Listen: Emerging markets: Comparing China and India’s energy-demand profiles

Sam Humphreys:

Hey Hill, how are you doing?

Hill Vaden:

I am all right, how are you?

Sam Humphreys:

Excellent. I'm good, thank you. The sun is shining, I feel very chilled. I've got the worst cup of tea I have ever made in my life that is slowly congealing on the desk next to me, but it is okay.

Hill Vaden:

Don't drink it, then.

Sam Humphreys:

No, I won't. We have just had a brilliant conversation with Karim Fawaz and Ruchika Gupta on the China and India energy mix and demand growth, and this was based off a conversation I think they had at CERAWeek for those that attended. And I think because it was so good, we've decided to record a podcast so everyone else can hear it, and it was brilliant, and a lot of things that I didn't know about, they illustrated. So do you want to give your takeaways for what the listeners should be listening out for?

Hill Vaden:

Yeah, sure. As you said, we kind of stole this idea from what was called the expert zone at CERAWeek, where we had a bunch of S&P experts talking about different trends in energy, and Ruchika and Karim were talking about the comparison of China's growth story, leading energy demand growth, leading up to 2024, and whether India can replicate that in the future. And so some of the takeaways for me are, one, just on that comparison that India has a lot more optionality than perhaps China did, in terms of the different supply that the energy or that India can build around, the other one being the role of energy security, that energy's security has a new priority or an additional priority for countries today.

And then the last one, perhaps the most important one, is that manufacturing really drove energy demand as China rose in the early 2000s. And that's not the way India has kind of built its economy, and so there's much more service oriented economy there that is not going to perhaps have the same impact on some of the commodity demand that they needed. So there's tons of people there and so there's a lot of similarities there, but after that things, get real different. How about you?

Sam Humphreys:

I mean, the one thing that I think is very interesting that Ruchika mentioned was India has some very stringent or ambitious goals for renewable energy in the next six years. I think it's up to 500 gigawatts, and just how they're tackling that, and the fact that they are developing coal at a similar rate to renewables, and it's just fascinating. I think it's an excellent conversation and I hope everyone enjoys it.

Hill Vaden:

All right, enjoy.

Speaker 3:

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Hill Vaden:

All right, welcome back to EnergyCents, an S&P Global podcast covering all topics on the intersection of energy and finance. This is your host Hill Vaden, and I'm here as usual with Sam Humphreys. Sam, how are you today?

Sam Humphreys:

I'm very well, thank you. How are you doing?

Hill Vaden:

I am doing all right. This is two days in a row that I'm doing all right and that we're doing a podcast.

Sam Humphreys:

It is, I know. So for those eagle-eyed listeners, you may notice a similar introduction. If you do spot it, let us know, but it's great, it's great. And we are joined today with returning guest Karim Faraz and Ruchika Gupta. So hello to the both of you, how are you doing?

Karim Faraz:

Hi, good. Thanks for having me on again.

Ruchika Gupta:

Hi, Sam and Hill. I'm very well. Thank you for having me for the first time. I'm doing it for the first , and it is a very warm day here in Delhi, and getting hotter. So I'm looking forward to the conversation and gearing up for the summer.

Sam Humphreys:

Fantastic, and thank you for taking time out of your evening to join us. So we are going to talk today about energy sector growth markets, and particularly, we're going to look at China and India, and this is based off a conversation held between our two lovely guests at CERAWeek, which was a couple of weeks ago now, and it's going to be a nice comparison between the two, and what's changing, and what are the key factors driving those changes. So Karim, would you like to kick things off and just set us up as to what China's historical impact on the global energy markets has been, and what it's looking like at the moment?

Karim Faraz:

Sure, happy to do that, and maybe to provide some context to listeners who were at that CERAWeek, what we tried to do at the time when we organized this presentation a few weeks back was to try to kind of peel away at this question which we're getting increasingly frequently of can India's acceleration over the remainder of this decade and into the next decade take the mantle of driving global energy demand growth from China, which has been kind of the driving factor of energy markets for the better parts of the past two and a half decades? And kind of trying to understand the scale, the drivers, the differences, really, between these markets, and uncover a lot of the detailed metrics to look at as we go forward, and answer that kind of difficult question, which is can someone really or can a country really single-handedly mimic the type of pull that China represented across all of these sectors, all energy sectors over the past several years?

