China LNG plant investors keen to exit business on margin woes

Focus story by Sarah Chen

SINGAPORE (ICIS)–A growing number of investors in China’s liquefied natural gas (LNG) plants are keen to exit the business, which is currently suffering from shrinking margins amid an uncertain market outlook, industry sources said on Thursday.

These investors are typically suppliers of bulk commodities, while others can be from totally unrelated industries like real estate, they said.

Promise of strong returns lured investors to pour in funds into China’s LNG plants over the past two years, resulting in rapid increase in the country’s gas liquefaction capacity, industry sources said.

But the tide has since turned, with cost of feedstock gas rising following a recent fuel pricing reform adopted by the government. This, coupled by the huge LNG capacity, triggered a downtrend in margins since the start of the year, with some plants now incurring losses, industry sources said.

In Shaanxi and Inner Mongolia – the two major LNG production regions in China – the average margin for the first nine months of the year stood at minus yuan (CNY) 132/tonne ($21.5/tonne) and minus CNY181/tonne, respectively, according to ICIS China data.

These represent a sharp deterioration from the previous corresponding period, when gas liquefaction margins were at CNY920/tonne in Shaanxi and CNY896/tonne in Inner Mongolia, the data showed.

Meanwhile, China’s aggregate gas liquefaction capacity stood at 56.49 million cubic metres (mcm)/day as of September 2014, representing a 46.7% increase from end-2013 levels, according to ICIS China data.

Plants under construction or in the planning stage will add another 70mcm/day to this capacity, based on the data.

One investor with an LNG plant under construction in the country has decided to drop the project, also citing difficulty in securing credit in China. Negotiations are ongoing for the sale of project assets, according to industry sources.

China’s apparent gas consumption, on the other hand, stood at 104bn cubic metres in the first seven months of the year, up 10.4% from the previous corresponding period. In 2013, its apparent gas consumption was estimated at 163bn cubic metres, according to data from the National Bureau of Statistics (NBS).

Prices of feedstock gas have been increasing after China raised the wholesale prices of natural gas to non-residential users by 15.4% in July last year. The move was in line with China’s move to embrace a more market-oriented energy pricing mechanism.

But the higher prices are dampening downstream demand for LNG, industry sources said, adding that another round of price hike for natural gas may be expected by the end of next year.

With the high paybacks gone following rapid expansion in China’s liquefaction capacity, investors want out of the projects, industry sources said.

Buying interest for such assets, on the other hand, is also waning amid concerns over the medium- and long-term prospects of the Chinese LNG market, they said.

An LNG producer was approached by a potential buyer in 2013, but no deal was concluded. The producer made the offer to sell this year but the buyer is no longer interested even with a significantly lower selling price, industry sources said.

Some of these investors have shifted their attention instead to LNG import terminals, they said.

LNG imports accounted for 25cbm or 24% of China’s total gas consumption in January to July 2014, according to official data.

($1 = CNY6.13)

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