ENERGY MARKETS

Coronavirus threatens the energy sector. Here's why

Since the first reports of the deadly coronavirus, oil prices have stumbled, shipments of U.S. liquefied natural gas have gone undelivered, production of solar equipment has languished, and two manufacturers of electric vehicles — Hyundai and Kia — have halted production at some of their factories.

Concerns are now growing about the energy sector as work slowdowns and transportation bottlenecks in China have a ripple effect because of the country's manufacturing dominance and its role as a top consumer of oil and natural gas.

"As the spread of the coronavirus does not yet appear to be slowing down, concerns are rising among LNG sellers," research firm Rystad Energy said in an analysis last week.

Over the weekend, Chinese officials confirmed that novel coronavirus has killed more than 800 people in mainland China, making the outbreak deadlier than the 2003 SARS outbreak. More than 25 countries have confirmed cases of the virus, which was first identified in central China.

According to a report from IHS Markit last week, the coronavirus will have a much larger negative impact on the global economy than SARS, as China's economy has grown from the sixth largest in 2003 to the second largest now.

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"Therefore any slowdown in the Chinese economy sends not ripples but waves across the globe," the report said. As one example, China's oil demand constituted 7% of world oil demand 17 years ago, compared with 14% now.

Here are four ways the novel coronavirus has affected oil and gas, renewables, and electric vehicles so far, as governments and health officials scramble to protect the public.

Solar pressure

The U.S. wind and solar industries are closely monitoring a work stoppage instituted because of the virus that is due to be lifted today in eight Chinese provinces.

Southeast Asian companies that sell many of the solar panels used in U.S. installations tend to source key raw materials in China.

So far, say analysts, the stoppages haven't dramatically upset supplies of wind turbine and solar panel parts. But that might change if factory closures and quarantines continue — particularly for solar, since the industry is more deeply dependent on China than the supply chain for wind, they said.

About 90% of the silicon "wafers" used in the United States — the bedrock of solar cells — originate in China, said Xiaoting Wang, a San Francisco-based solar analyst at BloombergNEF.

Producers probably have enough raw materials stockpiled to meet supply over the next few weeks, she added, but eventually a shortage could ripple through the rest of the supply chain for solar panels.

"Let's say the virus will be very bad and all the manufacturers cannot produce, you have nothing to offer even if the module price is doubled," said Wang.

Already, some analysts expect prices of some solar products, including panels themselves, to rise in the near term. In a Jan. 30 note, one senior researcher for an investment bank said the industry had already begun to experience "shortages of wafers and possibly glass."

The analyst, Philip Shen from Roth Capital Partners, noted that the work stoppages had affected provinces where major solar manufacturers like LONGi and JA Solar site their operations.

Some manufacturers had remained at least partly open during the stoppage. Representatives of U.S. industries, including the Solar Energy Industries Association and Advanced Energy Economy, said they had heard little from members about the coronavirus.

"The basic conclusion is, we can't quantify the impact yet," said Wang of BloombergNEF.

Wind industry representatives at the American Wind Energy Association declined comment, saying they were still assessing the situation.

Clifford Kim, a senior credit officer at Moody's Investors Service who follows renewables and public utilities, said the supply base for wind was "more diversified globally" than solar.

"It's not as concentrated in China," Kim said.

Yet executives at Vestas Wind Systems A/S, which Kim cited as the most exposed wind manufacturer, said on an earnings call last week it is reviewing "on a daily basis" when it could restart production at its plants. Vestas manufactures wind blades and other components in China near the epicenter of the outbreak.

"We all appreciate if China is remaining closed for weeks or even worse, months, then I think it is the whole world that will have a pandemic force majeure," said CEO Henrik Andersen, according to a transcript of the call. The company has about 3,000 employees in China.

Other large wind companies signaled that they were keeping a close watch on the outbreak.

Ben Hunt, head of corporate affairs at Siemens Gamesa Renewable Energy, said the company was assessing the movement of components, people and operations at manufacturing plants. The company, he added, had "started to develop India as a global hub to reduce our dependency from China."

Tesla takes a hit

The coronavirus is having a substantial impact on Tesla Inc., the leading maker of electric cars, while having lesser consequences for EVs made by other automakers.

Two weeks ago, Tesla said that its new Chinese factory would shut down briefly. Last week, a vice president of Tesla said via the Chinese microblogging site Weibo that February deliveries of the Model 3 sedan "will be delayed," according to a report from CNBC. The Shanghai factory, Tesla's first outside the United States, made its first car deliveries just last month.

News of that delay put the brakes on a red-hot run for Tesla's stock, which had reached new highs after the automaker reported higher production numbers.

Furthermore, Tesla on Thursday temporarily shut all of its stores in mainland China as a safety measure, CNBC reported. Tesla did not respond to a request for comment in time for publication.

Apart from Tesla, the impact of the coronavirus may be less serious for EVs than for traditional gas-powered cars.

China's EV battery industry has the good fortune of being rooted in the province of Fujian, which is distant from the disease epicenter in Hubei province, said Dan Hearsch, an automotive supply chain expert at consultancy AlixPartners.

