Coronavirus could curb China's 2020 natural gas demand

The coronavirus outbreak in China threatens to curb domestic natural gas demand as economic activity slows and industries brace for disruptions, raising concerns about LNG import volumes in coming months.

Consumer activity had already slowed in January during the Lunar New Year holiday as movie theatres, restaurants and tourist attractions shut in major cities.

Industrial activity has also slowed as companies in the major manufacturing hubs of Shanghai, Zhejiang, Jiangsu, Guangdong and Chongqing extended holidays for an extra week until February 9, and factory supply chains risk being affected for even longer.

With the outbreak worsening, quarantine measures and transportation restrictions are becoming tighter, making it tougher for hundreds of thousands, if not millions, of migrant workers to return to work. Factories are also finding it difficult to source raw materials or sell their products.

This means while gas demand for residential use could grow as most people stay indoors, the drop in demand from industrial, commercial and transportation sectors is likely to be much higher, market sources said.

According to state refiner Sinopec's 2018 data, city gas accounted for 33% of China's gas demand, combining 11.1% of residential use, 9% of heating demand, 6.7% public services and 6.1% for vehicles. Industrial consumption accounted for 40% of gas demand, power generation was 17% and petrochemicals 10%.

Economic growth threatened

Chinese gas importers, such as state-run CNOOC, Guangdong-based Jovo Group and Xinao China Gas Investment Ltd., said they are still evaluating the epidemic's impact on gas demand and expect more clarity once factories reopen next week.

Many companies cannot shut for too long as they have to meet operational expenses, despite provincial government's announcing monetary and tax relief.

But even if industrial gas demand recovers quickly, commercial demand could still be low as people are wary of eating out or returning to shopping malls.

Goldman Sachs last week cut its first-quarter real GDP growth forecast for China to 4% from 5.6%.

"Even with the assumption of a relatively quick rebound in Q2 and Q3, this would lower full-year 2020 growth to 5.5%, from 5.9% previously," the bank said. "A more prolonged outbreak could lower full-year growth to 5% or even below."

Factory closures and citywide lockdowns could reduce commercial and industrial gas demand, while boosting residential gas volumes, economists at Japan's Nomura bank said, adding the outbreak will hit China's economy much harder than SARS did in 2003.

Risk to LNG imports

Hubei province, the epicenter of the outbreak, constitutes only 4% of the Chinese economy, but a second group of 16 provinces, including the economic hubs of Zhejiang, Guangdong and Henan, have a high infection rate and account for 65% of Chinese GDP, Goldman Sachs said.

Wuhan, Hubei's capital city, is a major transportation hub with an extensive network of high-speed railways, expressways, ports and airlines.

Hubei itself is a major gas hub supplied by four national natural gas pipelines—PetroChina's West- East line 2, the Huaiwu line (Huaiyang-Wuhan), the Zhongwu line (Chongqing-Wuhan), and Sinopec's Sichuan-Shanghai line, according to local media.

These gas pipelines bring in coal-bed methane from Xinjiang in the west, and pipeline gas from Central Asia and shale gas from the Sichuan and Chongqing basins in the south.

Singapore-based LNG traders said uncertainty about Chinese gas demand has hit prices. The S&P Global Platts Asian LNG assessment, the JKM, for March hit a record low $3/MMBtu on Thursday.

"[The coronavirus] is bound to impact Chinese LNG demand, so a lot of buyers aren't looking to commit to any price levels at this time, since prices are likely to go down even further," a trader said, adding that amid all the confusion, people can't take new positions.

CNOOC has declared force majeure on LNG contracts, as the country's largest LNG importer struggles with weak demand. Other Chinese importers have said they are considering similar measures if demand drops.

This has further dimed China's gas demand outlook and raises concerns about the impact on global trade flows and prices, as CNOOC has supply contracts with most global gas producers, including oil majors and NOCs.