In Q3 of 2024, the increase in spot LNG DES prices and domestic LNG plants’ feed gas costs had significantly underpinned domestic LNG prices in China. Coupled with an overall reduction in supply, prices generally fluctuated upwards during the period, with only a slight decline at the end due to the holiday around the corner. Looking at Q4, as the Chinese LNG market enters its traditional peak season, both supply and demand are expected to increase, making it more likely that prices will experience seasonal upward movement.

I. Outlook for Q4 2024: Anticipated Increase in Supply & Demand, with Prices Likely to Fluctuate and Rise

The possibility of a narrow increase in domestic LNG supply is high.

In terms of domestic production, from Oct to Dec, the Chinese LNG market will enter its traditional peak season. The concentrated emergence of winter stocking up is likely to stimulate an increase in producing profit levels, driving LNG plants to maintain a high level of production enthusiasm, and there may be room for further increase in the operating rate.

In terms of imported resources, Q4 will see relatively abundant cargoes imported by tier-2/3 players, and the arrival of some spot cargoes will provide more LNG available for truck loading, although the increased gasification during the heating season may have an inhibitory effect on the LNG truck loading to a certain extent.

The seasonal increase in demand will be triggered by the "Golden Sept and Silver Oct" in industry sector and the city gas replenishment ahead of winter starting from Oct. From Nov to Dec, as the manufacturing industry gradually enters the off-season, it is difficult for the procurement of industrial users to rise. However, the heating demand boosts the market atmosphere in the heating season. Moreover, the increment in coal logistics will bring benefits to vehicle-fueled LNG. It should be noted that although the seasonal replenishment demand gradually arrives as expected, market participants still need to pay attention to the reserve inventories across the country, as well as the temperature changes in early winter. If the domestic temperature does not drop significantly beyond expectations, the peak-shaving demand for LNG may be limited.

Overall, the probability of LNG prices rising with fluctuations in Q4 is high. Although the LNG trading liquidity was suppressed by the National Day Holiday, the full release of city gas and reserve stocking up demand will gradually promote the trading activity after the holiday. At the same time, the early start of the heating season in some north regions will further boost the market atmosphere. From Nov to Dec, as the heating range in the Northern Hemisphere gradually expands along with winter approaching, spot LNG DES price and domestic plants’ feed gas prices may both operate at higher levels, which is expected to further support LNG prices. Starting from mid-Nov, as the northern region of China fully enters the heating season, the intermittent appearance of city gas replenishment demand is expected to further establish a strong tone for the LNG market. Overall, it is expected that in Q4 of 2024, domestic LNG prices may fluctuate within the range of ￥4,850-5,750 /mt ($13.32-15.80 /MMBtu).

Risk Warning:

There is a high probability of La Nina phenomenon,

Geopolitical risks continue,

Terminals and plants are likely to have intensive commissioning, intensifying domestic competition.

II. Review of Q3: Prices Follow an "Inverted V-Shaped" Trend

According to statistics from SCI, from Jul to Sept, the price of LNG in China generally followed an "inverted V-shaped" trend. The average price of LNG increased by ￥494.25 /mt compared with Q2, with an increase rate of 11.44%; and it rose by ￥789.51 /mt  compared with the same period of the previous year, with an increase rate of 19.61%.

In Q3, the domestic LNG price reversed the weak trend since Feb and rose to above ￥4,500 /mt since mid-July.

In Jul, the firm spot LNG DES price and the cost of feedgas for domestic LNG plants underpinned the domestic LNG price. Meanwhile, the maintenance of some LNG plants led to the reduction of output, while the booming gasification volume due to high temperatures subdued the truck loading volume from terminals. These factors supported the LNG price to fluctuate and increase within the month.

In Aug, the arrivals of cargoes increased MOM, but the truck loading volume remained relatively small under the high-temperature conditions. In addition, the uptick in the auction price of feedgas for LNG plants in the northwest and the increased demand for replenishing in reserves contributed to a relatively strong LNG price.

In Sept, LNG price was supported by the cost and the demand for replenishing of some local city gas distributors, before the sales slowed down and the inventory rose. With the Mid-Autumn Festival and National Day holiday approaching, producers and sellers tried to achieve a comfortable inventory with a declined price. The trend within the month was first up and then down.

