Traders Beware: China’s Gas Demand Isn’t the Whole Story

China’s natural gas demand is rising, driven by increased LNG imports and pipeline gas from Russia.

Despite growing gas imports, China prioritizes energy security and local sources like coal, as gas-fired electricity is more expensive.

IEA: demand growth in natural gas is set to outpace supply expansion, leading to a tighter supply situation this year and next year.

When traders want to know where oil demand is heading, they look to China. This has narrowed their viewpoint considerably, leaving them vulnerable to price shocks. Now, the same could be happening with natural gas.

China is a huge importer of natural gas, both via pipeline from Russia and in liquefied form. LNG imports to the country since the start of the year have reached close to 80 billion cu m, which is 30 billion cu m more than Russia was sending Germany’s way via the Nord Stream pipeline. China also looks set to receive over 30 billion cu m or so via the Power of Siberia pipeline this year. In short, China likes gas and can’t get enough of it.

This might suggest that the country is moving at a steady pace in a direction where gas provides growing amounts of electricity generation energy. This, however, does not seem to be the case, according to Reuters’ Gavin Maguire and data from climate activist outlet Ember. In a new report, Maguire reports Ember data revealing natural gas to be a minor contributor to China’s energy mix, accounting for a modest 2.8% of the total this year.

That 2.8%, which is a minuscule portion in absolute terms, compares with almost 60% for coal, 13% for hydropower, 10% for wind, and 9% for solar generation. China may be boosting its natural gas imports, but it is in no hurry to shut down its coal power plants and replace them with gas-fired facilities.

This is an important context for future international gas price prediction and bets. China is the world’s largest energy importer, even when its economy is not growing at double-digit rates. Yet China has also repeatedly indicated that it is more concerned with energy security than energy transition. In addition to an all-of-the-above attitude to energy sources, it also has a weakness for locally sourced energy as the more secure choice—hence its overwhelming reliance on coal.

There is, of course, also the issue of cost. Electricity generated from locally mined coal or hydropower plants is cheaper than gas-fired generation that uses imported liquefied natural gas. Indeed, LNG-sourced electricity appears to be between $30 and $40 more expensive per megawatt hour, according to another transition outlet, the Institute for Energy Economics and Financial Analysis. That could discourage greater use of the commodity until prices decline.

However, this is not really on the cards because China is not the only one consuming growing amounts of natural gas brought in from abroad. And that is exactly why it would pay for traders to bear in mind the fact that the world of energy imports is bigger than China.

The International Energy Agency earlier this month issued a warning about the market balance in natural gas. The agency, which maintains that natural gas demand would peak before 2030, said that this year and next, that demand is set to rise more than previously expected. In fact, the IEA said demand growth is set to outpace supply expansion, leading to a tighter supply situation.

“The growth we’re seeing in global gas demand this year and next reflects the gradual recovery from a global energy crisis that hit markets hard,” the IEA’s energy markets director Keisuke Sadamori said in the news release on demand and supply trends. “But the balance between demand and supply trends is fragile, with clear risks of future volatility,” Sadamori also said last week.

Meanwhile, the Gas Exporting Countries Forum said in its latest report that global natural gas exports in September had hit a two-year high, with Chinese demand for gas rising by 9.6% and even the European Union booking a rise in demand, at 3.3%, after seven months of declines in a row. The GECF also raised its demand outlook for the year to 2.2%.

The GECF noted China’s newly launched program for the replacement of diesel-powered trucks with LNG-fueled vehicles that has become a major driver for stronger demand for the superchilled form of natural gas, not least because of its lower price compared with diesel. The report also noted that despite a substantial increase in hydrogenation, China’s natural gas demand added 8.8% over the first eight months of the year, to reach 283 billion cu m.

In separate news earlier this month, Kazakhstan said it was discussing an increase in natural gas shipments to China thanks to the healthy growth in demand for the fuel. Currently, Kazakh gas flows to China are modest, at an annual 4 billion cu m, but it appears that the Caspian producer has ambitions in this respect as it eyes a boost in natural gas production.

It seems, then, that while natural gas constitutes a small part of China’s generation mix, it is a commodity in increasingly greater demand in the Asian powerhouse, as evidenced by the data about imports. However, it’s worth remembering that China is not the only importer of natural gas in the world and, as such, the only factor to watch when gauging prices’ future direction.