It's a very difficult question to answer, because I think the way I think about it in a macro sense is the China phenomenon for energy markets since the early 2000s is unlike anything we've ever seen historically. Both the scale, the velocity of growth, the sustainability of growth, really, over that long a period is something that we've never seen before. Clearly, a dominated market and price formation across a number of commodities, oil, certainly coal, certainly. Gas, to a lesser extent initially, but increasingly over the past few years, we've seen gas become a bigger part of the Chinese demand mix.

So it's a bit of a unfair ask, really, for India or any other country to be able to mimic the type of growth that China had, especially in the mid-2000s, when you had a five- to seven-year period where China's economy was growing at 10 to 15% per annum growth on a compound basis, and that was very energy intensive growth, not just strong economic growth, more broadly. It was very energy-intensive growth, and mimicking that expansion is very difficult kind of mathematically. And even if you do have the demographic and economic underlying growth prospects which are quite bright in the case of India, it's difficult to have the ingredients that are there to the same extent in terms of volumetric growth across the major commodities.

Obviously, I focus primarily on oil in my day-to-day job, but also, as you look to gas, and other commodities, and coal, that reality kind of holds across the board as we look forward. So China, back to your initial question, which is where are we in the China growth cycle and why does it matter? China is decelerating. That's kind of the subtext of what I've been saying since the start here, which is growth in Chinese oil demand is decelerating fast. The Sinopec CEO or president was at CERAWeek a couple of weeks ago, calling a peak in Chinese oil demand, which I interpreted the refined products demand in 2026, due to both the economic kind of transition, efficiency gains, but increasingly EV penetration.

So oil demand is turning over, and at the same time, more renewable penetration is kind of eating into cole demand, and you have a curbing of a lot of the overall kind of primary energy consumption in China looming in the next three, four years, where the rate of growth is decelerating. So that's something the world has to contend with, the energy markets have to contend with, and what they're trying to do at the moment is trying to see who's most likely to take over that mantle, and India is the natural candidate by virtue of scale, economic growth, and the fact that it is growing.

On oil for example, it is the fastest-growing market this year so far. It will likely be the fastest source of oil demand growth through the rest of the decade. Similarly, for other commodities as well, although Ruchika can speak more about that. So structurally, the market has to contend with slowing China. It's been instrumental to the state of energy markets as they are today, and you're losing that engine of growth, and what the market is kind of struggling with is what comes after that?

Hill Vaden:

So Ruchika, this is a good place to bring you in: China and India are the most populous countries in the world, and so there's obviously a lot of similarity, and just the humans that can drive energy demand. Karim's outlined a little bit of the historical strength of China, which has seen, I suppose, energy revolutions throughout the past 20, 25 years, that it's been a lead from shale gas in the US to the rise of solar, and electrical vehicles, and everything else. Talk about where we are today in India, and some of the overall power or energy balances.

Ruchika Gupta:

Yeah, I think, thank you Karim, for setting the context, and I agree with you. Okay, India and China, in terms of size and population, they look more similar, but fundamentally, if you think these markets are a little bit unique in itself and have a different growth trajectory, if China, as Karim mentioned, was more manufacturing-led growth, India has been less energy intensive and service sector led growth. So historically, on the economic side, right?

But if you see in terms of the energy market, like primary energy consumption, India is the third-largest market globally in terms of the primary energy consumption. And if we look at the share of the primary energy consumption in the world energy, it would be around 7%. It has doubled over the last two decades, growing at about 4.5%. But then, if you see, growing forward, it is going to double again in the next decade. So there is a growth potential that we see on India.

And if we look into and deep dive into the energy mix overall, it has been primarily dominated by fossil fuel. Around 76% share is contributed by fossil fuel, dominated by coal at 48%, which has its share, and the energy mix has grown from 35% in 2003 to around 48% currently. And what has been the driver, it has been majorly the abundant resources which is available and the energy security consideration about it. And then second point is gas, which I can talk about later in detail, but gas share in the overall energy mix, similar to China, has been limited. It is around 5%, and there are challenges around its growth, although the ambition to grow gas share in the energy mix is around 15% by 2030. But then, we can discuss about later.

