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New superhighway in China to alter energy trade flows

By  AOG Staff Thursday, 16 April 2015 03:06
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China’s Go West strategy to encourage coastal to inland flow of capital and people will result in the formation of a new commodity superhighway, according to Wood Mackenzie.

This superhighway will impact the energy trade flows within China and externally via the new Silk Road routes, which links the country's east to west, onwards to Central Asia and beyond.

The commodity superhighway will represent significant business opportunities and will have three implications, said Wood Mackenzie’s senior Asia power consultant, Frank Yu.

"The first implication is that power generation in the central and western regions will almost triple from around 3200 Terrawatt hours (TWh) in 2015 to almost 9600TWh in 2035. This far outpaces the coastal region’s generation growth in the same period, which is only set to increase from under 3000TWh to 6000TWh.”

“The second implication will see coastal regions become further reliant on China’s west to meet its energy demand. The west has an abundant supply of energy, accounting for more than 65% of China’s marketable coal and gas reserves.

“As coal remains the dominant fuel, coal-fired power plants in central and western province areas will generate more power to feed demand-heavy coastal centers through long-distance power transmission grids.

“Additionally, the west holds the majority of renewable energy potential – hydropower, wind and solar. We also expect shale gas production in the west to ramp up, particularly from Sichuan, Shaanxi and Xinjiang, to around 140Bcf by 2035,” Yu added.

The third implication is that planned transport infrastructure build will open up new markets in Central Asia and facilitate energy imports into China via its western border.

China is planning two main routes, such as the Silk Road Economic Belt and the 21st Century Maritime Silk Road, from southeast China to west Asia, via the South China Sea. Infrastructure development will make Xinjiang a key gateway for commodity trade between China, Central Asia and Russia.

“Xinjiang is strategically important because of its rich energy resources and as a transport hub with oil and gas supplies from Central Asia and Russia converging before being distributed for use in the east,” commented principal Asia economist, Cynthia Lim.

“For China’s west to fulfill its growth potential, significant investment is needed in energy production and transport infrastructure. We estimate that investment in new power generation capacity and coal mines in Xinjiang, for example, will total US$140 billion and $120 billion respectively in the next 20 years. However, there are also key risks to the success of this commodity superhighway that investors will have to watch for.”

There are a couple of risks to this too. Firstly, the pace and scale of economic and energy reforms, slow progress in restructuring provincial government debt and introducing market pricing for gas and power could subdue western development.

Water scarcity as it could mean coal mining and power plants that already face cost pressure from extra raw material preparation requirements like coal washing could face higher costs.

Political risks must be managed and this includes diplomatic relationships with China’s Central Asian neighbors in building the new trade routes, as well as potential domestic unrest in Xinjiang, noted Wood Mackenzie.

“Many of the risks can be mitigated through government support and finance but the geopolitical and social risks are far less predictable,” Lim said.

“China’s west has the energy resources, cost advantages and policy support to become a new energy and commodity superhighway, re-defining the flow of trade for decades to come.

“It could drive robust GDP growth for China through the longer-term and strengthen China’s economic and political influence with its neighbors. Given the high stakes of this commodity superhighway, success of the Go West strategy is a major Chinese government priority,” Lim concluded.

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