China natural gas demand-1Q17:Growth slows,but set to accelerate in 2H17

Through 1Q17, cumulative natural gas supply amounted to 59bcm, up 4% y-o-y, asimports rose 4% y-o-y to 21bcm and domestic production increased 3% y-o-y to arecord high of 39bcm. In March, natural gas supply rose 6% y-o-y as domesticproduction increased 11%. In addition, imports contracted 3% due to a sharp declinein PNG imports in March and 1Q17, as China-Asia pipeline supplies were in shortsupply. However, monthly liquefied natural gas (LNG) imports rose 17% y-o-y asPetroChina (Hold, CP HKD5.10, TP:HKD5.15) adjusted LNG imports based onshipping periods, demand, and market prices.

    Monthly data suggests that domestic gas output reached a new record high. Importsmaintain a critical role in supply, with import dependence at more than 60% during thewinter. Chinese LNG importers may benefit if North American LNG exports increase theoversupply of LNG globally and put further pressure on LNG spot prices, particularly inthe summer.

    Lower value added tax (VAT) to stimulate demand: From 1 July 2017, VAT on gas willbe cut to 11% from 13%, resulting in lower gas prices for end users. PetroChina plans tolower its non-residential gas price in the summer, after raising it temporarily in the winterof 2016. In addition, stricter environmental protection standards require provincialgovernments to establish measures to improve demand for natural gas. For example,Shanghai cut its base non-residential gas price by RMB0.4/cm from April, in line with thecountry’s gas pricing reforms, i.e. moving to a market-based pricing mechanism.

    2017 outlook