Overall, if we see non-fossil fuel, its share is about 4%. It's very small compared to how where we want to achieve and what the ambition we have, and given the rapidly-changing environment globally, the geopolitical dynamics which is there, all the global pressure on carbonization, there is a strong push towards non-fossil fuel, which includes hydro, nuclear, and renewable energy. But we still see its share to increase over time, but still goal to dominate around 40% share by 2050. So that's how we see the evolution of India's growth.

But clearly, there is a growth potential, and why do I say that? It is the largest market, but despite that, the per capita consumption of electricity is very low. If you see per capita primary energy consumption is 0.75 tons of equivalent or oil equivalent compared to world average of around 1.9. The world average is 2.5 times India's. So clearly, there is this potential which India offers, and there is growth opportunity which is there on the horizon.

Sam Humphreys:

So you talked then a little bit about gas, and I'd quite like to just jump on this. We've had quite a few conversations recently on the importance of gas, particularly with this move to sort of a "greener", I'm using air quotes, version of energy, and how that is playing a part in energy mix. So you touched on some challenges there. Can you kind of elaborate what those challenges are, and if that is set to change in the near-term future or long-term future?

Ruchika Gupta:

Yeah, sure. So the primary, I think if I look at globally, gas needs and anchor load, right? So globally, if we see power sector has been an anchor load for gas demand in the overall energy mix. But when it comes to India, there is coal, there is renewable, which is like the cheapest resources. So affordability of gas is challenging. Second, because there is no lack of domestic gas, like domestic gas is not sufficient to meet the demand or there are priority sectors for gas to be diverted towards not the power sector. And second, the LNG becomes expensive or cannot compete with the domestic resources, and there is also volatility that is associated with that.

So those are the challenges which makes the demand for gas in the sector little more seasonal and opportunistic, and that's where we don't see the share of gas increasing, at least in the power sector. It would be coming as more renewables will come in, there would be more integration demand which will be there, but that would be also opportunistic and seasonal. However, having said that, India or the common policies which are there, they are focused on other sectors, mainly transport, but there is also competition with EVs that are coming in, hydrogen vehicles which are coming in. So we don't see significant penetration or more large-scale integration of gas into that sector.

Third, there is a demand in fertilizer sector that is also being talked about, but then green hydrogen, green ammonia is being a competing fuel there, which is also on horizon and being discussed about. So those are the kind of things where we see. The other important sector which India is targeting is the CNG sector, which is the consumer, the domestic demand, the city gas distribution network in the tier one cities, where the domestic connections of LPG has been translated into the piped gas, there is some CNG demand through transport, and then some industrial demand from at least from the LPG cylinder to gas.

So I think there is the window where at least gas is competing with the oil and LPG fuel, and much more makes sense, and there we see some kind of demand emerging. Second constraint is the overall pipeline infrastructure which is also slowing growth. It's more majorly concentrated in the western part of the country and the some northern part. Now there is an expansion plan, and more expansion on the east and the northeast, south belt, where we do see some uptick in the demand growth. But still, as I highlighted, the target of 15%, that is still not achievable, even whatever scenario we are looking at. It would be still around six, 7% share in the energy mix by 2030.

Hill Vaden:

So Karim, Ruchika mentioned transportation, and I think, in some of your introductory comments, you as well mentioned just the rise of oil demand as it related to transportation needs in China. We're talking now in 2024, and much of the headlines and much of the internal conversations within these S&P walls around electric vehicles. How do we think about China today and India today in terms of their needs for oil as a transportation fuel?

