Due to the Lunar New Year, the National Bureau of Statistics (NBS) publishes combined January-February output data in March but does not release separate January figures. This data review therefore discusses combined data as issued by NBS, while customs data is available for each month.
China’s natural gas imports plummeted m/m by 2.24 Mt to 7.56 Mt in February, according to customs data, with LNG flows at 4.35 Mt (-2.23 Mt m/m, +0.38 Mt y/y) and pipelines accounting for 3.21 Mt of total arrivals (+0.27 Mt y/y). The majors’ bid to stock up ahead of peak demand combined with a warmer-than-normal winter have left LNG stocks high. While the weak February import data is also related to the week-long Lunar New Year, which effectively halted industrial activity for a week, we expect the softness to continue for another month or two as market participants will look to normalise storage levels before imports start to pick up again. In Q2 19, Chinese buyers will likely resume buying, as Sinopec’s 10.4 bcm Wen 23 storage site will start filling; buyers will want to take advantage of a 1 ppt VAT cut effective 1 April 2019. At the same time, as Chinese buyers are expecting oil prices to rise, they may also seek to take oil-indexed contract volumes sooner rather than later. Still, the outlook for China’s gas demand growth is looking more subdued in 2019 as the economy softens, and the coal-to-gas switch could also slow.
Softer imports on high stocks and the Lunar New Year
China’s imports of natural gas fell m/m by a strong 2.24 Mt to 7.56 Mt in February, and even though they were higher y/y by 0.65 Mt (9%), this was the slowest y/y growth rate seen since April 2017. LNG flows reached 4.35 Mt, falling sequentially by 2.23 Mt. While they were still higher y/y by 0.38 Mt, the 8% y/y increment was also the softest increase since July 2016. Pipeline flows were essentially flat m/m, and the increase from year-ago levels was also soft at 11%.
That said, the moderation in February imports comes as no surprise. The strong import bid since Q3 18 as the majors sought to ensure supplies ahead of the winter coincided with a softening economy and milder-than-normal weather. According to NDRC, between November and January (February data have yet to be released) gas demand grew by an average 12% y/y, compared to an average 26% y/y in the six months prior. February gas demand is also likely to be soft given the week-long Lunar New Year holiday shutdown.
We expect imports to remain subdued in March before picking up seasonally in April. At the same time, a number of factors will still support inflows. First, Sinopec is looking to start operations at its 10.4 bcm Wen 23 storage cavern by the end of March. The first phase is designed to include 8.4 bcm of storage capacity with 3.3 bcm of working capacity. Sinopec reportedly started gas injections at Wen 23 after a successful trial on 25 January, injecting 103 mcm by the end of February. Sinopec plans to inject 2 bcm of gas into the site this year, which effectively means it will have 0.7 bcm of working gas during the next heating season. While the gas injected into storage will likely come from domestic output, it will add to demand and keep room open for imports.
Second, the rise of private players in the domestic market and promises of further reforms to facilitate third-party access to midstream and downstream infrastructure will support LNG imports. In 2018, for example, Xinjiang Guanghui sold 2.4 bcm of imported and domestically-produced LNG, a 27% y/y increase. The company reportedly imported 1.15 bcm of LNG, an 80% y/y increase, as it doubled receiving capacity at its Qidong terminal (from 0.6 Mtpy to 1.2 Mtpy). Additional sales came from Guanghui’s domestic regas terminals in Xinjiang, using pipeline gas imported from Guanghui’s upstream assets in Kazakhstan and from a coal-to-gas project operated by a Guanghui subsidiary in Xinjiang. ENN, meanwhile, sold a reported 23.3 bcm, higher y/y by 18.9%, with 4.4 bcm of LNG arriving via the company’s newly-opened Zhoushan terminal.
