LNG: Price goes up as growth goes down in China

In 2020, the effects of pandemic-related cargo cancellations, plus a seasonal lull in demand over the warmer summer months of last year steered the LNG market into oversupply. Major portfolio players such as Shell, Total and BP – which mostly run on long-term contracts – were stung as they were forced to take on their contracted offtake volume and sell it at low spot prices. But those operating on the spot market – and therefore not burdened by long-term contracts – were not nipped by having to take on unwanted volume while prices had collapsed.

However, at the end of 2020 and beginning of 2021, an abnormally cold winter in Asia (the world’s top LNG importing region), alongside supply outages and delays along the Panama Canal which led to limited vessels, caused an unexpected soar in LNG spot prices. That winter saw the highest prices for the benchmark for Asian spot LNG since it was launched in early 2009.

At the time, an LNG analyst told TXF: “Now that spot prices have flipped, those left scrounging around the spot market are losing out while portfolio players with long-term offtake contracts reap the benefits”, adding that he expected many buyers to be seeking out contracts to tide themselves over until the mid-2020s in order to hedge themselves against inevitable seasonal price volatility.

Now that the winter of 2021/2022 is approaching its end, the analyst’s prediction was spot on – spot gas supply tightened during anomalously cold weather and prices went up to almost all-time highs. But it wasn’t just seasonal demand and a price hike that hit the market. The 2021 price shock forced multiple factories to shut down permanently these private enterprises have most likely switched industries, resulting in demand destruction for LNG, just as the world faces an energy shortage crisis.

And in response to this, contracts are indeed on the up. According to an analyst at Platts, contractual supply is increasing by an estimated 8.14 million mt/year in 2022, excluding the Venture global deals, and it is expected that Chinese buyers will be continually interested in signing mid to long term SPA/tenders indexed to oil or Henry Hub, considering that spot JKM prices are expected to remain elevated above oil indexed levels throughout the year.

But overall, China’s LNG imports, particularly spot LNG imports, are expected to decrease in 2022, as import costs that are higher than domestic sales prices will ward off importers. And these high prices may also mean that numerous smaller third-party LNG corporates will not be able to financially justify seeking out LNG terminal slots from state infrastructure company PipeChina in the coming year, causing potential issues regarding the liberalisation of China’s gas market.

A source familiar with the market has said that early market charter indicated that many slots at PipeChina's Tianjin LNG terminal have not found buyers for 2022, and that many Chinese firms are intending to minimize spot trading activity, while prioritising long-term contracts with suppliers.

But although economic pressures and skyrocketed spot LNG prices mean that China’s LNG growth rate is expected to be slower this year compared to 2021, China’s LNG demand will continue to rise in 2022. There are industrial consumers across many provinces in China that still predominantly use coal, and are expected to switch to LNG in 2022, with suppliers like Cheniere receiving an increasing number of LNG cargo inquiries from power generation and chemical companies.

Albeit still a fossil fuel, LNG is an integral part of the energy transition, and whilst China still consumes more than half of the world’s coal, demand for LNG will remain strong as the superpower country transitions to cleaner energy.

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