Analysis: High LNG prices trigger gas demand destruction in China's downstream sectors

High LNG prices in recent months have curbed natural gas consumption in some of China's downstream sectors like heavy-duty trucking and forced energy-intensive businesses like ceramics to either slash output or suspend operations as fuel costs continue to surge.

The demand destruction in industrial and transportation sectors comes amid China's recovery from pandemic-related economic deceleration, and some downstream businesses shutting completely due to fuel costs could impact third quarter gas consumption and fourth quarter LNG procurement.

China's natural gas demand comes mainly from four sectors -- industrial, city gas, power generation and chemicals. The industrial and city gas sectors each accounted for 37%-38% of total gas demand in 2020, power generation 16% and chemicals 9%, National Energy Administration data showed.

The power sector's gas consumption is capped by regulated electricity prices that prevent utilities from passing on higher fuel costs to consumers. ​The bulk of industrial gas demand comes from ceramics and other sub-sectors including glass, cement, steel, paper, textile, food and pharmaceuticals that use kilns or boilers for heating purposes.

Many of these factories, which typically use coal-fired kilns or boilers, were asked to switch to using gas-fired kilns or boilers last year under the government's coal-to-gas initiative, and the surge in gas prices heavily squeezes their profits. Some regions have also clamped down on gas usage or diverted fuels to residential use and industries deemed essential like power generation when shortages emerged.

The S&P Global Platts JKM, the benchmark for Asian spot LNG prices, was assessed at $19.66/MMBtu Sept. 1, rebounding from an August low of $15.30/MMBtu. At this time in 2020, LNG prices were in the mid-single digits.

Average trucked LNG prices in the Pearl River Delta jumped 79% to around Yuan 6,000/mt ($16.24/MMBtu) in mid-August from around Yuan 3,350/mt in mid-March, according to data provider Haoqi net.

Procurement curbs

The downstream demand destruction resulted in trucked LNG sales slowing in some cities. Trucked LNG prices in southern China eased from Yuan 6,000/mt to Yuan 5,600-5,700/mt in late August as more ceramics factories shut in Guangdong and Shandong provinces, a source in south China said.

Trucked LNG prices rebounded to around Yuan 6,000-6,200/mt in the Pearl River Delta Sept. 1, equating to around $16-$17/MMBtu, in line with the surge in Asian spot LNG prices, a second source with one of China's major city gas distributors in Shenzhen said.

The source said the distributor's gas sales fell by 10% in August due to the record high summer gas prices, indicating some consumers cannot afford such high fuel costs. A third national oil source said the situation has made some Chinese LNG buyers hesitant to procure cargoes for Q4.

One gas distributor in southern China said the company had cancelled a couple of terminal slots acquired from infrastructure company PipeChina due to high prices and the steady erosion of downstream demand in the past year.

More than 200 ceramics production lines in 19 Chinese provinces including Jiangxi, Shandong, Sichuan, Fujian and Henan have suspended operations since June due to a combination of surging fuel costs, power rationing and environmental protection initiatives, Ceramics Information or CI, a Foshan government-backed information provider, reported Aug. 4.

"They [ceramics factories] had to suspend or lower operating rates to cope with the surging fuel prices," an official with Foshan Ceramic Industry Association said on state media CCTV July 30.

Natural gas offered to ceramics factories was priced as high as Yuan 4.50/cu m and Yuan 4.28/cu m in Guangdong and Jiangxi provinces, two of China's top three ceramic production centers recently, an 85% increase from the first half of 2021, Ceramics Information data showed.

The soaring fuel prices have not only discouraged demand, but also disrupted gas supply from some upstream companies.

City gas distributors in Fujian's Nan'an and Jinjiang cities have cut daily natural gas supply to industrial users including ceramics factories by 18% from Aug. 9 and Aug. 13, respectively, due to lower gas supply, CI reported Aug. 3.

Almost 30% of natural gas in China is used in the building and sanitary ceramics industry, the China Building and Sanitary Ceramics Association said in a report July 30, which equates to around 71 Bcm of China's total natural gas demand of 238 Bcm in 2020.

Heavy-duty truck impact

Skyrocketing LNG prices have also forced LNG-fueled heavy-duty trucks to suspend operations and discouraged sales of new LNG heavy-duty trucks in recent months, market sources and analysts said.

The LNG price at filling stations in northwest China was estimated at Yuan 6,000/mt in late August, up 85% from Yuan 3,250/mt in early March, data from Haoqi net showed. In contrast, prices of another major trucking fuel, zero-vapor gasoil, rose around 7.5% in northern China over the same period, Haoqi net data showed.

Sales of heavy-duty LNG trucks fell 45% year on year to around 40,000 units in H1, with sales in May and June plunging 71.3% and 69.7%, respectively, according to domestic information provider Find.

China had 582,000 LNG heavy-duty trucks operating in 2020, up 26% year on year, which consumed 25.5 Bcm of natural gas, data from state-owned China Automotive Information Net showed. This accounted for 7.8% of the country's total natural gas consumption.

China's northwest is its main coal-producing region and has the most LNG filling stations to fuel to heavy-duty LNG trucks transporting coal.