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Following a price spike in the December 2020 and January 2021
winter season, China's domestic wholesale LNG prices settled down
by March 2021 but picked up again shortly after. By the end of
August 2021, the national wholesale LNG price averaged 6,000 yuan
per metric ton, about $18/MMBtu. This is more than double the price
level last August and already in a price range typically not
reached until winter seasons. Such uncharacteristically high
shoulder season prices increase the likelihood of even higher
prices in the upcoming winter season, which starts in
mid-November.
There are several key drivers behind this phenomenon. While
pipeline gas prices are largely regulated, China's domestic LNG
market prices are deregulated and reflect supply and demand
dynamics. Demand for LNG can serve as a proxy to understand piped
gas supply availability since end users will seek LNG, which is
typically more expensive than piped gas, when piped gas supply is
inadequate.
Demand. Gas demand grew robustly in the first
half of the year, 15% year on year. This was the result of a cold
winter and an early summer, strong economic and industrial
activities, local coal-to-gas switching programs, and high power
demand growth at the time of limited generation from coal and hydro
power. This led to competition for piped gas supply for industrial,
citygas, and gas storage injection use, forcing some players to
turn to the domestic LNG market.
LNG supply cost. The high demand also pushed
feed gas costs up for LNG liquefaction plants in key producing
regions like Inner Mongolia and Shaanxi. Looking at the other
source of supply into the liquid market—trucked LNG out of
receiving terminals, the average landed imports price increased 41%
year on year in July, and North Asian spot price is at a record
high for summer months.
LNG supply availability. Liquid-out volumes
from LNG terminals also dropped in June and July as more gas was
needed for the pipeline system.
High domestic summer prices signal the potential for even higher
prices in this upcoming winter. Can spot LNG make a profit in this
market? To make a profit selling into the pipeline system at the
Shanghai citygate plus the 20% winter price uplift, the landed LNG
import price needs to be below $8.0/MMBtu. In a warm winter with
domestic LNG prices dropping from the current level back to 5,000
yuan per metric ton, as in the 2019/20 winter, the landed price of
LNG imports needs to be less than $12.5/MMBtu to make a profit in
China's liquid market. A moderate winter scenario could mean
China's domestic LNG prices remain at the current 6,000 yuan per
metric ton level. In this case, the break-even price of LNG imports
becomes $15.2/MMBtu. A winter supply shortage scenario would entail
prices spiking up, as seen in the 2017/18 and 2020/21 winters. Such
a price spike increases the break-even price of LNG imports to
$17.9/MMBtu and $26.0/MMBtu, respectively, for domestic LNG prices
of 7,000 yuan per metric ton and 10,000 yuan per metric ton,
respectively.
But the higher the price, the higher the risk of government
scrutiny owing to the consideration of price stability and the
impact on market sentiment. Also, the domestic LNG market is highly
sensitive to price. Since the end of July 2021, certain industrial
gas end users such as ceramics and glass factories have reportedly
curtailed production owing to high fuel costs.
Although high-priced domestic LNG market in the upcoming winter
bodes well for LNG imports' profitability, the liquid market's size
and profit margins will depend on how Chinese demand responds to
winter weather. Like in many past winters, supply curtailment will
be the tool that Chinese gas suppliers resort to in a cold winter
event instead of paying for highly priced spot cargoes.
