China’s weaker yuan cuts interest in LNG imports

The latest devaluation of the yuan by China’s central bank has curbed buying interest in US dollar-denominated LNG imports for now, according to Chinese buyers.

The differences in exchange rate is making it risky to buy spot cargoes now, an independent LNG importer in China said.

“It has become uneconomical because imports would be more expensive and we would make a loss if we sell it at domestic prices,” the source said.

“Maybe the state-owned majors can weather the economics, but independent buyers will have to consider their finances very carefully,” a second importer said.

On 7 January, the People’s Bank of China (PBoC) set the official midpoint rate of the currency at 6.5646 yuan against one US dollar, the lowest since March 2011. The value of the yuan against the US dollar had been declining since 11 August last year, when the central bank devalued the currency by nearly 2% to reflect market forces, according to ICIS news. On both days, the move affected both the stock and commodity markets in China, causing trading activity to halt.

Fuelling the concerns is the strengthening US dollar, which has gained value following the Federal Reserve’s decision on 17 December to hike interest rates for the first time since 2006.

A cut in Chinese non-residential city-gate gas prices by yuan (CNY) 0.70 ($0.10)/cubic metre (cbm) from 20 November 2015 onwards was expected to stimulate domestic consumption this year, but the weaker yuan might have derailed that.

In any case, LNG demand from China have been limited since last year when lower-than-expected economic growth affected the country’s manufacturing sector, which is a key user of natural gas.

“The question now is how bad is market growth. We’ll see the official number soon, but there’s speculation that the right number is 4-5%,” Tom O’Sullivan, president of Tokyo-based consultancy Mathyos Energy, said. “If that’s the case, it’s very, very serious.”

While obtaining delivery windows at state-owned terminals is a constant challenge for independent buyers, the upcoming Lunar New Year holiday in early February has weakened their interest further.

“Factories would be shutting down or lowering output from mid-January to let their workers head home for the celebrations. We are expecting gas demand to fall,” a third importer said.

Most state-owned and independent importers would have either covered their spot LNG requirements in advance or wait until late February to make enquiries, sources in China said. xieli.lee@icis.com