Coronavirus could hit 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 already slowed in January during the Lunar New Year holidays as movie theatres, restaurants and tourist attractions shut in major cities, including Beijing where urban gas demand has skyrocketed in recent years.

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. 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 that 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 say.

According to state refiner Sinopec's data for 2018, 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%. The numbers for 2019 were not immediately available.

Economic growth threatened

Chinese gas importers such as state-run CNOOC, Guangdong-based Jovo Group and Xinao China Gas Investment Ltd. said they were still evaluating the epidemic's impact on gas demand and expected 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.

The outbreak began in late 2019 in Wuhan city in central China, and is from the same family of viruses as SARS and MERS, which previously caused a short, sharp drop in economic activity. Economists warn that the current outbreak could be far worse as China has become much more integrated with the global economy.

Goldman Sachs last week cut its first-quarter real GDP growth forecast for China to 4.0% 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. A more prolonged outbreak could lower full-year growth to 5% or even below," the bank added.

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

"We expect real GDP growth in Q1 2020 to drop materially from the 6.0% pace achieved in Q4 2019, on a scale likely bigger than the decline of 2 percentage points registered in Q2 from Q1 2003 during the SARS outbreak," Nomura said Monday.

There is a much greater risk to gas demand from the collapse of regional supply chains, as factories have started informing customers of their inability to meet supply commitments.

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, 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, regardless of whether Chinese buyers actually declare force majeure or not.

"[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.

Another trader said some Chinese end-users could not even be contacted in the past two weeks. "[Amid] all this confusion, people can't create new positions. Strengthening of demand [due to low prices] will be postponed," the trader added.

Platts Analytics forecasts that if reduced industrial activity across Hubei Province extends through the end of February, it would reduce Chinese LNG demand by 5%-7% relative to its base case, driving down imports.

The S&P Global Platts Asian LNG assessment, the JKM, for March hit a record low for a front month of $3.15/MMBtu on Wednesday.