China 2022 winter outlook: Mild residential demand to limit spot LNG purchase

ICIS forecasts China LNG winter demand, from November 2022 to February 2023, to decline modestly by 1.5% when compared to the same period last year. In absolute numbers, we estimate around 27m tonnes of LNG will be required this winter.

For the first time in over a decade, China’s gas consumption fell year-on-year (yoy) in the first half of 2022 and was down by 2% to 182 billion cubic metres (bcm). At the same time, LNG imports declined by 22%, with China likely to cede the title as the world’s largest LNG importer in 2022.

The weakening gas demand was due to a confluence of factors, including a slowdown in China’s economic growth, weaker gas to power demand, rising gas production and piped gas imports amid surging LNG import prices. Given hitherto sluggish demand, questions have been raised as to whether consumption will revive in the coming winter heating period.

Weak industrial activities and power demand

The industrial sector – which represents nearly 40% of total gas consumption – has seen a significant   slowdown due to various lockdown-related disruptions since February. While in June, the purchasing manager index (PMI) indicated a slight recovery, it fell again in July, possibly signifying a more persistent malaise. The wealthiest provinces are urged to bolster output, but both the grim global outlook and domestic covid situation will continue to bear down on industrial activity.

In addition, increased supply of coal and renewable generation will further discourage gas use in power, as seen in the 15% yoy decrease in gas-fired power generation during the first half of this year.

Residential heating demand is expected to be mild, in-line with the latest winter forecast

China’s residential demand will be the key sector this winter. City gas consumption achieved positive yoy growth in H1 2022 despite a depressed economy.

LNG imports in winter can be 1.5 times higher compared to the summer season, due to LNG’s role as a peak-shaver for central heating use. According to China Meteorological Admin (CMA) in August, a mild winter is likely this year. As such, ICIS does not expect winter heating demand to be any higher than last year.

Domestic production and pipeline imports are expected to surge to all-time high during the winter months

On the supply side, China’s priority has been to ensure the continuity of gas supply for residential heating, while keeping domestic gas prices low for all. The latter is expected to become increasingly challenging as we approach winter – the ICIS East Asia spot index (EAX) had reached a record high of US$66/mmbtu at the time of writing.

Various initiatives have been taken to offset the impact of the surging spot prices, including boosting domestic gas production, keeping underground storage (UGS) and LNG tank inventory levels high, signing as many long-term pipeline and LNG import contracts as possible and withdrawing significantly from the spot market.

Gas production at record high: Expected to grow slightly above 7% yoy in 2022

China produced 127 bcm of gas in the first seven months of 2022, rising by 5.6% compared to the same period last year. This is in line with the national energy security strategy to boost domestic production, which replaces costly LNG amid growing uncertainties in the global market. We expect domestic production to remain strong and to be the backbone of supply throughout the rest of the year. In the coming winter months, ICIS estimates gas production to rise by 8.5% when compared to winter last year, which will enable it to satisfy nearly 60% of national gas demand during those cold months.

Higher gas storage capacity

China has been increasing its UGS capacity to secure supply for winter heating requirements. This year, the country has managed to add another 7 bcm of capacity. This is up from 15 bcm by the end of last year which represents around 9% of winter gas consumption. We tracked 13 new UGS sites became operational in the last 15 months or so. ICIS estimates that at least 22 bcm will be operational by winter, giving China a buffer to fulfill winter demand.

The steady growth of piped gas import

Pipeline gas imports to China totaled 37 bcm, rising by more than 10% in the first seven months of 2022. Inflow from Russia through the Power of Siberia pipeline rose 61%, making it the most significant increase in piped gas imports this year. A contracted annual incremental volume with Gazprom will push Russian pipeline gas imports up by 44%.

ICIS forecasts that pipeline imports will reach 30 bcm this winter, up 14% compared to the last winter. In contrast, the LNG dependency rate will fall further to 25%.

China’s heavy reliance on term LNG – nearly 72m tonnes this year, lowers overall LNG import bill

As of August, the ICIS EAX index had almost tripled since the low of US$21/mmBtu in February 2022 and nearly quadrupled when compared to the same time last year. Consequently, Chinese LNG importers have largely retreated from the spot market since February. We have not seen any sign of a pickup in spot buying activity even for the summer peak period. Instead, many Chinese importers have been selling their FOB-based term LNG to the international market instead.

The EAX price is unlikely to drop to an affordable range for Chinese buyers in the near term as Japan and South Korea compete to secure around 80 spot cargoes ahead of winter, based on an ICIS analysis on storage fullness (for further details, please read here). We forecast Chinese buyers to purchase around 70 spot cargoes this winter from November 2022 to February 2023, a 56% drop compared to winter last year.

Term LNG imports have been stable, hovering around 4m tonnes per month over the past 7 months. ICIS estimates contracted LNG to rise to a new high from October, when an additional 7.6m tonnes per annum start delivery in phase. Parts of these new contracts will supply three new terminals, slated to start in winter: the 3mtpa Jiangsu Binhai, the 5mpta Suntien Tangshan and the 3mtpa Fujian Zhangzhou terminals.

Jointly written by Xu Fei and Wang Yuanda. They are both ICIS China gas analyst based in Shanghai. Please reach out if you would like to know more about this article or ICIS LNG Analytics capability in general.