Our forecast for China’s LNG imports this year could be at risk following some mixed data for April. On the bullish side, Chinese buyers took advantage of a VAT cut that improved gas competitiveness and upped LNG imports to rebuild stocks. On the bearish side, however, initial NDRC data suggest the first monthly y/y drop in gas demand since December 2017. Gas demand is facing headwinds from PetroChina’s announcement that it will raise domestic prices, as well as concerns about the macroeconomic environment in light of the escalation in the US-China trade war. With domestic gas supply starting the year in robust fashion, and in line to deliver a 12 bcm y/y gain, the gap for imported gas will grow. But a failure of Chinese gas demand growth to accelerate in the coming months will jeopardise our +30 bcm y/y demand growth forecast for 2019—and that will eventually slow down y/y LNG import growth.
Chinese natural gas imports in April reached 7.65 Mt, reversing the 0.62 Mt m/m fall in March and rising y/y by 0.86 Mt (13%). LNG imports at 4.54 Mt accounted for all the increase and were higher y/y by a strong 1.18 Mt (35%), more than offsetting a y/y fall of 0.32 Mt (9.3%) in pipeline imports. As such, relative to demand growth slowing seasonally, imports remained robust. NDRC demand data for the first four months of 2019 was reported at 97 bcm (+7 bcm y/y, 10%), which the NDRC attributed to added demand in the industrial sector. The implied April demand number of 20 bcm, if left unrevised, would suggest the first monthly y/y drop in gas demand since December 2017. It would also point to a more material slowing of Chinese industrial gas demand and put in doubt our forecast for Chinese gas demand growth to surpass 30 bcm. The low NDRC demand numbers for April, given the hearty supply numbers, would also imply a rebuilding of stocks—both LNG and underground storage—well ahead of the cooling season. Such high stocks could weigh on Q3 19 demand if the summer is mild and end-user demand growth does not recover.
The robust import numbers suggest Chinese buyers are now tapping the LNG market to take advantage of lower spot gas prices, particularly as they will expect their oil-linked contract prices to rise alongside crude in the coming months. According to customs data, the cost of imported natural gas in April averaged 8.2 $/mmbtu, a 7% m/m drop and substantially lower than the average 9.5 $/mmbtu recorded in January. A 1 ppt VAT rate cut effective 1 April was slight but still helped improved the competitiveness of gas.
Headwinds to demand?
While gas imports have been elevated as restocking and cooling seasons begin, the softening macroeconomic outlook combined with reports that PetroChina will raise domestic gas prices this summer could further weigh on demand growth.
Indeed, after a series of strong macroeconomic indicators in Q1 19, April data were something of a let-down. Industrial production growth slowed to 5.4% y/y from 8.5% in March, while y/y investment growth slowed to 5.7% from 6.5% in March. Exports unexpectedly shrank by 2.7% y/y compared to 6.7% y/y growth in March and the official manufacturing PMI also dipped from 50.5 to 50.1, bringing it to the verge of contractionary territory. With industrial users already bearing the brunt of the slowdown, an additional natural gas price increase could weigh on them further. PetroChina has reportedly started raising the wholesale prices that it charges provincial piped-gas distributors, power plants and big industrial users such as fertilizer producers in April. The company is seeking to raise the selling prices of domestic conventional gas and pipeline gas by 6.4% above government-set city-gate prices, and to raise imported LNG and domestic shale gas sale prices by as much as 30% above city-gate levels. With the government growing increasingly concerned about rising inflationary pressure, PetroChina may be using price hikes as a way to put pressure on the government to reform the domestic pricing mechanism or offer fresh subsidies. PetroChina is under pressure to recoup losses from its gas import business as state-set city-gate prices do not allow importers to pass on full costs when imported gas prices rise, leading PetroChina to book a 3.3 billion yuan ($480 million) loss on Q1 19 gas imports. With the looming launch of a new pipeline company set to strip a very lucrative business segment from PetroChina, the firm is hoping to offset some of its losses with higher domestic prices.
Domestic production in the limelight… but maintenance season set to start
The government’s rising concerns about the external environment, higher input costs and inflation will reinforce its desire to beef up energy security by boosting domestic output and diversifying imports, but the loss of US suppliers amid the trade war will make that challenging.
Following the government’s call last year to raise output, Sinopec, PetroChina and CNOOC produced a combined 35.4 bcm in Q1 19 (+2.9 bcm y/y, +9%), out of a total 43 bcm reported by the National Bureau of Statistics (NBS), which was in line with our annualised growth forecast of 12 bcm y/y in 2019. PetroChina accounted for 26 bcm of production (+2.3 bcm y/y, +9%), with Sinopec contributing 7.2 bcm (+0.5 bcm, +7%) and CNOOC producing 2.3 bcm (+0.24 bcm y/y, +12%), following higher Capex pledges at the beginning of the year. In April, domestic production reached 14.8 bcm, a strong y/y uptick of 1.92 bcm (15%). At the same time, domestic production growth is set to slow seasonally on annual field maintenance. CNPC announced that four fields in Xinjiang, including Ke75, Pen5, Mahe and Kelameili, went offline on 15 April but will resume production on 22 June. Still, even at a 12 bcm y/y increment in 2019, domestic output alone will not be enough to match demand and will lead to an import gap that will still need to be met.
Pipeline gas disappointing, with Australian LNG benefitting
The increase in LNG more than offset the y/y fall in pipeline flows (-0.32 Mt y/y, -9.3%), but at 3.11 Mt, they recovered m/m by 0.23 Mt, in part due to their cost competitiveness. In March, customs data pegged pipeline gas coming in at an average 7.2 $/mmbtu, versus 10.2 $/mmbtu for LNG. We had, however, expected pipeline flows to come in slightly higher in April and are currently forecasting an increase in May (to 3.5–3.7 Mt or 4.7–5 bcm). Should pipeline arrivals disappoint over the coming months (vs our expected 1 bcm y/y increase in Q2 19), LNG imports may be needed to backfill. Kazakhstan was the only supplier to export more y/y to China in April (+0.13 Mt), but at 0.49 Mt this was not enough to offset the strong 0.33 Mt y/y drop in Turkmen supplies, which were 2.07 Mt.
Imports of US LNG, coming in at a price of 8.53 $/mmbtu, resumed in April, but this was in the context of an expected US-China trade deal in May or June. However, the trade war has since escalated rather than eased, and tariffs on LNG rising to 25% (from 10%) starting 1 June, so inflows are set to fall. Arrivals from Australia hit a record 2.79 Mt, up m/m by 0.75 Mt and higher y/y by a massive 1.06 Mt. Australian LNG was priced at an average of 8.96 $/mmbtu in April, falling from 10.14 $/mmbtu in March, placing it on the lower end of the LNG cost range. Imports from Qatar, China’s second-largest LNG supplier, reached a modest 0.59 Mt in April, a 0.16 Mt m/m recovery and a small y/y uptick.