Oil Price Sends Mixed Signal for Asia

With oil and related energy prices having suddenly descended precipitately, the outlook for Asia is going to vary dramatically, and to be built on more than just who is an importer and who an exporter.

Certainly, it is beginning to look as though the recent fall in oil and related energy prices is not just a blip, with prices in the US$50-70 a barrel range, or less, possibly with us for a long time, with the main reason having less to do with weaker demand from China and more with supply as shale production in the US continues to ramp up.

Although some new drilling has been curtailed because of the price fall, there is enough exploration already at an advanced stage to keep production rising for at least three years. A similar trend may apply to a significant number of commodities whose cycles roughly parallel those of oil.

Thus the net result of low oil prices would be a major overall gain for East and South Asia but a broader commodity price decline has more varied consequences. Almost as important as oil are the partly-linked prices of coal and natural gas. Both tend to be more volatile than oil and gas prices have more variables between piped and LNG and more is traded on longer-term contracts rather than spot prices and location is also more important. But over the medium term the prices of carbon energy mostly move together.

The largest gains in monetary terms are clearly the energy important-dependent, manufacture-exporters China, Japan and Korea. China now, a bigger oil importer than the US, imports half of its oil, one third of its gas and some thermal coal and has been rapidly ramping up exports while the good times last. It forecasts its strategic reserves at 91 million bbl.

China’s gas imports, now from Qatar, Australia, Indonesia and Malaysia, are set to increase rapidly as well as the country tries to shift from polluting coal. But in the future Russia is set to be a major supplier via new pipelines. Gains should offset any decline in export competitiveness caused by a strong yuan so its current account surplus is likely to remain large, encouraging sustained outward investment, not least in SE Asia.

Because of their almost total import dependence, Japan and Korea will benefit even more in proportion to their trade volumes so will see a significant gain in their terms of trade. However, Asian industrialized countries will continue to see much higher gas prices than enjoyed by the US where the shale boom has had a maximum impact and which so far lacks the means of exporting gas. A steep energy price fall should in theory help to stimulate the Japanese economy at last but for consumers the gains may be offset by the weak yen so the net benefit will to the corporate profits of exporters.

Among developing countries, the Philippines looks the biggest gainer relative to the size of its economy, importing almost all its oil and coal, which account for some 45 percent of energy consumption and are set to grow faster than other sources. Although there is some local gas, domestic energy comes mostly from hydro and geothermal sources. Last year fuels at US$13 billion comprised 21 percent of imports, not far behind electronics imports which are mostly for processing for re-export. The value added in electronics is less than half the value of fuel imports. So the nation is a huge winner from lower prices – and needs to be because energy consumption is still very low by regional standards and is set to rise much faster than GDP.

As for other major commodity items, the Philippines is only a significant exporter of nickel ore. Nickel prices are volatile, particularly because of Indonesia’s ban on export of raw ores in the effort to build its domestic processing economy, but tend to follow their own cycles. Labor export earnings however might be hurt by lower demand for workers in the oil-producing Middle East.

India is now about 38 percent dependent on imports for energy consumption. Oil is about 75 percent imported, making India the fourth largest importer in the world. Coal is the main contributor to India’s energy needs, accounting for 44 percent of supply, mostly for electricity generation. But despite its massive coal output, third in the world, production and transport inefficiencies have resulted in 25 percent of thermal coal now being imported, a situation which is unlikely to change for several years. Lower gold as well as oil and coal prices are already making large improvements in India’s current account balance and sustained they will make it easier for the Modi government to reach its medium term economic and political goals.

As for other commodities the net effects look small. India exports a net US$20 billion of farm products, led by rice and cotton but weak prices of these exports are offset by the largest import, edible oils led by palm oil.

The palm oil price is indeed worse news for Malaysia and Indonesia than oil prices. At around US$680 a tonne it is now little over half its 2011 peak and back to where it was five years ago. It remains double its price a decade ago so on a longer view it is not particularly cheap. But given its close price link to soybean oil and hence US and Brazilian crops, forecasts beyond the short term are difficult even for a tree crop with a long investment cycle.

Although palm oil accounts for only 6 percent of gross exports, in terms of national value added it is at least on a par with LNG and electronic product exports and has a more immediate impact on household incomes because of the numbers of people employed on the plantations. Although Malaysia now imports almost as much oil and products as it exports, a low price is hurting producers who are looking to cut investments.

Although there is still a large current account surplus, Malaysia suffers a sustained net outflow of private capital and may now find it harder to attract investment from the Gulf region. So all circumstances combined it is no surprise that the ringgit has fallen 10 percent against the US dollar this year and the stock market also been weak, with poltical implications for an already-weak Prime Minister Najib Tun Razak and the Barisan Nasional.

Indonesia’s situation is also not easy – though more complicated – because of the importance of coal, palm oil and LNG in its exports. However as LNG exports are almost balanced by net oil imports, the overall impact is limited. Coal however is a different matter, with exports of about 400 million tonnes a year with roughly the same value as palm oil, of which Indonesia is the largest exporter.

Rubber too remains a significant export as are copper and nickel, both suffering from the ore exports ban. Indonesia’s current account has suffered as a result so it can expect a deficit this year of around 3.5 percent of GDP after years of balance or surplus. That could rise further if badly needed infrastructure investment takes place. However, the cuts in oil subsidies have steadied any market nerves and fiscal caution will continue. Indonesia’s economy is anyway much less dependent on foreign trade than neighbors such as Malaysia and Thailand.

Of the ASEAN countries other than the Philippines, Thailand is the largest beneficiary of the oil price decline. Oil is mostly imported and it also imports natural gas to supplement its own production. At 20 percent of merchandise imports, any large fall in hydrocarbon prices is helping at a time when tourism remains weak because of political and governance factors and rice prices remain low thanks to global supply and Thailand’s previous stockpiling. It also plans to use more imported coal for electricity generation.

When bulk agricultural exports, including rubber, mostly face weak prices, Thailand continues to increase processed food sales, and fish and prawns. Cereals prices, including rice, corn and cassava, look less likely to suffer prolonged down cycles than mineral one. Thailand’s economic problems are largely self-inflicted at a time when at worst its terms of trade are stable thanks to oil’s decline. It remains to be seen how far it can benefit from any increased capital flows from northeast Asia or suffer from reduced flows of money and tourists from Russia and the Gulf region.

Vietnam is also relatively fortunate being a small net oil importer, small net coal importer and self-sufficient in natural gas. Rice and rubber exports have faced weak prices but strong gains in fish and prawn export prices and a firm coffee price have more than compensated. Meanwhile foreign investment has continued to yield strong gains in manufactured exports.