.

The main data are: in 1972 (before the crisis), the U.S. midstream share was 19.0%; in 1973–1975, the U.S. midstream share averaged 19.8%, representing an increase of 0.8%. In 1978 (before the crisis), the U.S. midstream share was 17.4%; in 1979–1981, the U.S. midstream share averaged 18.8%, representing an increase of 1.4%.

III. Future outlook: Scenario analysis of how high oil prices can lift China’s midstream share

1. Route 1: Reshaping the supply chain, orders shift to China. Drawing on the experience of the pandemic, the pandemic had a major impact on the global supply landscape. Taking machinery and transport equipment as an example, in 2020 global total demand fell with a growth rate of -4.8%, the lowest growth year since 2016. But China’s machinery and transport equipment export growth rate reached 5.2%. In terms of shares, China’s machinery and transport equipment share increased from 17.7% in 2019 to 19.6% in 2020. After the end of the pandemic, even though the share fluctuated, it remained in the 19%-21% range, far above 17.7% in 2019. With the current high oil prices and military conflict, for economies that face significant supply shocks due to insufficient energy security capacity, China may benefit from its relatively strong energy security capacity, and its export share may rise further.

2**. Route 2: Increased new demand, China is expected to benefit.** Drawing on the pandemic experience, the new demand mainly occurred in the field of epidemic prevention, with typical examples including textiles and medical products. Although the global total export growth rate was -7.2% in 2020, the global export growth rate for textile-related goods was 7.2%, and the global export growth rate for medicine-related products was 9.7%. China benefited from the increase in global demand. For textiles, China’s export growth rate in 2020 was 28.9%; for medical products, China’s export growth rate in 2020–2021 was 28% and 120.6%, respectively. The current high oil prices and military conflict may bring new demand in areas such as energy security, defense security, and supply-chain security. Typical product categories may include new energy, new-energy vehicles, power grid equipment, ships, and military industry products, among others.

3**. Route 3: Cost advantage increases, helping boost share

The third route is also related to costs. China benefits because in its energy mix the shares of coal and non-fossil energy are relatively high; when oil prices fluctuate significantly, the impact on electricity prices is smaller. But electricity prices in Europe and the United States are highly affected by crude oil price fluctuations. For example, in 2022, impacted by the Russia-Ukraine conflict, the oil price benchmark rose sharply throughout the year. In Europe, electricity prices (PPI measure, representing industrial electricity, and the same below) rose 61% for the full year, while in the United States electricity prices rose 90.5% for the full year. China’s electricity prices increased by only 5.1% for the full year.

Risk notice: high oil prices persist for a relatively long time and create a large shock to global demand; global monetary policy tightens significantly.

Table of Contents

Body of the Report

I. Current situation: Global manufacturing depends on oil and gas imports

Global manufacturing generally relies on oil and gas imports. We use 2024 data to calculate the net oil and gas import amounts needed for each country’s manufacturing value added; the sample covers 50 economic entities, accounting for 92.5% of global manufacturing value added.

We find that economic entities accounting for 23.9% of global manufacturing value added have oil and gas as net exports, so they do not require oil and gas imports. However, economic entities accounting for 68.6% of global manufacturing value added have oil and gas as net imports.

In terms of economic entities, for China, in 2024 oil and gas imports corresponding to 1 unit of manufacturing value added are 8.6%. There are 25 economic entities with higher dependence on oil and gas imports than China, including in East Asia Japan (14.7%) and South Korea (18.6%); in Southeast Asia Vietnam (12.2%), Thailand (29.3%), Singapore (14.9%), and the Philippines (22.8%); in South Asia India (20.8%) and Pakistan (33.6%); in Europe Germany, France, the UK, Italy, Spain, Portugal, Belgium, Finland, Romania, Austria, the Czech Republic, Poland, and Hungary; in Africa South Africa and Egypt, and in South America Chile and Peru. Combined, these economic entities’ manufacturing value added accounts for 30.1% of the global total.

II. Historical experience: Analysis of the impact of oil crises on midstream manufacturing

(I) Recap of the first oil crisis: 1973–1975

The first oil crisis, in terms of oil prices and crude oil consumption, mainly affected 1973–1975. Among them, in the first quarter of 1973 to the first quarter of 1974, oil prices rose sharply. According to the World Bank’s statistics of the world’s monthly average crude oil prices, the crude oil price in January 1973 was $2.08 per barrel, and by December 1973 it rose to $4.1 per barrel. It further rose to $13 per barrel in January 1974; it then fell slightly to $10.6 per barrel in April 1974, and subsequently, through December 1976, remained volatile in the $10–$12 per barrel range.

Global crude oil consumption fell sharply in 1974–1975. According to BP’s (British Petroleum) statistics, global crude oil consumption growth was 7.92% in 1973; in 1974 and 1975 it fell to -1.54% and -0.85%, respectively. In 1976 crude oil consumption returned to normal, with growth reaching 6.46%.

From 1973–1975 global midstream manufacturing (SITC, Category 7) export figures. Based on sample data from 68 economic entities (sample entities account for about 82.4% of global export total). In 1973–1975, midstream exports maintained strong growth, with an average annual growth rate of 25.5%, better than 19.7% in 1972, as well as data for 1976–1977.

For manufacturing powerhouses at the time (the United States and Germany, the top two in global export share with a small gap), both countries’ midstream manufacturing benefited, but the United States benefited more than Germany. In 1972 (before the crisis), the U.S. midstream share was 19.0%; in 1973–1975, the U.S. midstream share averaged 19.8%, representing an increase of 0.8%. For Germany, the midstream share in 1972 was 19.5%, and the 1973–1975 average reached 19.8%, representing an increase of 0.3%. In terms of crude oil consumption, Germany was hit more severely: during the years 1974–1975 when global crude oil consumption had negative growth, Germany’s crude oil consumption growth rate average was 2.62 percentage points lower than the United States.

