China Energy: Strong China LNG growth; policy incentive may drive further gas demand upside
China gas demand growth continues to strengthen, with year-to-July apparent demand +16% yoy (according to NDRC), and early numbers for August also looking very strong (apparent demand +28% monthly yoy, and now +15% YTD growth). According to the National Bureau of Statistics (NBS), August domestic gas production and total imports (gas/LNG) both continued strong growth (+12% yoy and +70% yoy respectively). This is indicative of counter-seasonal (summer) demand strength. As we progress into winter, we do anticipate coal-gas switching initiatives in Northern China to continue to drive strong growth – which should underpin a strong domestic gas production outlook.
Data analysis
Strong YTD gas demand has led to growth in both LNG and pipeline gas imports. July LNG import prices increased just a little (+3% mom to Rmb1.91/m3 or US$7.9/mmbtu). Growth in LNG shipments has been broadly based, with increased traffic across most terminals (with much of the incremental volume coming from Australia).
Recent government policy reforms are likely the key driver of demand strength in our view, with VAT on natural gas reduced from 13% to 11% since July 1, 2017.
Industrial coal to gas switching likely continues, and lower gas costs (along with other policy initiatives) are incentivizing increased use of gas/LNG fueled trucks in the transportation sector. On August 30, 2017, the NDRC announced a cut to the non-residential city gate price by Rmb0.1/m3 for all provinces (around 5% to 9% cut) effective September 1, 2017 - funded by the lower VAT and lower gas pipeline transmission fees. We expect this price cut ahead of the winter peak demand season is likely to be positive for gas demand in 4Q17 and 2018. We suspect YTD gas demand growth could be structural, which may present upside risk to our full-year demand forecast.
SEH Price at posting:
9.1¢ Sentiment: Buy Disclosure: Held
