A spike in Covid-19 infections in China has dampened demand for LNG from the country, dimming LNG producers' hopes of selling more volumes to the world's second largest economy and most populated country.
China imported 79.93mn t of LNG in 2021, up 18.7pc from 67.31mn t in 2020, overtaking Japan as the world's largest importer of LNG for the first time ever. Japan imported only 73.67mn t of LNG in 2021. This is in line with a national drive to transition to cleaner energy sources and achieve carbon neutrality by 2060, which has further driven Chinese appetite for LNG.
But the recent upward climb in Covid infections within China, particularly in Shanghai, has greatly limited China's LNG procurement. Typically, industrial gas demand picks up right after the lunar new year celebrations, but this year industrial gas demand has been muted since February. This is amid a spate of lockdowns in cities across the country as officials scrambled to contain the outbreaks in line with China's "zero-Covid" policy.
At the same time, some downstream LNG users in east and south China have pivoted to using pipeline gas instead, which is much cheaper than LNG at present and is also perceived as a more stable source of supply, as roadblocks being set up in a bid to contain Covid infections have disrupted trucked LNG transportation. Market participants have estimated this switch to comprise no more than 10pc of downstream users' total gas demand.
But specific figures on the degree of the switch are not available, as downstream users may be adjusting their procurement patterns based on the evolving Covid situation on the ground.
Chinese state-owned CNPC's research institute has lowered its projection for the country's aggregate gas demand growth to 8.2pc from the earlier projected 11pc. LNG import projections were also lowered, with growth on the year cut back to 8.52mn t, instead of an assumed 11mn t in the previous forecast.
Although China obtains a stable supply of pipeline gas from its closest neighbours including Russia and central Asian countries, a stable supply of LNG is imperative to ensure that the country has enough gas, particularly during peak demand seasons such as winter. The country imported 42.43mn t of pipeline gas in 2021, up by 18.6pc from the previous year.
China LNG buyers continue preference for term contracts
Meanwhile, Chinese LNG buyers have so far maintained their practice to ink more term agreements with LNG suppliers. There have been four term agreements signed between Chinese LNG buyers and suppliers this year alone — between US firm NextDecade and Chinese firm ENN for 1.5mn t/yr, US firm Energy Transfer and ENN NG for 1.8mn t/yr, Energy Transfer and ENN Energy for 900,000 t/yr, and China's Guangdong Energy Group (GEG) and NextDecade for 1.5mn t/yr.
Chinese buyers also dominated interest in term procurement in 2021, having signed a total of 22 term deals since the start of 2021 and making up 87.5pc of all northeast Asian buyers to have done so. This is up from just around three Chinese consumers that signed term contracts in 2020.
Increased spot price volatility should continue to encourage Chinese LNG buyers to focus on securing term volumes. The front-half month of the ANEA, the Argus assessment for spot LNG deliveries to northeast Asia, was last assessed at $25.01/mn Btu on 26 April, down by $29.43/mn Btu from an all-time high of $54.44/mn Btu on 8 March.
