China - Jan 2018

Published at 16:05 26 Feb 2018 by . Last edited 11:17 22 Aug 2019.

Chinese LNG imports reached another record high in January, growing by 1.59 Mt (51%) y/y to 5.18 Mt on peak winter demand as temperatures dropped and the country was hit by snowstorms. Moreover, cold weather in Central Asia meant producers there limited gas flows to China, so with a modest y/y increase in pipeline imports (+0.20 Mt y/y, +8.2%), demand for LNG was supported.

Imports from Australia—China’s biggest LNG supplier—surged by 0.69 Mt (37%) y/y to 1.81 Mt, partly because Australian LNG was the second-most competitively priced, at 7.52 $/mmbtu, but mostly thanks to long-term bilateral contracts under which China takes 20 Mtpa of Australian gas. That said, those supplies fell m/m by 0.26 Mt, while cheaper Malaysian imports, at 7.29 $/mmbtu, rose m/m by a strong 0.18 Mt to 0.50 Mt, though they were 2.5% lower y/y. Qatar remained China’s second-largest source of LNG supplies, providing 1.19 Mt in January, higher y/y by 0.12 Mt even with its LNG at 9.16 $/mmbtu, well above the average LNG cost of 8.35 $/mmbtu. Surprisingly, the US emerged as China’s third-largest supplier in January, pushing 0.52 Mt of LNG, an almost 300% y/y surge (+0.39 Mt y/y) despite a hefty price tag of 9.37 $/mmbtu. Flows from the US are likely to remain strong given Cheniere’s early February announcement that it had agreed a long-term contract with PetroChina for 1.2 Mtpa of LNG, starting in 2018, with the purchase price indexed to the Henry Hub price plus a fixed component. The surge in Chinese gas demand also attracted one-off and pricey cargoes from Angola (0.13 Mt at 9.93 $/mmbtu) and reloaded cargoes from the European hubs - the UK (0.06 Mt at 9.03 $/mmbtu) and the Netherlands (15.44 $/mmbtu).

Pipeline imports totalled 2.59 Mt, led by Turkmenistan at 1.81 Mt, though Turkmen volumes inched down m/m and fell y/y by a considerable 0.30 Mt (14%), reportedly due to higher Turkmen gas demand. Flows from Kazakhstan continued to ramp up, however, coming in 0.23 Mt (819%) higher y/y. At January’s flow rates, China would be taking around 3 bcm from Kazakhstan over 2018, from a contracted 5 bcm. Border prices for Central Asia gas flowing through China’s West-East Pipeline (WEP) remain lower than spot LNG, with Turkmen gas at 5.84 $/mmbtu and Kazakh and Uzbek supplies at 4.57 $/mmbtu and 4.98 $/mmbtu respectively, even assuming high domestic transportation costs. Despite this, relatively expensive gas from Myanmar (9.13 $/mmbtu) emerged for the first time as China’s second-largest pipeline supplier, flowing 0.32 Mt (+0.07 Mt).

We expect Chinese gas demand growth to remain strong in 2018. The central government plans to phase out coal-fired residential heating systems and small coal-fired industrial boilers in 4 million household and industrial plants this year, slightly up on the 3.94 million users converted in 2017. Another year of stimulating underlying demand risks a repeat of acute winter shortages, and producers and importers will need to focus on delivering infrastructure investments and filling storage tanks in a timely manner to accommodate another year of strong demand growth. We forecast that LNG imports will be higher y/y by 3.3 Mt in Q1 18, before adding another 1.8 Mt in Q2 18. Over all of 2018, we expect Chinese LNG imports to grow by 10 Mt y/y and then a further 8.6 Mtpa in 2019.

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