[Introduction] With the end of the heating season, domestic LNG plants in China started routine maintenance as early as March, which used to happen from April to May in previous years. Going forward, as LNG market prices remain low in the off season, some plants may face operational losses again, suggesting that the operation rate for domestic plants could continue to drop in Q2.

Maintenance capacity accounted for over 20% of China since March.

After highly operating throughout last winter, some northern LNG plants began routine maintenance following the end of the heating season. According to SCI, since March, a total of 38 domestic plants have started maintenance, involving a capacity of 39 million cubic meters per day, which represents 21.42% of the country's total LNG capacity.

The scale of maintenance is larger in North China. Taking Inner Mongolia, Shaanxi, and Shanxi as an example, their LNG production capacity accounts for over 55% of the national total, providing substantial support for urban gas supply during the winter in northern regions. Among them, Inner Mongolia, as the province with the largest LNG capacity, has also seen the most plants undergoing maintenance so far, with a combined capacity of 10.25 million cubic meters per day.

Maintenance season started forward with an 80% Y-O-Y increase in capacity.

At the end of the heating season, the maintenance capacity of LNG plants increased significantly. According to SCI, starting from March, the number of plants in maintenance increased by 16 Y-O-Y, with a capacity increase of 78.90% Y-O-Y. Moreover, the maintenance season in 2024 began in early March, two weeks earlier than in 2023.

The core reason lies in the supply and demand imbalance. Since 2023, the global natural gas market gradually recovered from the impact of public health events and geopolitical conflicts, and the global gas price drop stimulated the purchasing of China, leading to an abundant supply in China during the 2023-2024 heating season. However, due to the warm winter caused by El Ni?o, the demand for heating was lower than expected, resulting in a loose supply in the domestic natural gas market. Meanwhile, the domestic prices of LNG followed the international market's downturn in Q1, and as the heating demand began to decline in early March, some LNG plants started maintenance to avoid the risk of the loose fundamentals.

The operation rate of LNG plants may continue to decline in Q2.

The market's supply and demand looseness harmed profits, with the loss occurring multiple times that were not seen in Q1 2023. According to SCI, the comprehensive profit of plants in Q1 2024 was between RMB-100-400/mt, which is a significant decline Y-O-Y. By late March, the loss had exceeded RMB 100/mt, which was also closely related to the increase in maintenance capacity.

The northern heating season completely ends in Q2, marking the entry of the natural gas market into its off season in China. On the supply side, due to the limited consumption of inventories in winter, the supply in Q2 may be relatively abundant, which will inevitably lead to declining profits for plants. According to an assessment by SCI, it is expected that the profits of LNG plants will continue to be at a low level in Q2. Based on the fundamentals forecast, the price advantage of domestic LNG will not be as competitive as imported LNG. Additionally, plants fed with higher-cost gas and those that require secondary processing of feedgas will face more pronounced cost pressure, increasing the possibility of losses. With this expectation, the operation rate of LNG may continue to decline in Q2.