Chinese LNG concerns offered 'force majeure'

Thursday, 06 February 2020
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Uncertainty over China’s LNG future demand has grown following its decision to offer force majeure certificates to domestic companies.

The certificates will be made available if companies are unable to fulfill their international contractual obligations due to the coronavirus outbreak.

Beijing’s decision adds to concerns over demand from the world’s second largest LNG importer and the bearishness in the north Asian markets exacerbated by oversupply leading to falling prices, Platts reported.

It was believed that the major LNG importers, including CNOOC, were mulling over whether to take advantage of the certificates.

If reduced industrial activity across Hubei Province lasts to the end of February, it would reduce Chinese LNG demand by 5-7% relative to the S&P Global Platts Analytics base case, which would lower Chinese LNG imports.

While coal to gas switching in the residential sector has played a large role in China’s recent LNG demand growth, the driver behind the country’s gas demand remains the industrial sector.

Between 60% and 70% of China’s total LNG imports are ultimately destined to end users in the industrial sector, depending on the degree of weather related demand.

On Monday, Platts JKM plunged to an over 10-year low, falling to $3.512/MMBtu for March, the lowest since records began in February, 2009 on slow demand and a wave of new supply from Australia and the US.

China’s move is aimed at protecting the interests of domestic companies and helping mitigate losses, but its impact on LNG markets is unclear, including the likelihood of Chinese LNG importers exercising force majeure, the protection such a declaration would offer and the implications it would have for international LNG sellers.

“It might take some time for China to be able to justify this virus outbreak as force majeure,” S&P Global Platts Analytics spokesperson said. “While it might affect a buyer’s ability to fulfill its contractual obligations, most of the long-term contracts have an annual volume commitment that can be postponed to later in the year, so it might be early for Chinese companies to justify and obtain reliefs from performance. The key still lies in to what extent China can demonstrate that the contractual requirement cannot be fulfilled.”

Proof needed

With their application for force majeure certificates, Chinese companies would need to provide proof of delivery delays or cancellations, sales contracts or agreements, as well as customs declarations, the China Council for the Promotion of International Trade said in a statement last Thursday.

Although it is a bit early to gauge, Chinese end users could be delaying February cargo deliveries amid high inventories and a poor outlook on downstream demand stemming from the virus outbreak, sources told Platts.

Concerns were also expressed over possible port closures if the situation worsens. A Chinese LNG end user said it might adjust its LNG procurement schedule going forward while it continues to assess the effects of the virus outbreak.

“Demand for LNG will be greatly affected,” the unnamed end user told Platts. “There is a decline in residential gas demand, gas power generation and traffic. If the epidemic lasts until May, I think the LNG growth rate will be a single digit.”

Last week, ports closed and economic activity slowed in Hubei province, an important industrial hub and demand centre for regasified LNG.

Hubei sources regasify LNG from terminals in the Shanghai region, which account for around 8% of Chinese LNG imports. Elsewhere, Chinese national and provincial officials have mandated that commercial and public activities shut through February. 

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