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April’s North Asian Demand Chinese-driven, but May Outlook Less Certain

Jump-start of Chinese economy led to LNG demand rocketing over the past two weeks, aided by SOE coordination and low prices. However, Monday’s economy update by the CNBS foreshadows a decline in China manufacturing output as the world shuts its doors to COVID-19.

Current market visibility suggests China is leading North Asian LNG demand growth, ahead of Japan and South Korea. Our market data indicates the country is likely to import around 1.71mmt this week, which means it is moving towards imports of around 5mmt for April, up from its imports in March, which reached 4.65mmt.

Re-opening of factories increased energy demand

Chinese gas consumption growth is aided by a rebound in manufacturing activity that began in late March. Factories are beginning to ramp up operations after weeks of work suspensions and an extended Lunar holiday period as part of public health measures aimed at containing the COVID-19 outbreak.

Chinese March PMI rebounded

China’s official manufacturing index rebounded in March from its plunge in February, according to data provided by China’s National Bureau of Statistics. The official manufacturing purchasing managers’ index rose to 52.0 from the record low figure of 35.7 seen in February. Notably, the 50-point level represents the tipping point between economic contraction and expansion.

Demand growth led by Tianjin and Guangdong areas

Accordingly, demand growth within China this month to date was led by the wider Tianjin area, which also supplies the capital Beijing, and the country’s southern terminals supplying core manufacturing centres such as Guangdong Dapeng LNG, Dongguan LNG and Shenzhen Diefu LNG.

Six US LNG cargoes still en route to China

Notably, we currently see China receiving a total of seven US LNG cargoes by mid-May, one of which aboard the Hoegh Giant (spot chartered by BP) had already arrived at Tianjin LNG on Monday. The remaining six are due between 24 April and 10 May, our shipping data indicates. Our analysis suggests the cargoes comprise two likely sold by Cheniere out of its Corpus Christi and Sabine Pass contingent as well as one each by Tokyo Gas, Naturgy, RWE and Total, with the lion share bought by CNOOC. In our view, PetroChina is also going to be among the buyers via its Hong Kong listed subsidiary Kunlun Energy.

Demand rebound likely product of orchestrated jump-start

We see the LNG demand rebound as a likely product of an orchestrated jump-start of the Chinese economy, aided by coordination between large state-owned conglomerates, extremely low spot prices and, in terms of US exports, the temporary waiver of import duties on US LNG. As we reported previously, the Chinese government has remained keen to maintain a strong growth trajectory for the year despite the lockdown and it has yet to signal it will revise its original economic goals for 2020, including minimum full-year economic growth of 5.6%.

Continued growth in 2Q uncertain as overseas demand evaporates

However, China’s economic growth in 2Q – and by extension LNG demand growth – is looking highly uncertain to us. Economic data for 1Q 2020 published by the National Bureau of Statistics shows quarterly utilisation of industrial capacity plunged by more than 10pp over 4Q 2019 and 8.9pp over the same period last year. Heavier, more energy intensive industries were hardest hit.

Accordingly, we do not see China being past COVID-19 in economic terms or otherwise – its Asian neighbours certainly are not and the spread of COVID-19 globally is likely to cause second wave demand shock for Chinese industrial centres. Much of the consumer goods produced for overseas markets do not stem from state-owned enterprises and their output is much more vulnerable to market pressures. Already, some smaller privately-owned manufacturers have indicated they will suspend their workforce from mid-April as overseas buyers are freezing contracts.