CHINA MARKET COMMENTARY: THIRD AND FOURTH QUARTERS, 2006

China's economy continued its strong growth and commensurate energy demand. Annual growth for 2006 reached 10.7 percent, surpassing growth of 9.9 percent in 2004 and the revised growth rate of 10.4 percent for 2005. Growth of fixed asset investment, which the government has been trying to contain, slowed slightly in the third and fourth quarters.

*Oil. In the third and fourth quarters, prompted by a sharp fall in international oil prices, demand for heavy oils led that for light oils. Destocking and restrained inventory buildup are expected to mask real demand well into 2007.

*Natural gas. Prospects for natural gas imports by pipeline brightened even as the market power moved firmly into the hands of suppliers for liquefied natural gas into China's eastern coast, and Chinese planners continued to wrestle with the anticipated long-term supply shortfall.

*Electric power. After adding 105 gigawatts of power in 2006-almost the total capacity of France-China's power markets moved closer to surplus with some fall in utilization hours, particularly for thermal plants as the government encouraged dispatch of cleaner power sources.

*Coal. The increase in coal demand in 2006-up 8.5 percent over 2005-may be understated by as much as 60-80 million metric tons due to the commissioning of many thermal plants in the late months of the year. Investment in coal transport infrastructure continues apace.

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