China LNG traders see margins squeezed by producers’ direct sales

13 August 2012 09:46  [Source: ICIS news]

SINGAPORE (ICIS)--China’s LNG traders have seen declining margins in the past two years as more producers increase their distribution channels and direct sales with end-users, instead of relying on traders for revenue, sources said on Monday.

The average margin that LNG traders can earn declined to yuan (CNY) 50/tonne ($8/tonne) between January and July, a drop of around 67% from CNY150/tonne in 2011, the traders said.

The arbitrage window for moving LNG from north China-based plants to consumers in south China’s Guangdong province was around CNY122/tonne on average from January to July, according to data compiled by ICIS C1 Energy. However, many traders said only large trading companies can quote this price, while many others recorded lower profits.

The increasingly fierce competition meant that many producers have chosen to build their own distribution channels, including LNG-refuelling stations, re-gasification plants and logistic facilities such as LNG trucks, to boost revenue. More producers have also been dealing in direct sales with end-users, instead of relying solely on LNG traders, causing them to have declining margins.

Ningxia Hanas New Energy Group, which started up China’s biggest LNG plant at 3Mm³/day on 18 July, has bought 100 trucks for the delivery of the material. It also plans to establish sales networks in some provinces for deeper market penetration, according to an east China-based trader.

“Having a large customer base is the key to surviving,” a major LNG supplier based in north China said.

More than two years ago, producers in China had fewer concerns about their sales volume as the LNG market was in undersupply. Traders also earned comfortable margins as the producers required their services in identifying end-users. Consumption was centred in south and east China, while LNG plants are mostly located in north, northwest and southwest China.

However, the Chinese market has been in oversupply since 2011, with the rapid capacity expansion of many plants. China’s LNG production capacity rose by 4.85 million cubic metres (Mm³)/day between January and July this year, a 30% rise from the same period in 2011, data from ICIS C1 Energy showed.

The rise in direct sales between producers and end-users have made it challenging for traders to do arbitraging as there is greater price transparency in the market, industry sources said.

“Some producers offer the same price to both end-users and traders, which further crushes the margins,” a LNG trader based in north China said.

To increase their margins, some traders are trying to extend their businesses through partnership with LNG producers or building their own LNG plants, market sources said.


By: Jane Han

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