That may blunt the impact on electric vehicle production, though it is subject to the same uncertainties that beleaguer all automakers right now.

Late last week, Toyota Motor Corp. and Groupe Renault both said that they would delay the restart of production at their Hubei province facilities until the end of this week. A few days earlier, Korean automakers Hyundai Motor Co. and Kia Motors Corp. suspended operations at their home factories in South Korea because critical parts from China hadn't arrived.

One reason the auto industry is hobbled is that, unlike industries like solar power, inventories are kept very "lean," meaning that few parts are kept on hand to contend with interruptions.

"We don't tend to keep weeks of safety stock, even for critical materials," Hearsch said.

The crucial day is today, which is the day that China targeted as the date that the epicenter would be sufficiently under control for the masses to return to work in Hubei. Carmakers with major operations in Hubei, including Germany's Volkswagen AG and Daimler AG, have said they plant to restart today.

If Chinese authorities don't have the coronavirus sufficiently under control and extend the work stoppage, the auto industry's troubles could start to accelerate.

LNG fears

The outbreak has caused some Chinese companies, such as China National Offshore Oil Corp. (CNOOC), to declare force majeure, the idea that a set of unpredictable events would stop a company from fulfilling its original contract.

CNOOC, which says it is China's largest offshore oil and gas producer, has declined to accept some cargoes of liquefied natural gas because its ability to import the fuel is inhibited from the virus's impacts, Bloomberg first reported.

Neil Bhatiya, an associate fellow for energy and economics at the Center for a New American Security, said the Chinese companies could either stockpile the LNG offshore — which creates an additional expense — or could refuse the deliveries outright.

The canceled orders will affect the bottom line of U.S. exporters of LNG, he said.

"They are going to have to try to find, if they can, a different market for it, and it'll probably be at a lower price than what they had initially contracted out," Bhatiya said. "They're basically trying to chase a price level that keeps going down as more and more orders are canceled."

Bhatiya said assessing the full extent of the virus on global oil and gas markets is complicated by not knowing how long or how wide the coronavirus will spread.

Research firm Rystad Energy revised its growth estimate for Chinese LNG for 2020, limiting it to 4.7% compared with 2019. Earlier estimates from the Norway-based company expected Chinese demand to rise 10%-13% this year, the company said in a brief Friday.

"If more Chinese companies cancel or defer importing LNG volumes from term contracts, and if the spot price then falls further, sellers may face even greater pressure from buyers wanting to renegotiate existing contracts or hesitating to sign new ones," Rystad Energy said.

Xiaonan Feng, a research analyst at IHS Markit, said the firm expects China will reduce its crude imports by as much as 900,000 barrels per day over the next four months to "bring the country's crude supply and demand" back to balance. That amounts to an annual reduction of 300,000 barrels per day from an earlier company projection.

"This will exacerbate the already sizable supply surplus of over 700,000 b/d expected in 2020 globally," Feng said, who noted that the virus outbreak dealt "a significant blow" to Chinese refineries that were well stocked before the virus began to spread.

Oil

China is the world's second-largest consumer of oil, prompting oil demand to fall sharply in recent days because of travel restrictions and decreased consumption of petroleum products.

The price of Brent crude oil — an international crude benchmark — was at $54.47 per barrel as of Friday, while U.S. West Texas Intermediate futures landed at $50.32 per barrel. Earlier in the week, the WTI price fell below $50 to its lowest level in over a year.

On Friday, Energy Secretary Dan Brouillette said the impact of the virus on energy markets has been "marginal," despite the large drop in crude oil price. But he added it's important for the United States to closely monitor China's response to the situation.

Brouillette said DOE is also watching the direction OPEC takes over the next few days, adding that the group's decision would have an effect "across the world."

If China is able to contain the virus, "perhaps you won't see quite the slowdown that people are anticipating," Brouillette said at an Atlantic Council event. "If it does continue, if it creates a contagion and moves across China as well as around the world, then obviously we're going to be concerned about Chinese economic growth."

An advisory body to OPEC met last week to discuss provisional cuts in oil output in order to counter an expected drop in oil demand, according to multiple media reports. The group — the Joint Technical Committee — recommended cuts of 600,000 barrels per day, although Russia has reportedly still not given an official signoff.

Phil Flynn, an oil analyst with Price Futures Group, said the Russians have traditionally played "hard to get" in these meetings and that this is a time of year when the country does not export a lot of oil, instead needing it for domestic use. He said the Russians are likely to ultimately agree to some degree of provisional cuts.

"Now, what will be the market impact if they come back and say we're doing nothing?" Flynn asked. "If that's the case, now you're going to be talking about 500,000 barrels [per day] of oil more on the market, and that's definitely going to depress prices again."

OPEC representatives did not respond to requests for comment on the advisory group's meetings or its final recommendations.

Brouillette, meanwhile, said the United States is "excited about the purchase of U.S. energy by China."

"For the moment, the Chinese seem to have a clear indication of the virus itself, where it is, and they're taking very aggressive steps to contain and control the potential outbreak," Brouillette said.

Reporter Lesley Clark contributed.

Twitter: @cjanchondo Email: canchondo@eenews.net

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