Whack-A-Mole: China LNG Prices Soar To A New Record, Crushing Distributor Margins
There is one recurring problem with central planning: the greater the level of intervention, the worse and more widespread the unexpected adverse consequences. Just last week, when we reported that Beijing had imposed price controls on its coal rationing, we said that the problem with such explicit subsidies which create an artificially low price, is that they don't address the underlying problem (too much demand, not enough supply), but instead accelerate hoarding and lead to a run on the artificially underpriced commodity, forcing spikes in another energy commodity while resulting in an even faster drain of the commodity in question, in this case coal. In essence, it's like a giant game of "whack a mole".
Just earlier today, we reported of precisely one such outcome when we discussed how China had inadvertently "sparked "Panic Buying" after telling households to stockpile food ahead of the winter." This comes days after we reported that China's coal and natgas energy crisis had quietly spread, with many gas stations across the country running out of diesel due to supply constraints caused by the surging demand for subsidized coal.
And now we have another example of central planning's unintended whack-a-mole consequences: Bloomberg reports that domestic liquefied natural gas prices in China are surging, driven by soaring prices in the international market, adding pressure on downstream city gas distributors.
The national average price for the fuel, carried by trucks to factories or vehicle refueling stations, surged to a record 7,814 yuan per ton (about $26 per million British thermal units) on Monday, up almost 100% from a year ago, according to the Shanghai Petroleum & Natural Gas Exchange. In Beijing, prices saw a single-day jump of 1,000 yuan a ton on Monday, according to the CTL Group, a research unit of gas distributor ENN Group.
The price surge comes as importers try to compensate for the rising cost of LNG imports. While China regulates the price of natural gas sold through pipelines, trucked LNG can rise and fall based on market forces.
According to YuanTalks, Chai Shouping, chief financial officer of state-owned energy giant PetroChina, said at its earnings conference call on October 29 that, given the rising prices of LNG imports, PetroChina recorded a loss of 6.4 billion yuan for gas imports in the third quarter, bringing its total loss in the first three quarters of the year on gas imports to 3.2 billion yuan.
Chai said that “we will supply natural gas at contract prices to downstream companies, including those that have signed long-term supply agreements with us, but for other companies, we will have to sell gas at prices based on our purchases prices.”
While upstream resources companies plan to pass on rising costs to downstream companies, it’s difficult for downstream city gas distributers to pass on the rising prices to end users. Li Yalan, chairwoman of Beijing Gas Group, said at a gas industry forum on October 27 that problems faced by gas distributors this year are different from previous years and much more efforts are needed to purchase resources and balance resources.
“Surging gas prices are unlikely to be transmitted to end users and that is causing serious problems for gas distributors whose gas purchasing prices are higher than selling prices. Gas distributors have to absorb the burden themselves,” said Li, although we are confident that unless Beijing intervenes yet again, distributors will do everything in their power to make sure others foot the soaring bill.
Meanwhile, as reported previously, some factories in gas-reliant sectors such as ceramics and fertilizers have already had supplies restricted in order to conserve fuel for home heating. Those that can get it will pay more - the cost for gas feedstock at ceramics factories in Guangdong and Jiangxi have nearly doubled, according to industry publication Ceramic Information.
The gas surge is coming just as a jump in coal prices is relaxing. Action by China’s authorities to boost output has helped ease a crunch on supply that’s contributed to power shortages and crimped output in some key industries.
Thermal coal futures on the Zhengzhou Commodity Exchange fell 2.8% to close at 891.8 yuan ($139.3) on Tuesday, paring an earlier drop of as much as 8.4% that brought the price to the lowest since August.
Alas, as the LNG example shows, unless Beijing successfully manages to plug all hole where the "mole" can emerge, this strategy merely exacerbates an already unprecedented crisis, and the longer the state intervenes in price discovery the worse the final outcome.
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