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Ample power supply, high LNG prices curb China’s summer gas demand

China’s natural gas demand at the start of this year’s summer season has been muted due mainly to sufficient power supply including hydropower, coal and renewables, as well as higher Asian LNG spot prices, market sources and analysts said.

Gas-fired power producers typically buy spot LNG cargoes to meet peak-shaving power demand when summer approaches, but heavy rains in southern China in the past two months have led to a significant increase in hydropower supply and curbed demand for gas-fired power generation.

Chinese LNG importers have been quiet in the Asian spot market over the past two months, with no additional procurement seen for June-July deliveries, according to trade sources.

“There might be restocking demand for August, however, we are still monitoring the temperature. Southern China is yet to see firm demand for LNG due to more rainfall,” one trading source with a state-owned oil and gas company said.

Hydropower supply rises

China’s hydropower supply has been better than this time last year, state agency National Development and Reform Commission (NDRC) said at a press conference June 18.

Guangdong’s electricity imports, mainly hydropower from Yunnan province, have been rising since May, with daily power supply rising to nearly 1 TWh recently, doubling from around 400-500 million kWhr in April, the source in Guangdong said.

As the second largest hydropower producer in China after Sichuan province, Yunnan exported around 182.3 TWh of electricity to southern and eastern coastal provinces in 2023, around two-thirds of which was sent to Guangdong, local government data showed.

Furthermore, China’s renewable power generation volume continued to grow this year, and wind power and solar power generation volumes are expected to increase by more than 25% year on year in third-quarter 2024, according to China Electricity Council (CEC).

Higher hydro supply pushes down thermal power prices

The increased hydropower supply in China has impacted the share of gas-fired and coal-based power in the local spot electricity market, a source with a major power supplier in Guangdong, said.

Both gas and coal-based power traded at around Yuan 0.3/kWh in the power spot market recently, down from around Yuan 0.4/kWh in April, data from Guangdong Power Exchange Center — the official power trading platform in southern China — showed.

China’s manufacturing hub Guangdong had the highest natural gas consumption at 38.7 Bcm in 2023, of which around 51% went into power generation, as the province also had the highest gas power installed capacity at 39.55 GW in 2023, accounting for 31% of the country’s total gas power installed capacity, data from S&P Global Commodity Insights and Guangdong Power Exchange Center showed.

Besides, China’s thermal coal inventory at power plants across the country continued to hover at a relative high level of 198 million mt recently, providing assurance for summer power supply, according to the NDRC.

China is expected to add 150 GW new installed power generation capacity by end-June, and total thermal coal and gas supplies are generally sufficient for power generation in summer, state media CCTV reported June 26, citing CEC.

Higher spot LNG prices curb buying interest

In addition to sluggish gas power demand, higher Asian LNG prices compared with domestic pipeline gas are believed to have also discouraged buying interest for spot cargoes, trade sources said.

“Chinese buyers still rely on pipeline gas priced at approximately $10-$11/MMBtu and trucked LNG at $11-$12/MMBtu for the summer season. Anyone purchasing LNG from the international market at prices above $12/MMBtu might incur a loss,” a third market source with a Chinese gas importer said.

China’s pipeline gas imports were estimated to increase 17% on the year to 21.85 million mt in the first five months of 2024, with its import cost averaging $7.43/MMBtu excluding taxes and fees, 32.3% lower than the cost for imported LNG over the same period, calculations based on customs data showed.

The average price of trucked LNG at 98 domestic LNG plants and receiving terminals, which are not regulated by the government and reflect the tradable price of natural gas in the spot market, was pegged at around Yuan 4,608/mt ($634.17/mt) June 25, data from domestic gas distributor ENN Group showed. This is equivalent to around $11/MMBtu after adding taxes and fees.

Platts, part of Commodity Insights, assessed the August JKM, the benchmark price for LNG cargoes delivered to Northeast Asia, at $12.975/MMBtu June 26.

“Although temperatures are rising in North China, we have yet to see the full coverage of summer demand … buying interest in the region is still around $11.5/MMBtu,” a fourth trade source said.

However, some sources pointed out that it is too early to say China’s summer demand is weak as summer has just begun. If the temperature rises sharply in July and August, spot LNG demand may increase as well, they said.
Source: Platts

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