Karim Faraz:

I mean, the needs are still great on both sides of that divide, both China and India. China is much farther along in terms of electrification than arguably anywhere else in the world, save for perhaps Norway, in terms of a share of sales. The velocity of the growth in that sector and the velocity of the penetration has continuously surprised us at S&P, to the upside over the past several years. I was looking back the other day at our forecast for EV, and by that I'm talking about both battery EVs and hybrid EVs, that broader bucket. I was looking at our forecast for 2023 that we had done in late 2021, which is not that long ago, a couple of years ago, which was for something around 18% of all sales being EVs. In reality, what we had last year was north of 30%. If you believe recent comments by large EV manufacturers in China, running sales are probably much higher than that currently, north of 40%.

So clearly, you're in the process of transforming the Chinese transportation sector. You're still going to see... I mean, China still has by far the largest automotive fleet in the world, gasoline-powered automotive fleet in the world. That fleet is going to take a very long time to turn over. So it's not that demand is going to disappear overnight, but the EV penetration is really eating into oil-related transportation growth as we go forward. Basically, it's eating into that marginal barrel quite significantly, and that's kind of accelerating the peak here as we move forward, which is an interesting kind of distinction in the trajectories, which is then the potential advantage to India in a macro sense, which is China's rise, especially in the mid-2000s through recently, transportation had to grow primarily by via oil demand. That was the only way you could grow mobility, grow vehicle penetration. It was gasoline-powered cars, diesel-powered trucks, and that was the extent of it.

Those were markets, those were kind of segments of the economy that we believed for a very long time were largely shielded from substitution, because you didn't have a viable substitute, especially in these markets at scale, to do what refined products did. Increasingly, that's changed in the context of China, and the kind of interesting trend is Chinese vehicle exports are rising to competition in the EV space across the world is expanding. So for India, which is at an earlier stage of that vehicle penetration curve, it provides potentially a different kind of trajectory here in terms of oil intensity, in the sense that if you can electrify, it doesn't even need to be electrifying light vehicles, it could be just electrifying two-wheelers and three-wheelers, which are motorcycles and small city vehicles, that alone can have meaningful displacement effects on demand, in a way which China didn't have 10, 15 years ago, when its transportation sector started expanding significantly.

So all of that is to say the EV sector, the electrification of transport is moving fast, and even though there's headlines about stumbles, lower targets in the US, issues with sales, you had a bad quarter last quarter, from a micro standpoint, you still have this kind of competitiveness and profitability debate happening in the US and elsewhere. But in a macro sense, as you look forward, it's fair to say that transportation demand growth over the next 15 years will be significantly less oil-intensive than it was during the past 15 years. And with India being the largest single market in terms of potential automotive mobility and vehicle energy demand growth over the next 15 years, that can be a big factor in terms of that trajectory of growth. The more you have electrification of transport in India, the more you have EV penetration, which has been quite low, especially compared to China so far, the extent to which that happened and that plays out in the next few years.

The earlier it happens in your vehicle kind of penetration S-curve, if you will, the more impact it can have in terms of demand displacement, or you short circuit that initial phase, which is the buildup of a vast refined product fuel fleet, the way we have in the US, and even China, for that matter. This is to bring it back to India to kind of bring it outside, to broaden it beyond transportation, China, in the mid-2000s and throughout the first several years of its rise, was fairly captive in terms of the sources of energy they could rely on to fuel the growth they needed at the time, economic growth, and manufacturing, and export growth, and the expansion of the economy, which were largely coal and oil.

Everything was powered by coal and oil for the most part, oil for transport and industry and coal for... And by oil, I mean also oil-refined products and petrochemicals that go into that process, and coal from a power generation and electricity demand more broadly. And yet, today, going forward, which is at an earlier stage of that... I mean, is at that kind of inflection point where potentially we're looking at an acceleration over the next five to 10 years, you have more substitution options, you have a much broader set of choices that can be made as to which way we go with that.

I mean, going back to Ruchika's point about gas, gas is an option, it could be opportunistically used. If you have a crash in gas prices in 2027 because there's too much LNG capacity coming on and suddenly global gas prices are very attractive, that's an option that might be more attractive to India than it is today. You can choose gas, you can choose coal, you can go electrification route, you can go continued on oil, but even oil can be more efficient. So a lot of the maturation of the energy sector over the past 20 years works really in the favor of countries that are now at that early stage of growth, because you have more optionality to pick your own path based on your own priorities and whatever, what you have access to. That's going to be an interesting process to go through.

