OREANDA-NEWS. April 26, 2013. China’s economy slowed unexpectedly in the first quarter of the year, expanding by only 7.7% as slackening factory output and tightening in the property sector dashed hopes for a reacceleration. But the country’s booming gas market looks to be largely immune to the general malaise, with fuel-switching from oil to gas in China’s transportation sector set to cushion demand against substantial downside risks.

“The slowdown will have an impact on the overall energy situation, but it will not impact on natural gas,” Lin Boqiang, director of the China Centre for Energy Economics Research in Xiamen University, told Interfax. “The Chinese government is desperate to reduce the sale of coal. So, I think the economic slowdown is going to affect the energy demand – by reducing coal – but it will not affect natural gas.” Chinese slowdown Market sentiment was bearish following the news growth was below the 7.9% recorded in Q4 2012.

“China’s growth has slowed significantly in recent quarters and the risks going forward are largely on the downside,” Mark Williams, chief Asia economist at Capital Economics, told Interfax. The slowdown sent commodities reeling, extending the sell-off which had seen Brent reach a nine-month low and gold post the largest single-day loss since 1980. Copper futures, meanwhile, hit a 10-month low during European trading hours on Monday, while WTI lost 2.8%. Commodities rebounded slightly on Tuesday morning, but the sell-off has caused some analysts to question whether the current super-cycle – buoyed by seemingly inexhaustible Chinese demand for raw materials – had finally come to an end. “The Chinese economy is finally slowing down, which will deliver a psychological impact to Chinese planners and western investors,” Keun Wook-Paik, from the Oxford Institute for Energy Studies, told Interfax. But while China could be set for a Japanese-style slowdown – arresting double digit demand growth for metals, oil and chemicals – analysts polled by Interfax thought gas looked insulated, at least for now. Substitution dynamics Unlike markets in North America, Japan and Europe – where power generation accounts for a large proportion of gas demand – China’s economy is still predominantly fired by cheap coal.

Instead, breakneck urbanisation and a growing fleet of natural gas vehicles (NGV) has driven Chinese gas demand growth. In an indication of China’s NGV potential, Bernstein forecast on Tuesday that the number of heavy duty trucks running on LNG will grow to 247,000 in 2015, from 51,000 last year. “We think gas demand growth will continue to be robust, expanding at a greater rate than the economy. The Chinese gas market fundamentals are being driven by a substitution dynamic, as Beijing is trying to encourage a switch from oil to gas in transportation,” Simon Powell, head of Asian oil and gas research at CLSA, told Interfax. “However, there is something fundamentally wrong with the Chinese economy, and we think there’s been no real improvement since the 2012 slump.

This can be seen by stagnant diesel, petrochemical and chemical demand, which is a good indicator of industrial activity,” said Powell. While China’s gas consumption growth has significantly outpaced that of the general economy, figures released earlier in April did show a significant slowdown in the first two months of the year. Apparent consumption in January and February rose by 14.7% to 29.7 billion cubic metres – a figure significantly below the 35.9% growth rate recorded for the same two months in 2012. However, some analysts argued this slowdown was largely a result of China’s supply-constrained market, rather than deteriorating consumption. “Demand is very tight at this moment.

That’s why different local areas are beginning to increase gas prices. There’s been a huge discussion in the last couple of weeks, because some local governments have started to increase prices at the end-consumer level – which they didn’t want to do to begin with. But they’ve been forced into it because demand is high and the supply situation is not good,” said Boqiang. Mounting speculation over the price hikes, fuelled by media reports, sparked panic buying in a number of Chinese cities in March. Long lines of customers queuing to buy gas supplies were reported in the provinces of Gansu, Heilongjiang, Henan, Hubei and Shandong late last month, after the China Business Times reported prices would rise by nearly one-third to about RMB 3.5 (\\$0.56) per cubic metre in seven cities and provinces. “China’s gas demand growth during this decade will not be as robust as the previous decade, during which time we saw consumption quadruple. But it’s still too early to be talking about a significant slowdown,” said Paik. “Substitution, especially of coal boilers in the north for heating, is driving a lot of new demand. Meanwhile, the NGV infrastructure is expanding and we’re seeing greater connectivity throughout the country.

This increase in penetration is one driver of urbanisation and GDP growth,” another market source told Interfax. LNG outlook However, with dozens of LNG plants scheduled to come online within the next 10 years, there is some concern a Chinese slowdown could affect the country’s LNG appetite and make the country’s buyers more averse to traditional pricing structures. “Commodity prices have been on more of a rollercoaster over the past decade than a super-cycle. But the likelihood is that prices will continue to fall over the medium term as China’s growth becomes less commodity intensive,” said Williams.

“The China story has been used to justify high prices – especially in industrial commodities – but we are now seeing a rebalancing of China’s economy and, with it, of market expectations,” said Williams. With China close to locking in a 38 bcm supply deal with Russia and considering additional Central Asian pipelines, slowing consumption growth could help moderate LNG demand. “I think the LNG bulls are going to be disappointed with China. Pipeline gas is expanding and currently trading at a discount to most LNG cargoes,” said Powell.