Analysis: China policy reform to end losses for city-gas firms on household sales

Kunlun Energy

26/07/2023 03:23

* 
      Household gas prices increase 6%-20% in more than 30
cities 
    

        * 
      Policy could increase LNG demand by passing on costs more
evenly
    

        * 
      Reform comes after gas association lobbied for change in
March 
    

        * 
      Each increase to add max 100 yuan/year to average home gas
bill
    

  
    By Chen Aizhu, Emily Chow and Andrew Hayley
       SINGAPORE/BEIJING, July 26 (Reuters) - Policy reform in
China will boost profit for city-gas distributors by letting
them raise prices for residential sales above costs, after years
of selling piped gas to households at a loss, according to
utility officials and analysts. 
    The scheme, which allows retail residential tariffs to be
adjusted twice a year in line with gas procurement costs, will
inject billions of dollars in revenue into companies like ENN
Energy Holdings  2688.HK , China Gas Holdings  0384.HK  and
China Resources Gas  1193.HK , utility officials said. 
        Higher households tariffs - as much as 20% higher in
certain cities - should also help alleviate some of the pain
distributors felt last year, when China's gas use declined for
the first time in two decades as COVID hammered the economy and
lofty global liquefied natural gas (LNG) prices hurt imports. 
    Regional piped gas distributors like Shanghai Gas, Chongqing
Gas  600917.SS  and Changchun Gas  600333.SS  and other gas
utilities suffered steep declines in profit or outright losses
in 2022 as they were unable to pass on more of their costs to a
sector accounting for over 20% of China's gas consumption.     
    The new market-based pricing system will also encourage
distributors like ENN and China Gas that are expanding into
global gas trading to look at importing LNG. 
    "The policy will help the whole (gas) distribution sector
and restore utilities' profitability," said Tan Yuwei, general
manager of capital management at China Gas Holdings. 
        The privately controlled firm, one of China's largest
gas distributors with residential customers making up 36% of its
gas sales, expects the initial price hike this year to generate
3.2 billion yuan ($444 million) in gross margin, Tan said.
        A second major distributor estimated the policy will
lift its gross margin by more than 10% and anticipated further
improvement in 2024 as China's economy recovers, said an
official who declined to be named due to company policy. 
    Shares for listed gas utility companies briefly reversed
this year's trend downwards after the policy was announced, but
they remain under pressure from lacklustre industrial demand and
China's struggling economy.     
    
    PHASING IN PRICE HIKES 
    State planner the National Development and Reform Commission
(NDRC) announced the policy last month, after the China Gas
Association had lobbied in March for reform saying heavy losses
at utilities could cause supply disruptions, officials with
direct knowledge of the matter told Reuters.     
        Since then more than 30 cities - including Qingdao and
Nanjing in the east, Shijiangzhuang in the north and Lanzhou in
the northwest - and the provinces of Hubei, Guizhou and Shaanxi
have hiked residential tariffs by between 6% and 20%, according
to local governments and utility sources. 
    Officials said the increases probably won't hurt household
demand much because each rise can add no more than about 100
yuan ($13.88) to the annual bill for a home burning 200 cubic
meters of gas a year to fire stoves and water heaters. 
    The price hikes will also be introduced slowly to help
minimise any hardship to poorer families, with the policy
letting local authorities decide when to implement them and
granting subsidies to low-income households, the officials said.
    China in recent years has liberalized natural gas prices by
allowing distributors to pass costs on to industrial and
commercial customers, although Beijing maintained tight control
over household prices to avoid a consumer backlash. 
    That left some households, such as in rural communities in
northern Hebei province, short of gas during the 2022/2023
winter because distributors scaled back supplies as costs
soared, utility officials said. 
    The new policy, though, will narrow the 0.50 to 0.60 yuan
price gap per cubic metre between higher-tariff industrial users
that make up 40% of China's gas consumption and residential
users who up to now bought gas at lower prices, the officials
said. This will help distribute fuel costs more evenly and is
likely to prompt more buying from the global market, they said. 
    "This policy reform will result in more reasonable
downstream gas prices in China, which will encourage city gas
utilities to increase purchases from upstream importers," said
Yi Cui, an analyst with consultancy Rystad Energy, referring to
Chinese national oil companies.  
        
    ($1 = 7.2028 yuan)

    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Chinese gas distributors have seen narrowing profit margins in
recent years    https://tmsnrt.rs/44TvhJS
Hong Kong-listed shares of China’s city-gas distributors on the
decline since 2022 Gas    https://tmsnrt.rs/44XCLLT
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 (Reporting by Chen Aizhu and Emily Chow in Singapore, and
Andrew Hayley in Beijing; Additional reporting by Beijing
newsroom; Editing by Tom Hogue)
 ((aizhu.chen@thomsonreuters.com; Reuters Messaging:
aizhu.chen.reuters.com@reuters.net))