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China LNG demand uncertainty grows as Beijing offers force majeure shield on virus outbreak

Highlights

Concerns grow over potential delivery delays, port closures

China's LNG demand forecast revised down: Platts Analytics

JKM plunges to more than 10-year lows, below $4/MMBtu

Singapore — Uncertainty over China's LNG demand has grown following China's decision to offer force majeure certificates to domestic companies if they are unable to fulfill their international contractual obligations due to the coronavirus outbreak.

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Beijing's decision adds to concerns over demand from the world's second largest LNG importer and bearishness to the north Asian markets. Platts JKM has plunged to a more than 10-year low, falling below $4/MMBtu for the first time since July 2009 on slow demand and a wave of new supply from Australia and the US.

China's move is aimed at protecting the interests of domestic companies and helping mitigate their losses, but its impact on LNG markets is unclear, including the likelihood of Chinese LNG importers exercising force majeure, the protection such a declaration would offer and the implications it would have for international LNG sellers.

"It might take some time for China to be able to justify this virus outbreak as force majeure," S&P Global Platts Analytics Thursday. "While it might affect a buyer's ability to fulfill its contractual obligations, most of the long-term contracts have an annual volume commitment that can be postponed to later in the year, so it might be early for Chinese companies to justify and obtain reliefs from performance."

"The key still lies in to what extent China can demonstrate that the contractual requirement cannot be fulfilled," it said.

With their application for force majeure certificates, Chinese companies would need to provide proof of delivery delays or cancellations, sales contracts or agreements, as well as customs declarations, the China Council for the Promotion of International Trade said in a statement Thursday.

February delay concerns

Trading sources said earlier this week that Chinese end users could be delaying February cargo deliveries amid high inventories and a poor outlook on downstream demand stemming from the virus outbreak.

"The Chinese delaying February cargoes now probably indicates they are concerned about tank-top issues. That could result in more ships waiting to discharge cargoes and support freight prices going ahead," a trader said.

Another market source voiced concerns over port closures if the situation worsens.

A Chinese LNG end user said it might adjust its LNG procurement schedule going forward while it continues to assess the effects of the virus outbreak.

"Demand for LNG will be greatly affected," the end user said. "There is a decline in residential gas demand, gas power generation and traffic. If the epidemic lasts until May, I think the LNG growth rate will be a single digit."

Another Chinese end user said: "It depends on the development of the epidemic; we are losing confidence day by day as we see the number of cases rise."

The virus, which emerged in Wuhan, Hubei province, has now affected more than 6,100 people globally, with cases emerging in the US and Europe, while the death toll across China has climbed to 132, according to CNBC.

LNG trading activity in China remained largely muted this week because of the Lunar New Year break.

Demand forecast revised down

So far, ports have closed and economic activity slowed in Hubei province, an important industrial hub and demand center for regasified LNG.

The province sources regasified LNG from terminals in the Shanghai region, which account for approximately 8% of Chinese LNG imports. Elsewhere, Chinese national and provincial officials have mandated that commercial and public activities shut through February 9.

"With these figures in mind, if reduced industrial activity due to the coronavirus was extended to the end of February, it would curtail Chinese LNG demand by 5-7%, or 11-15 million cu m/d relative to Platts Analytics current February Chinese LNG import forecast of 222 million cu m/d," Platts Asia LNG Analytics manager Jeff Moore said Wednesday.

This would drive Chinese LNG imports in February to 207 million cu m/d (7 million cu m/d growth year on year).

This represents the best-case scenario for the impact on gas demand, Moore added, but at this point of the outbreak, too much is still unknown about how far the coronavirus will spread and for how long, as well as the implications for LNG and energy markets.

While coal-to-gas switching in the residential sector has played a large role in China's recent LNG demand growth, the driving engine behind the country's gas demand remains the industrial sector.

China is the world's second-largest LNG importer behind Japan. It is also the largest crude oil, iron ore and soybean importer and steel exporter.