Innovation
Global Investor Focus, 02/2007 Credit Suisse
Global Investor Focus, 02/2007
Credit Suisse
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GLOBAL INVESTOR FOCUS <strong>Innovation</strong> — 45<br />
China’s incremental oil demand<br />
Energy cost comparison for one barrel of oil equivalent<br />
Mbd<br />
1000<br />
800<br />
600<br />
400<br />
200<br />
0<br />
–200<br />
Domestic production (mbd) Coal to oil Imports (exports)<br />
01 02 03 04 05 06 07E 08E 09E 10E 11E 12E 13E<br />
Cost of 1bbl oil eq energy (USD)<br />
70<br />
60<br />
50<br />
40<br />
30<br />
20<br />
10<br />
0<br />
1990A 1992A 1994A 1996A 1998A 2000A 2002A<br />
Crude oil Converted coal-NEW Natural gas<br />
Converted coal-OLD Coal (FOB)<br />
2004A 2006A<br />
2008E 2010E<br />
LT<br />
technologies, with the target of generating 15%–20% of total consumable<br />
energy from alternatives by 2020.<br />
There are understandable reasons for diversification. The development<br />
of alternatives lowers China’s reliance on imported<br />
crude oil, and thus contributes indirectly to an improvement in<br />
national security. Alternatives also offer one more way of slaking<br />
the thirst for energy created by primary industrial growth and subsequent<br />
consumer demand. On 16 June 2006 the Ministry of Finance<br />
announced the “Management Rules for Funds Dedicated<br />
to the Development of Renewable Energy” as well as the “Directional<br />
Instruction for the Development of Renewable Energy Resources.”<br />
These two instructions are the most important guidelines<br />
mapping out China’s alternative energy future. Various forms<br />
of subsidies, interest-free loans and consumption-tax exemption<br />
are being provided to encourage development and innovation in<br />
various categories of alternative energy, including wind, solar, biomass,<br />
geothermal, ocean and hydropower.<br />
Coal-to-oil conversion: The parent of China Shenhua Energy,<br />
the largest coal producer in China, has pioneered the development<br />
of coal-to-oil (CTO) conversion technology. It intends to inject<br />
these CTO projects into the listed company when the business<br />
matures. For more details on coal-to-oil projects in Asia, please<br />
refer to our Research Weekly Asia: “Coal-to-oil conversion bodes<br />
well for long-term coal prices” dated 2 November 2006.<br />
Wind: China’s wind power capacity grew at a robust CAGR of<br />
32% between 2000 and 2005. The National Development and Reform<br />
Commission (NDRC) plans to further increase the capacity<br />
from 1.3 gigawatt (GW) in 2005 to 5 GW in 2010. Together with<br />
their parent companies, Huaneng Power, Datang International<br />
and China Shenhua are three of the active participants in this<br />
area. Shanghai Electric also has plans to go into the wind turbine<br />
manufacturing business.<br />
Solar: China is the fifth-largest solar photovoltaic (PV) market<br />
in the world. The government has three major programs to promote<br />
the use of solar PV, namely the Brightness Program, the<br />
National Township Electrification Program and the Renewable Energy<br />
Development Program. As the largest solar cell manufacturer<br />
in China, Suntech Power will be a key beneficiary.<br />
Nuclear: The Beijing government is focusing mainly on the development<br />
of 1 GW-class nuclear units with a view to increasing domestic<br />
content to 60%. Currently China is capable of producing<br />
300 megawatt (MW) nuclear units with 95% domestic content,<br />
but 1 GW units with only 50% domestic content. So far, Datang<br />
International is the only Chinese Independent Power Producer<br />
(IPP) looking to aggressively diversify into nuclear power generation<br />
over the next decade. It has already invested in a joint venture<br />
in a 2 x 1 GW nuclear plant in Fujian for estimated completion<br />
in 2013. Equipment providers such as Shanghai Electric will also<br />
benefit as they start to diversify into the nuclear turbine manufacturing<br />
business.<br />
Biofuel: China is the third largest ethanol fuel producer in the<br />
world, after Brazil and the USA. In its 11th Five-Year Plan, the<br />
government is targeting a rise in ethanol fuel production from the<br />
current 2% of gasoline consumption to 3.3% by 2010E and 10%<br />
by 2020E. China Agri-Industries, a spin-off from China Food,<br />
controls two out of four licensed ethanol fuel players in China.<br />
China Petroleum and Chemical and its parent hold interests in the<br />
other two licenses. Cheuk Wan Fan, Timothy Fung<br />
Source: Credit Suisse, industry sources