Unlike 2004, China oil demand unmoved by power woes

BEIJING (Reuters) - China's worsening power woes are all but guaranteed to trigger a surge in imported oil, just as they did in 2004 during the worst crisis in decades, right?

Wrong, say experts and industry sources. While the theme is familiar, the circumstances couldn't be more different, suggesting that oil bulls looking for a reason to push crude beyond $150 a barrel will need to look elsewhere.

This year, it's coal availability and price -- not a lack of generating capacity -- that have curbed supplies, forcing more than a dozen provinces to ration electricity amid a deficit now totaling as much as 27 gigawatts (GW), about 4 percent of total capacity in the world's second-biggest power user.

This year, Asian diesel prices are at record highs near $180 a barrel, over four times what they were in mid-2004, and most of the pain is being felt by huge power-guzzling metals firms that are cutting back output in the face of rising costs.

And this year, a slowing global economy and a rising yuan are conspiring against the smaller-scale industrial users who would otherwise be desperate to keep their conveyor belts humming.

"This time is quiet, very different from last time we had power cuts," said a manager surnamed Kong, who owns a diesel generator plant in the city of Ningbo, one of the regions worst hit in 2004, when a peak shortfall of some 40 GW caused brownouts or blackouts in nearly three-quarters of China's provinces.

"We haven't seen any unusual demand for small generators. Our stocks are plentiful," he told Reuters.

Yan Kefeng, a senior Beijing-based analyst at Cambridge Energy Research Associates, also sees little incremental demand.

"Oil prices are at levels that metal firms cannot afford. And export-oriented small industries are having a really tough time this year," he said.

On top of all that, China appears to be well-stocked with foreign fuel after 8 months of steady inventory builds that caused diesel imports to surge 9-fold in the first five months this year.

A senior marketing official at top refiner Sinopec Corp (0386.HK) said the company had seen a bit of extra demand from small users like hotels and restaurants which were stocking up in case the brownouts spread, but little beyond that.

"We are talking about several hundred tonnes a month of extra use for a hotel to stock up," he said. "We are not going to see a more than 10 percent jump in monthly sales that we saw in 2004."

GENERATORS ABUNDANT, POWER SHORT

And there's little to suggest a quick pick-up.

Kong has sold fewer than a hundred 30- to 50-kilowatt diesel generators this year versus about 1,000 in the summer of 2004, when small private manufacturers in his province and southern Guangdong scrambled to generate their own electricity as the local grid cut their supplies for several days a week.

This time it's the heavy electricity users -- smelters of aluminum and zinc, ferroalloy makers and fabricators -- that are worst hit, already hard pressed by soaring global raw material costs and a recent hike in domestic power tariffs.

Instead of trying to generate extra power they've chosen to cut output, a move that also boosts domestic metal prices.

The country's top 20 aluminum smelters, churning out more than 70 percent of output in the world's top producer of the metal, said last week they would cut output by up to 10 percent, while smaller zinc smelters agreed a similar measure on Saturday.

"For big power users like alumina refiners and us, we simply cannot afford diesel as power fuel," said Tommy Chen, vice general manager of Shanxi Dongfang Resources Development Co Ltd, a producer of ferroalloy.

"We are already squeezed on three fronts -- surging prices in raw material prices, higher power rates and increasing prices of coke," said Chen.

It costs 0.90-1.00 yuan to generate one kilowatt hour of electricity from diesel, he said, well above the current power tariff of around 0.65 yuan after Beijing raised it July 1.

As electricity makes up some 40 percent of the total operating cost at Chen's plant and more in an aluminum smelter, burning diesel is worse than simply shutting down.

ECONOMY OFFSETS

Small industries, the backbone of incremental diesel use in the summer of 2004, have been forced to halt production this year, not by power shortage but by a depreciating U.S. dollar and soaring labor costs.

Many of these plants, making everything from shoes and clothes to toys and pumps, are export-oriented and labor-intensive.

"They were knocked out of the market by economic woes before power cuts took their toll," said Yu Qiongfang, who manages a magnetic steel plant in Ningbo, which has felt the shortages.

In eastern Wenzhou, one of China's private-sector incubators for making lighters, pumps and shoes, about 20 percent of the city's 360,000 small businesses have plans to shut down from June through August, the head of a local industry group told Reuters.

($=6.836 yuan)

(Additional reporting by Polly Yam in Hong Kong and Langi Chiang in Beijing; Editing by Clarence Fernandez)