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China’s trucked LNG spot prices hit three-year high
Spot prices of trucked LNG in China were highly volatile in December 2020. Delivered price indices in Hebei, southern Jiangsu and southern Guangdong almost doubled in just three weeks, with spot prices in Hebei and Jiangsu reaching around RMB10,000/t ($28/mn Btu) on 21 December, the highest since December 2017. Prices then dropped sharply, only to increase again when another cold spell hit the country in late December, although failing to reach the previous week’s peak.
Commenting on the trend, Wood Mackenzie Research Director Miaoru Huang says: ‘The price spike came as a huge surprise to market participants. Before winter started, consensus was that there would be a well-supplied market with subdued trucked LNG prices, as was the case for most of 2020. As a result, trucked LNG supply had been tightened to make room for piped gas in the current winter season.’
Trucked LNG makes up less than 20% of China’s total gas demand annually. However, its prices are highly sensitive to market balance, especially in winter when it acts as an important peak-shaving source.
The current winter gas demand has been accelerating due to strong economic recovery, household coal-to-gas switching, relaxed gas allocation to non-prioritised sectors and cold snaps.
Logistical issues added to the price hike this season. Cold weather disrupted LNG transport, as roads were frozen. In addition, a fire at Guangxi Beihai LNG terminal in southern China forced the facility, which has a maximum receiving capacity of 6mn t/y, to cease operations until late December.
Huang continues: ‘City gas distributors, small industrial and transport end-users are most affected by the price surge. Upstream suppliers’ top priority is to safeguard residential and space heating demand. Non-prioritised users faced piped gas cuts at short notice. As demand was sluggish before winter, city gas distributors did not ask upstream suppliers for enough additional supply in winter piped gas contracts. As a result, some of them were caught by the sudden demand surge and had to resort to trucked LNG.’
In the first 11 months of 2020, trucked LNG demand increased by 35% year-on-year, due to its price competitiveness. Demand continued to increase at a time when trucked supply was reduced. After the unexpected tightening, market sentiment further pushed up spot prices.
Huang notes: ‘China’s national oil companies (NOCs) are ramping up gas storage withdrawal while maximising domestic production and pipeline imports. There is more gas storage this winter compared to previous years. PetroChina has stocked 12.4bn cm of gas in underground storage facilities, a 15% year-on-year increase… Reportedly, all three NOCs have domestic production in full swing and Russian pipeline flows to China are above contracted levels.’
The central government has increased price supervision. PipeChina has assumed its role to facilitate gas flows to northern China, leveraging improved pipeline inter-connectivity.
Since the severe gas shortage in winter 2017/2018, China has built more flexibility on the demand side, such as seasonal pricing, winter gas contracts where uncontracted demand will be met only at market prices, and interruptible demand. In the worst case, coal facilities have been allowed to restart. For example, Beijing restarted two coal-fired power units in late December to generate heat, in addition to two units already started in November.
Huang concludes: ‘The tightness in December is unlikely to result in much upside in LNG demand imports in December and January. There is not enough time for LNG importers to secure prompt supply. Through curtailing demand and mobilising domestic supply, China would be able to ease demand pressure to some extent. The main LNG importers – NOCs that have adjusted their winter gas contracts – are not obliged to meet all peak demand. Besides, the international market lacks prompt cargoes and spot prices are high, which will limit China’s LNG demand upside.’