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Analysis: Price wars rage in China's domestic LNG market as supply glut worsens

Highlights

Trucked LNG wholesale prices in China lowest in 10 years

Importers ENN, CNOOC undercut each other in eastern provinces

Glut forces terminals to cut capacity, prolong vessel queues

Singapore — China's top LNG importers are competing aggressively in the domestic gas market, but face demand saturation in several regions like key eastern provinces where wholesale trucked LNG prices have hit multi-year lows, while gas consumption has ceased to grow.

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The provinces of Jiangsu and Zhejiang are seeing fierce gas-on-gas competition, with main suppliers China National Offshore Oil Corporation, or CNOOC, state-run PetroChina and ENN Group slashing prices for trucked LNG, and even competing with domestic pipeline gas in some areas.

The supply glut means that China's LNG imports could be capped, while any rebound in gas demand will be subject to risks of secondary coronavirus infections, such as this week's resurgence in Beijing that shut parts of the city.

Domestic LNG wholesale prices in eastern China dropped below Yuan 2,000/mt for a short period in early June, which is equivalent to around $3.82/MMBtu, reflecting a 10-year low before rebounding, local traders said. This compares to around Yuan 3,450/mt in June 2019, market sources said.

This week, other regions recorded price drops to as low as Yuan 1,800/mt in northern China and Yuan 1,880/mt in the northeastern province of Shandong, which will exert more downward pressure on the market, the analyst said.

GAS PRICE WARS

China's gas pricing is divided geographically due to differences in provincial economies, availability of pipeline gas imports from Central Asia, Russia and Myanmar, domestic gas production and infrastructure like LNG terminals, pipelines and storage facilities.

The eastern provinces, which also include Shanghai, Anhui and Fujian, have seven LNG import terminals with a total capacity of around 25 million mt/year, accounting for around a third of China's LNG import capacity.

These are CNOOC's Ningbo, Yangshan and Putian terminals with a combined capacity of 12.3 million mt/year, PetroChina's 6.5 million mt/year Rudong terminal, ENN's 3 million mt/year Zhoushan terminal, Guanghui's 1.85 million mt/year Qidong terminal and Shenergy's 1.5 million mt/year Wuhaogou terminal.

Most of these terminals use LNG trucks to supply their customers, and CNOOC and ENN operate some of the largest LNG trucking fleets in the region. A recent estimate showed CNOOC's Ningbo terminal, ENN's Zhoushan terminal and PetroChina's Rudong terminal operating 460, 270 and 130 LNG trucks, respectively.

Consequently, CNOOC and ENN have engaged in a price battle since the economy reopened in April, driving the ex-factory LNG price in Zhejiang to Yuan 1,920-2,200/mt and ENN's Zhoushan prices to Yuan 1,750-2,100/mt, according to market sources. Other terminals held up at the Yuan 2,000/mt mark.

These prices were at times the lowest in China, and several market participants called the price wars "irrational." At one point, CNOOC and ENN had reportedly agreed to stop undercutting each other, but it remains to be seen if the negotiations were successful as the price competition was still fierce, traders said.

Price competition was less aggressive between Sinopec, CNOOC and JOVO in southern China, the country's largest gas demand region with nine LNG terminals and a total capacity of 28.8 million mt/year, accounting for nearly 40% of China's total.

State-run PetroChina, which has business in both domestic pipeline gas and LNG trucks, was forced to slash prices in both businesses to boost sales, traders said. A pipeline customer's wholesale LNG price of Yuan 2,400-2,500/mt is much higher than imported LNG, they added.

Downstream buyers like city gas enterprises, power plants and industrial buyers have been dialing back on long-term contracts for pipeline gas from PetroChina, and shifted some volumes to cheaper spot LNG cargoes.

BEARISH OUTLOOK

A surge in cheap LNG imports contributed to China's supply glut. The JKM LNG spot price averaged $3.50/MMBtu, $3.10/MMBtu, $2.80/MMBtu, and $2.10/MMBtu, on a DES basis, for March, April, May and June delivery, respectively, S&P Global Platts data showed.

China imported 4.2 million mt of LNG in March, up 3.4% year on year, and 5.1 million mt in April, up 12% on the year, official customs data showed. In May, China's natural gas imports, including LNG and piped gas, rose nearly 4% year on year to 7.84 million mt, preliminary data showed.

But sluggish domestic demand, combined with high inventories and tank tops at coastal LNG terminals, forced importers to cut prices to clear stocks and make room for new cargoes.

There were other repercussions -- lower wholesale prices forced some domestic LNG plants to shut for maintenance or lower operating rates, and vessel queues got longer. In the week of June 7, two LNG carriers were waiting to unload at the anchorage of CNOOC Ningbo, and one LNG carrier at PetroChina Rudong terminal, market sources said.

They said official gas consumption data for April may have also accounted for the rise in inventories as final consumption, and many domestic sources remain bearish for coming months as LNG imports continue to pour in at increasingly lower spot prices.