What LNG traders want to know most is if China surprises again

What will it do for an encore?

As the growing trade in LNG connects once-provincial gas markets around the globe, buyers and sellers from Munich to Houston to Singapore find themselves trying to divine the future of the world’s biggest energy user. President Xi Jinping’s push to banish urban smog by replacing coal-burning furnaces boosted LNG demand last year, and the biggest question in the industry is whether that happens again next winter.

“China has always been a wild card in the LNG market and will remain so for the future,” said Uwe Bode, managing director of Munich-based PGNiG Supply & Trading GmbH.

China overtook South Korea as the world’s second-biggest LNG importer in 2017 as local officials were urged to convert homes to gas heating. The efforts lifted global LNG prices and stretched the nation’s supply to its limits, leaving some citizens in the cold this winter.

The nation switched almost 6 million households to gas or electric heat in 2017. About 4 million were in 28 cities of the Beijing, Tianjin and Hebei region, the core area of Xi’s clean-air drive. China plans to convert 4 million more households this year.

China’s LNG imports surged 46% in 2017. That expansion may slow to 25% this year and 10% in 2019, according to consultants Energy Aspects Ltd. in London.

What’s critical for imports will be the storage sites that China is building, according to Bart Riemens, head of long-term gas trading and LNG at Axpo Trading AG. Unlike Europe and the U.S., China lacks facilities that allow fuel to be stored in summer when prices are typically cheap and used in winter as heating demand soars.

“If they want to import more, the only thing they can do is to store gas within the country,” Riemens said in an interview in Essen, Germany. While imports will grow next winter, it won’t be at this season’s pace as the brunt of the coal-to-gas conversions are done, he said.

China plans to have about 15 Bcm of underground gas storage by 2020, and more than double that a decade later. By contrast, the U.S. has about 131 Bcm outside Alaska.

The pace of infrastructure development and coal-to-gas switching will be key as import growth is likely to remain in double digits. Surging gas demand in China, which also brings in the fuel by pipelines, will keep markets tight for the next two to three winters, according to Goldman Sachs Group Inc.

“What overwhelmed the LNG industry was the significant purchase of LNG volumes into China in 2017, especially in the second half,” said Andree Stracke, chief commercial officer at German utility RWE AG’s supply and trading unit. “China is still investing in LNG infrastructure. I believe they will import more LNG this year and next year.”