III. Market Drivers in Q3: Cost Support and Supply Contraction

1. Supply Contraction Widened Price Upside Potential

Domestic production decreased before increasing. Generally, Q2 and Q3 are the traditional maintenance seasons for LNG plants, with reduced operating rate affecting LNG output. According to market research by SCI, LNG production saw a slight decline in Jul and Aug, but rebounded in September with the completion of previous maintenance and the commissioning and expansion of new plants in Shanxi, Ningxia, and other regions. Additionally, LNG plants in the southwest and other areas experienced temporary production cuts due to power shortage during the hot weather, which did not have a sustained impact on the overall domestic production. Overall, LNG production from Jul to Sept showed a trend of initial decrease followed by increase, with total Q3 production reaching approximately 6.25 million tons, a MOM increase of 3.41% and a YOY increase of 10.84%.

Truck loadings from terminals were significantly reduced. On the one hand, high summer temperatures increased the demand for gas-powered electricity, leading to a higher proportion of gasification at terminals and consequently decreasing the supply of LNG. At the same time, high spot LNG DES prices resulted in fewer spot imports by tier-2/3 buyers. On the other hand, the continuous increase in LNG ex-terminal prices made them less affordable for industrial users. This, combined with the fact that summer is traditionally a low season for industrial demand, also contributed to a reduction in truckload volume. Overall, the total truckload volume in Q3 was only 3.47 million tons, showing a MOM decrease of 22.02% and a YOY decrease of 7.93%.

In summary, according to statistics from SCI, in Q3 2024, China's LNG supply volume was 9.73 million tons, with a MOM decrease of 7.38% and a YOY increase of 3.32%. The reduction in supply has broadened the potential for LNG price increases.

2. Upstream Players Driven by Cost to Push for Higher Prices

In terms of profit, supported by the upward trend in feedgas and spot LNG DES prices, LNG plants and terminals have been eager to reverse the losses of the previous quarter since the beginning of 2024.

On the LNG plant front, according to market research by SCI, the feedgas of western LNG plants delivered in Jul had an average price of ￥2.375 /cbm, a MOM decrease of 11.05%; in Aug, the feedgas price was ￥2.498 /cbm, a MOM increase of ￥0.123 /cbm; in Sept, the feedgas price was ￥2.904 yuan /cbm, a MOM increase of ￥0.406 /cbm. Overall, except for a decline in Jul, costs increased significantly in Aug and Sept. LNG plants in most regions faced a margin inversion in Q1 and Q2. Therefore, taking advantage of the upward trend in costs, the intention of LNG plants to push for higher price has become increasingly strong. The profit situation has slightly improved, but more than 60% of domestic LNG plants are still at a relatively low profit level of less than ￥500 /mt.

On the LNG terminal front, from Jul to Sept, as temperatures continued to rise, strong heatwaves boosted the demand for natural gas-powered electricity. Coupled with the market’s high concerns over the supply uncertainties in the regions such as Norway and Australia, international natural gas prices were prone to rise. Against this backdrop, China's spot LNG DES prices have been at a high level, reaching as high as $10/MMBtu since May, and have breached $12/MMBtu on several occasions. Additionally, the impact of Hurricane ‘Francine’ in the United States led to the shutdown of some export facilities, causing a decline in LNG production, which stimulated the Asian LNG market. Consequently, China's spot LNG DES prices fluctuated at a high level throughout Q3. Supported by costs, the ex-terminals prices kept LNG prices on a strong trajectory.

From the demand perspective, traditionally, Jul and Aug are the off-season for consumption, with demand primarily driven by rigid procurement and being lackluster. The continuously rising cost of imported spot LNG has led to successive price rallies at terminals. High market prices have finally dampened the procurement enthusiasm of end-users. Additionally, heavy rains in various regions this summer have not only suppressed demand in gas-fired power generation but also affected highway transportation, constraining gas consumption for traffic. These combined factors have led to a reduction in LNG consumption in Jul and Aug. However, the arrival of the industrial "Golden Sept and Silver Oct" period has, to some extent, stimulated the demand for industrial gas. In addition, as the heating season approaches, many city gas companies have begun to replenish their storage, and the cargo flow from restocking has also driven an increase in sales at LNG filling stations.

Therefore, according to statistics from SCI, China's LNG consumption in Q3 was approximately 9.79 million tons, marking a MOM decrease of 6.74%, and a YOY increase of 4.03%.