(II) Recap of the second oil crisis: 1979–1981

For the second oil crisis, in terms of oil prices and crude oil consumption, the main impact was in 1979–1983. But considering that the U.S. monetary policy tightened significantly in 1980–1982, the later crude oil consumption effects may come from the U.S.’ monetary tightening. We mainly focus on the first three years, namely 1979–1981.

Among them, 1979 saw a sharp increase in oil prices. According to the World Bank’s statistics of the world’s monthly average crude oil prices, the crude oil price in December 1978 was $14.5 per barrel; by December 1979 it rose to $39.75 per barrel. In December 1980 it remained at the high level of $39.75 per barrel, and after 1981 it began to decline. Global crude oil consumption growth rates slowed down in 1980–1983. According to BP’s statistics, global crude oil consumption growth was 1.26% in 1979; in 1980–1983 the growth rates were -4.33%, -3.67%, -3.08%, and -0.55%, respectively. For four consecutive years, global crude oil consumption growth rates were negative.

From 1979–1981 global midstream manufacturing (SITC, Category 7) export figures. Based on sample data from 68 economic entities (sample entities account for about 82.4% of global export total). From 1979–1981, global midstream export growth slowed somewhat, with an average growth rate of 11.7%, slightly lower than the level in 1977–1978. The main reason is that starting in 1981 global midstream export growth slowed sharply, to 3.1%; in 1980 it was 16.4%.

For the manufacturing powerhouses of the time, the United States saw an increase in its midstream manufacturing share, while Germany was harmed. In 1978 (before the crisis), the U.S. midstream share was 17.4%; in 1979–1981, the U.S. midstream share averaged 18.8%, representing an increase of 1.4%. For Germany, the midstream share in 1978 was 19.2%; in 1979–1981 it averaged 17.9%, showing a decline. In terms of crude oil consumption, in the years 1979–1980 when global crude oil consumption had negative growth, Germany’s crude oil consumption growth rate average was 1.75 percentage points lower than the United States.

III. Future outlook: Scenario analysis of how high oil prices can lift China’s midstream share

(I) Route 1: Reshaping the supply chain, orders shift to China

Drawing on the experience of the pandemic, the pandemic had a major impact on the global supply landscape. Taking machinery and transport equipment as an example, in 2020 global total demand decreased, with a growth rate of -4.8%, the lowest growth year since 2016. But China’s machinery and transport equipment export growth rate reached 5.2%. In terms of shares, China’s machinery and transport equipment share increased from 17.7% in 2019 to 19.6% in 2020. After the end of the pandemic, although the share fluctuated, it remained in the 19%-21% range, far above 17.7% in 2019.

With the current high oil prices and military conflict, for economies with insufficient energy security capacity, there may be a larger supply shock. China may benefit from its relatively strong energy security capacity, and its export share may rise further.

(II) Route 2: Increased new demand, China is expected to benefit

Drawing on the experience of the pandemic: the new demand mainly occurred in the field of epidemic prevention, with typical examples including textiles (such as masks) and medical products (such as antipyretic drugs). 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 the global export growth rate for medicine-related products was 9.7%.

China benefits from the increase in global demand. For textiles, China’s export growth rate in 2020 was 28.9%; its global share increased from 38.4% in 2019 to 46.1% in 2020. For medical products, China’s export growth rates in 2020–2021 were 28% and 120.6%, respectively. Global share increased from 2.7% in 2019 to 5.8% in 2021.

With the current high oil prices and military conflict, the new demand brought may be in areas such as energy security, defense security, and supply-chain security. Typical categories may include new energy, new-energy vehicles, power grid equipment, ships, and military-industrial products, among others.

(III) Route 3: Increasing cost advantages, helping boost share

The third route is also related to costs. China benefits because in its energy mix the shares of coal and non-fossil energy are relatively high; when oil prices fluctuate significantly, the impact on electricity prices is smaller. But electricity prices in Europe and the United States are highly affected by crude oil price fluctuations. For example, in 2022, impacted by the Russia-Ukraine conflict, the oil price benchmark rose sharply throughout the year. In Europe, electricity prices (PPI measure, representing industrial electricity, and the same below) rose 61% for the full year, while in the United States electricity prices rose 90.5% for the full year. China’s electricity prices increased by only 5.1% for the full year.

Since 2000, using oil price data and China’s midstream manufacturing share data for comparison, we find that in years when oil prices surge significantly (for example, exceeding 30%), China’s midstream manufacturing share continues to move upward (compared with the previous year within the same year). A typical year is 2022: according to the World Bank’s benchmark for the full year, the oil price benchmark rose 40.6%, and China’s midstream export share continued to rise by 0.1%. Considering that in 2020–2021 the midstream export share had already risen substantially due to the pandemic, sustaining an increase in 2022 was relatively difficult. Other years when the oil price benchmark rose more than 30% for the full year also include 2021, 2011, 2008, 2005, 2004, and 2000. In all those years, China’s midstream manufacturing global export share increased.

In addition, considering that midstream manufacturing firms’ overseas gross margin is significantly higher than in China domestically, and that midstream manufacturing firms have an even larger cost advantage in overseas production versus overseas capacity costs (when oil prices rise), the increase in share may be even more smooth (there is both the momentum for active exports and a cost advantage for expanding into markets).

_See the report titled 【Hua Chuang Macro】 High oil prices bring “market clearing,” China’s midstream share may move “up”—Strategic Bullish View of Midstream Manufacturing Series Four**, released on March 26 by the Hua Chuang Securities Research Institute. _

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