China's LNG import growth still hangs in the balance despite natural gas price decline

China's LNG import growth is being capped by weaker-than-expected downstream natural gas consumption, a feeble response to a decline in gas prices, and the slow pace of economic recovery and industrial activity.

One way to measure downstream gas demand is via trucked LNG prices, as both inland gas fields and coastal terminals rely heavily on transporting LNG by trucks due to a lack of pipeline transmission networks and large distances between supply sources and end-user demand.

Average trucked LNG prices dropped to 13-month lows in recent weeks, with prices in the northwest regions dropping to almost Yuan 4,000/mt on March 27, data from Chongqing Petroleum and Gas Exchange showed. Northwest trucked LNG was trading at around Yuan 4,700-5,000/mt a month earlier.

Trucked LNG prices in China's three major industrial hubs -- the Pearl River Delta, the Yangtze River Delta and the Beijing-Tianjin-Hebei region -- were at Yuan 5,300/mt, Yuan 4,800/mt and Yuan 4,580/mt on March 27, respectively, according to private gas producer ENN.

The highest trucked LNG price stood at Yuan 8,568/mt on March 2, 2022, according to Shanghai Petroleum and Natural Gas Exchange data, and this has continued to move lower in recent weeks.

"In general, trucked LNG prices are a reflection of supply and demand in the market, with economic and policy drivers playing a determining role in demand growth," Jenny Yang, Director at S&P Global Commodity Insights said, adding that without demand for Chinese products, energy demand is absent and gas prices will continue to fall.

Feeble demand recovery

There have been some signs of downstream gas demand recovery in China.

China's northwest, its main coal-producing region, has the most LNG filling stations to fuel heavy-duty trucks transporting coal. This is different from the trucks that carry LNG as cargo.

LNG prices in filling stations at Inner Mongolia in northwest China dropped to less than Yuan 4.5/kg, or Yuan 4,500/mt, in the week ended March 25, making LNG fueled heavy-duty trucks more economical than diesel trucks, industrial sources said.

When the price of 1 kg of LNG drops below 0.9 liters of diesel, LNG-fueled trucks become more economical than diesel-powered ones, industrial sources said. On this basis, diesel costs Yuan 6.5 compared with Yuan 4.5 for LNG at the current diesel price of Yuan 7.24/liter in Inner Mongolia.

This boosted the economics of trucked LNG and the provincial government-owned Sinotruk received orders for more than 2,000 heavy-duty LNG trucks at a conference held in northwestern Shanxi province in March, local media reported. Sales of heavy-duty LNG trucks in China reached 5,426 units in February 2023, up 214.4% year on year, and up 161.7% month on month, the reports said.

Another gas consuming sector showing recovery is ceramics. Many ceramic factories in southern Guangdong province restarted production lines as natural gas costs dropped to around Yuan 3.8-3.9/cu m recently, down by more than 20% from Yuan 4.8-4.9/cu m in February, Ceramics Information, a Foshan government-backed information provider said March 23.

Ceramic factories in Guangdong, about 85% of which use natural gas as fuel, had slashed operating rates to around 40% due to high gas prices, CI said.

Gas demand from the industrial sector, China's biggest gas consuming sector, was also recovering, but at a slower-than-expected pace due to weak overseas orders. Current domestic gas prices are below the breakeven price of Yuan 5,000-6,000/mt for many industrial users, but the constraint is demand.

Trucked LNG dynamics

Market participants continue to expect China's natural gas prices to move lower amid ample supply, with several market dynamics impacting trucked LNG prices.

Trucked LNG competes with pipeline gas in many regions, and is typically the most expensive gas source compared with both domestic gas production and pipeline gas imports from Russia, Central Asia and Myanmar. End-users rely on trucked LNG when they do not have other options or when pipeline gas supply is insufficient.

For companies to sell spot LNG into the domestic market as trucked LNG, they not only have to price competitively with other gas sources, but also have to account for a margin that includes regasification costs in the form of a tolling fee charged by LNG plants and a 9% value added tax. The tolling fee is on average Yuan 400/mt.

With low demand, Chinese gas importers struggle to justify these margins and the price gap between oil linked and spot LNG contracts, especially with oil prices having dropped in recent weeks to just over $70/b.

LNG importers were expected to drive some demand given their need to utilize empty slots at PipeChina's LNG terminals that they had signed up for. Unutilized slots would attract a take or pay penalty, but this has failed to drive a surge in gas imports and some importers ended up diverting gas volumes back to their own terminals instead of selling downstream.

Meanwhile, domestic gas prices continue to drop. The auction price for PetroChina Natural Gas Sales Western Branch's latest round of 83.5 million cubic meters pipeline gas for delivery March 21-31 was settled at Yuan 2.28-2.29/cu m on March 17, down 29% from the previous round of Yuan 3.18-3.22/ cu m for delivery March 11-20. The latest pipeline gas auction price equated to around Yuan 4,000/mt after processing into LNG, sources said.

Supply from the Central Asian natural gas pipeline resumed to a relatively high level in March, after shrinking since November, putting more downward pressure on prices.