China’s regulator lowers domestic natural gas prices amid coronavirus outbreak
China’s state planner National Development and Reform Commission, or NDRC, will reduce domestic natural gas prices to help companies restart operations as it attempts to balance the impact of the coronavirus outbreak and the country’s economic development, it said in a statement dated February 22.
The measures, like recent tax breaks and monetary stimulus, are being implemented in the backdrop of concerns that economic activity could be heavily impacted due to the epidemic.
The NDRC said it will bring forward the date when government-regulated natural gas prices switch from peak season to off-peak levels, from the usual implementation date of April 1.
As of February 22, the city gate gas price will be lowered for non-residential sectors that follow the government-guided pricing mechanism, and for gas suppliers that follow market-based pricing, companies were encouraged to negotiate prices with downstream gas consumers in accordance with market conditions.
“This aims to reduce the price as much as possible,” the NDRC added. The notice was addressed to all Chinese provinces, autonomous regions, municipalities, and the national oil companies China National Petroleum Corp or CNPC, China Petroleum and Chemical Corp or Sinopec, and China National Offshore Oil Corp or CNOOC.
During the peak season, CNPC’s listed subsidiary PetroChina can hike the city gate price by as much as the upper limit of 20%, and last year it was able to push through a hike of over 15%, Neil Beveridge, senior oil analyst at Bernstein Research said. He said the off-peak season price hike last year was around 6.4%.
“The exact off-season gas price at the city gate for 2020 is not yet clear; however, we expect an approximate 15% decline in average city gate price as a result of the policy,” he added.
NDRC said it will offer more favorable price cuts for sectors that have been paralyzed by the coronavirus outbreak, such as chemical fertilizer production. Local authorities should lower prices for non-residential use according to price reductions in the upstream sector, and pass on the lower rates effectively to end-users, it said.
Additionally, the regulator stressed on maintaining the stability of the natural gas market, including gas production, supply and demand connections, downstream consumption, and to “keep the market running smoothly.”
LNG MARKET IMPACT
Lower domestic gas prices typically reduce profit margins for gas importers like CNOOC or Petrochina, and can slow their LNG imports in the international market. However, in the longer term, lower gas prices help boost domestic gas demand and allow consumers to benefit from a fall in global gas prices.
“PetroChina may see an increase in gas losses as a result of the decline in city gate prices. Although JKM spot LNG is cheap at $3/MMBtu, PetroChina may not be able to take advantage of the cheap prices as the group needs to fulfill their contractual volume,” Beveridge said.
He said lowering of domestic gas prices does not have a direct impact on city gas distributors’ margins, and any decline in the city gate price will be passed on to the end-user.
“However, the policy may help distributors to avoid margin compression in provinces that have adjusted down their end-user gas price earlier this month,” Beveridge said, adding that Zhejiang, Hubei and Chongqing have lowered end-user gas prices by around 10% for small-medium enterprises.
“The downward adjustment in the city gate price will help distributors to avoid losses. Furthermore, any increase in gas demand as a result of the lower prices will benefit gas distributors,” he added.
Various market indicators show that Chinese industries are still struggling to recover.
“With the various levels of lockdowns, numerous roadblocks, travel bans and restrictions on the re-opening of factories, offices and shops in place, many migrant workers still find themselves stuck in their hometowns,” economists at Japanese bank Nomura said Monday.
Nomura said one of its indicators of business resumption, the Baidu Migration Index, or BMI, showed that the cumulative return rate of migrants in its 15 sample cities rose to 27.7% on the 30th day of the Lunar New Year, February 23, from 27.3% one day earlier. Full resumption was largely achieved on the 24th day of Lunar New Year last year.
On February 23, President Xi Jinping said in an speech that the epidemic situation was still severe, and the prevention and control of work was at the most difficult and critical stage. However, the economy cannot be paused for too long and regions not severely affected by COVID-19 should push for business resumption.