China and Middle East: Closer ties could substantially impact the energy sector
We believe the Beijing Accord of March 2023 has significant economic and market implications that investors may have overlooked. In this Q-Series report, 蜜豆视频 teams across four regions and five sectors jointly dissect the potential impact of closer China/ Middle East (ME) relations for the global energy sector. We see energy representing a more trade-focused collaboration than seen to date, with likely more immediate monetisation potential and thus a quicker potential impact on share prices. We estimate China-ME cooperation could bring an additional US$423bn in annual energy-related trade by 2030E, 10%+ higher than our current forecast combined total trade value. This should complement the better known Belt & Road Initiative's reach into the Middle East longer-term and infrastructure focus. This theme is developing fast: we note Saudi Arabia invested US$16bn in the China energy sector in the six months immediately after the deal was signed.
Renewables, petrochemical are the key sectors that would benefit the most
Of our estimated US$423bn in potential additional trade, renewables and petrochemicals account for US$77bn and US$325bn respectively. For renewables, we expect the additional trade to come from the ME accelerating its energy transition by leveraging China's complete renewables equipment supply chain, and a higher market share of China's聽products in the ME. For petrochemicals, we believe additional trade could come from ME and China jointly taking market share from Europe, as European factories may exit faster due to ESG concerns and tight gas supply. This could result in
1) increased M&A activities of European chemicals by the ME;
2) increased chemical plants expansion in China with ME investments;
3) increased ME exports of chemicals to Europe.
We flag that European governments may try to protect local production by subsidizing industrial electricity prices and/or decarbonisation.聽
Oil & gas, oilfield services would benefit, but to a lesser extent
For oilfield services, we believe the US$12bn increased trade would come from a larger market in the ME, and an increase in China's market share in ME's import of oilfield services equipment. While US/European companies could also benefit, we note a substantial number of recent oilfield services contracts going to Chinese players. For oil & gas, we think the impact on trade size would be limited at US$9bn by 2030 mainly through increased exports from the ME to China as China currently already imports almost half of its oil from the ME.