Finally, the government’s 1 ppt VAT cut, effective 1 April 2019, will further support imports. Buyers may well seek to source as much LNG as they can earlier in the year, fearing that rising oil prices will also increase the cost of their term supplies (which are oil-indexed). Not only would their own import costs rise, but new importers buying spot cargoes may well be able to gain additional market share given the current forward JKM prices.
Shale in question
Domestic production in January–February reached 28.7 bcm, higher y/y by 2.2 bcm (8%) compared to a 1.7 bcm uptick over the first two months of 2018. The majors are gradually releasing their guidance for 2019, with Sinopec pledging higher upstream Capex and a focus on shale gas. But a series of earthquakes in Sichuan in late February led to a temporary halt of all 15 shale platforms operating in Rong county in the province. The growing concern about the tremors’ links to shale resulted in more than 10 thousand protesters clashing with police. The upside to imports from this incident will be limited as the shale wells in Zigong produced just 0.1 bcm in 2018, and a month-long shutdown is only estimated to take 8 mcm offline. Going forward, however, disputes with local communities could delay the return of exploration work and slow progress on shale development.
The government steps in to protect growth, at the expense of the environment?
Yet a key question for Chinese buyers and global markets remains the fate of the Chinese economy and its implications for gas demand this year. A slowdown in economic growth would weigh on the industrial sector and therefore soften demand growth from the country’s largest gas user base. While the threat of the US imposing additional duties on Chinese goods (and China reciprocating) has eased for now, a potential meeting between Xi and Trump that would end the current dispute is repeatedly being delayed with reports initially pegging it for late March and then April, but now suggesting it is unlikely to take place before June. The Chinese government is looking to support economic growth with targeted measures, but it is still seeking to avoid a massive credit stimulus, suggesting that any support will only filter through to the economy gradually. While the economic softness may be bottoming out, any recovery is unlikely before H2 19—and even then, GDP growth rates are likely to come in lower than in 2018, with the government aiming for ‘between 6%-6.5%’ compared to their 2018 target of ‘around 6.5%’.
Concerns about the health of the economy and the continued ability of new users to switch from coal to gas have led the gas majors to lobby the government for a slower fuel switch this year, or to restrict the increase in gas prices, especially given soft coal prices. While the Ministry of Environment and Ecology (MEE) has stated that the government will raise spending on pollution control by 25% this year to 5 billion yuan ($740 million), in order to facilitate coal-to-gas conversion, the MEE has not issued specific fuel switching targets this year. The updated fuel conversion plan runs from 2018 to 2021 (after the initial one ran from 2014–2017), so even if fewer users switch in 2019, local and central governments will need to accelerate progress in the following years.
A question of power
The state of the economy will also impact gas demand in power. In January–February, total power generation reached 1098 TWh, higher than 2018 levels by 5.0%. Thermal generation—mostly from coal-fired plants—rose y/y by 4.2% to 843 TWh, as the government allowed some coal-fired power generation to remain online (after switching it back on in the winter of 2017–18) to ensure adequate supplies this winter. While wind power generation was flat y/y, nuclear generation was higher y/y by 9.1 TWh (+23.1%), at 48 TWh, as the 1250 MW Haiyang 2 went into commercial operation in January. Hydro output rose y/y by 7.7 TWh (+6%), but lower water stock levels at China’s major reservoirs in mid-February (-5.7% m/m) will likely limit hydro power generation in March.
Gas demand in the power sector increased by a hearty 23% y/y in 2018 (albeit from a low base), and according to CNPC in 2019 it is set to grow by a more muted 10%. Slowing economic growth will lead to a more modest uptick in power demand compared to 2018, especially if industrial demand is negatively impacted by the economic deceleration. According to the National Energy Administration (NEA), the manufacturing and service industries consumed 4,720 TWh (+7.2% y/y) and 1,080 TWh (+12.7% y/y) of power respectively, with the two sectors combined accounting for 85% of China's total power consumption in 2018. In a bid to alleviate some of the pressure on industrial users, the government announced a 10% cut to on-grid power tariffs for business (starting 1 April).