Sam Humphreys:

So you've talked there about the ability to choose which source of power a country might go for. What I'm interested in, with there being so much talk on renewables, greening of everything, how is, if we go with India to start with, how much legislation, and public demand, and public lean towards renewable sources? I'm going to use my little air quotes again, "cleaner" sources of energy to make up that energy mix. And is there then a parallel with China in this move towards other percentages, similar sort of percentage going forwards, or is there still a difference between a growing demand market as industries evolve, or is it similar? Ruchika, would you like to take that first?

Ruchika Gupta:

Yeah, I think very interesting question, Sam, and yeah, there is a great, ambitious target India has to achieve renewables, like 500 gigawatt target by 2030. We are currently at around 135 gigawatts, and then we are adding about 15 to 20 gigawatt annually. So to achieve those target India, has to add more than 40, 45 gigawatt of renewable capacity year on year till 2030, to meet the targets, which is challenging, given the financial constraints, the infrastructure constraints. But yes, there is a strong ambition that India carries to achieve those targets. Even if you talk about the public, so there is a lot of corporates which are going green route, like decarbonization is one of their key agenda on sustainability, and there has been a lot of demand which is coming up from these corporates in terms of PPAs for renewables, which is actually increasing year on year.

And we do see there is a growth on renewables. We have seen historically there it has grown by 15%. We do expect that growth trajectory to continue. But as Karim mentioned, India has a strategy to adopt all approaches. So coal is growing in parallel to renewables. So renewable pipeline, if you see, is around a hundred gigawatt, which is going to be achieved in the next four or five years. But then, there is a 30-gigawatt pipeline of coal which is still under construction. Around 20, 25 gigawatt is on hold, but under litigation and will come online. India has, the minister has announced 80 gigawatt of new coal capacity to be added by 2032.

So there is all above approaches is what India is adopting to with respect to, "Okay, we have to have..." because there is a potential for demand growth. You see the per capita consumption is so low, it needs everything to grow its economy and its demand, to meet its demands, and it has to exploit all the resources domestically, because of energy security and protect itself. So coal, there is hydro, there is renewable, so everything is in tandem, growing together to meet the demand.

Hill Vaden:

So somewhat picking up on that, kind of the original idea for this conversation was around energy demand and China leading energy demand 20 years ago, India potentially leading it in the future. China has, over those 20 years, kind of changed its place that. Now China is producing tons of next-generation energy in terms of solar panels, in terms of batteries, in terms of electric vehicles. Do you expect a similar transformation, Ruchika, in India, or do you think over the next 20 years or so we'll be looking at India still as an energy consumer and less so an energy exporter? You mentioned energy security as well, and so I guess that first part of the question, Karim, I'd like you to weigh in as well, just on how important India might be as an energy demand center for Chinese exports outside of oil.

Ruchika Gupta:

So I may take the first part on India, right? So yes, India, China grew on manufacturing and building all this capacity, the solar batteries, et cetera. India has that ambition to become a manufacturing hub, as I mentioned earlier. And there are schemes which have been launched, like production link and sector schemes which have been launched too for developing solar manufacturing batteries, electrolyzers. So everything is in the plan and agenda, where some kind of support mechanisms are in place for India to develop those in-house, so that it doesn't have to depend on China for imports.

Currently, if you see it has been totally dependent on China, there are some manufacturing capacity, but that's limited and doesn't meet the demand of what the country has. And most of them are also mostly assembly lines which are being there, but there are plans. I think today I was reading a news where one of the solar manufacturing capacity by Adani has been in operations. So there is an ambition and there are plans, projects are in pipeline for setting up these manufacturing hubs. All these RE developers, they are not only just limiting themselves to project development, they are going across value chain and expanding their capabilities from being an energy generator to being a supplier.

