Chinese Gas Utility Profits Buoyed by Cold Winter: Fitch
Chinese city-gas distributors have seen sales rise since Q4 2020 as heating demand soared during one of the coldest winters in decades, New York-based Fitch Ratings said in a research note on January 20. Fitch also attributed the acceleration in growth to a post-pandemic recovery in industry, partly offset by pressure on US dollar margins.
Increased demand growth has led to spot LNG prices soaring by over 100% in northern China and 60% in southern China since November, Fitch said. LNG prices in the Hebei, Jilin, Liaoning, and Shandong provinces reached yuan 10,000 ($1,550)/metric ton in late December, versus yuan 2,700/mt in June through August last year.
Despite record low temperatures, Fitch said Chinese gas supply was under less pressure this winter than in 2017, and the spike in demand could be mostly covered. The government pushed for an expansion in storage capacity after the 2017 shortages, with supplies from these facilities exceeding 100mn m3/day or 9.7% of total demand this winter. New pipelines and LNG terminals, and the movement of some long-term contract deliveries to this winter have also helped ease the situation (for more on this please see January NGW magazine feature here).
The surge in demand translates into strong gas sales for distributors. Most distributors have long-term gas supply contracts with national oil companies (NOCs) and LNG suppliers, Fitch said, with prices typically linked to oil benchmarks over time, making them less volatile than spot prices. Gas sector reforms have also improved their access to infrastructure and their bargaining position in negotiations with NOCs on pricing.
"Distributors need to bear a sharper increase in fuel costs from their spot market purchases, although we think the fuel cost pass-through has become smoother since the reform of the gas distribution price mechanism, with distributors having accumulated some experience from previous rounds of fuel cost pass-through," Fitch said. "Gas distributors can better identify target customers to optimise cost structure and maintain active communication with the government on tariff adjustments."