Karim Faraz:

Yeah, I mean, in the context of China, it's important to remember that the steepest part of your demand growth curve is the toughest one to extricate yourself from in terms of transitioning from being basically a demand engine versus being of more of a two-way player. For China, it took 15, 20 years to become more flexible in the way it impacts markets across all of these sectors. Clean technology is one the exceptions, because they were pretty early movers in terms of capitalizing on that opportunity. The other difference, and going back to the comments that Ruchika was making, the China case is one where you have the central kind of centralized planning, execution, development of large scale infrastructure projects at a scale which really arguably no one else in the global economy has been able to do over the past 30 years.

That has allowed them, really, in recent years to scale up these sectors, whether it's EVs, or solar panels, or battery materials, or semiconductors, or whatever else you want to think about in a country who sends at a velocity that's difficult to replicate in systems that are not built, structured in the way the Chinese system is built, the amount of capital available that was made available to players in the Chinese setting. But as Chinese demand plateaus or decelerates and it becomes more reliant on exports of clean tech, and automotive, and other sectors, once again as a driver of economic activity, certainly, growth in India and other emerging markets will become quite important to them.

So far, India has not been particularly kind of a major importer necessarily of EVs or vehicles, but over time, that's a possibility, obviously. As the domestic demand plateaus, China has being forced increasingly to find market for these goods. And these industries, the automotive industry is a great example of an industry that was built ostensibly for a domestic market that peaked and transitioned sooner than expected, and suddenly they have a lot of excess capacity, whether internal combustion engine, manufacturing, or increasingly new energy vehicles, which is what they call EVs.

So you're going to see more competition and a lot of the competition around the world is going to become concentrated by suppliers, it's going to be constantly around India, because it is the single largest kind of source of growth, foreseeable future. It is one of the few large concentrated single-country markets that will be growing over the next decade. So it's natural for that competition to exist.

Sam Humphreys:

Okay, excellent. Thank you. So just to wrap up, then, I'd like to get your thoughts on what are a few key things that we should look out for in the next, say, year in these areas? Ruchika, would you like to go first? Just a couple of thoughts just to finish off with.

Ruchika Gupta:

In terms of, I see China's stagnating, but then what India promises is a favorable environment, resilience in the growth, and promises like meeting its 5% economic growth, which actually results into a robust energy demand growth. So there is a very good opportunity and potential that India offers, and it is like overall, above all, approach that India is adopting for energy transition, meeting its demand through affordable and sustainable means, so that it can meet the power of all the four billion people in the country.

Karim Faraz:

I mean, from my standpoint, the big takeaway for me is it's an unfair ask to ask for India to replicate the China phenomenon over the past 20 years. I think the most likely way in which it would be replicated is by committee, and you could argue that India should be at the head of that committee, which is driving kind of the expansion of global energy markets for decades, for kind of years and decades to come. So it will be different. It won't be, I think, a smooth relay, where you kind of pick up where China left off and suddenly you have this massive engine of energy demand growth that's getting underestimated by everyone.

I think it will have its own factors, drivers, and parameters that the market is going to have to contend with. And over the next two years, I think it's a pretty critical period in that process of market awareness and market recognition that the era of... At least from my personal standpoint, as I think about oil, over the next two years, as China progressively nears its peak in refined products demand or even decelerates to the point where it's growing at a very shallow rate, which might be 2025, 2026, 2027. In the next three years, that will happen.

As that happens, the market will have to kind of search for who the bellwether is of the state of the oil market, who's the bellwether of the state of global energy demand, and then that kind of process is going to be taking place over the next, I would say, 24 months. So it'll be an interesting thing to watch how energy markets start to think about India more broadly in a more macro sense, without the long shadow of China over it, as far as demand is concerned. I think that's going to be an interesting dynamic for the next few years.

Sam Humphreys:

Amazing, thank you. Hill, any last comments that you wanted to make before we finish up?

Hill Vaden:

No, thanks. This has been a great conversation. I guess another thing we heard at CERAWeek is people listening to this podcast on treadmills. So if any of listeners out there are on treadmills right now, great work, cardiovascular health is important. And clean up your equipment before walking away, if you're in a gym.

Sam Humphreys:

Excellent, awesome. Thank you, everyone.

Karim Faraz:

All right, guys.

Ruchika Gupta:

Thanks.

Speaker 3:

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