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China Natural Gas Sector:Natural gas price marketization to invigorate industry

研究机构:工银国际 研究员:Yang Lin 发布时间:2015-03-06

Crude oil price plunge provides good opportunity for China’s market-based natural gas pricing reform. Market-based pricing provides clearer visibility for natural gas industry outlook which helps accelerate natural gas market expansion with different kinds of capital investment. The heightened awareness of air pollution abatement will prompt the launch of more government policies to encourage natural gas usage. As the most direct beneficiary of natural gas price marketization, we believe gas companies will be boosted significant in their results in the short term. Meanwhile, transportation industry’s natural gas demand will resume fast growth trajectory. We remain positive on gas station investment plays and gas equipment producers.

Natural gas pricing mechanism generally marketized. Recently NDRC announced that, under the current pricing mechanism, effective from 1 Apr 2015, the maximum citygate price for incremental natural gas would be reduced by Rmb0.44/cubic metre and maximum citygate price for stock natural gas would increase by Rmb0.04/cubic metre, for natural gas pricing unification between incremental gas and stock gas, and rationalize non-residential usage natural gas price. In 2013, China began the market-based 3-stage natural gas pricing reform. Citygate price for incremental natural gas will directly link with international market. Citygate price for stock natural gas reform is approaching completion while the most difficult part is the unification of incremental and stock natural gas prices. From 2H2014, in tandem with international crude oil price plunge, fuel oil and LPG as natural gas alternative fell during the period and incremental natural gas price which benchmarks alternative energy price has been trending down. This provides good opportunity for the market-based natural gas pricing reform. After this round of natural gas pricing reform, apart from residential natural gas and natural gas for fertilizer production, citygate price for all types of natural gas will be unified. Apart from pricing unification, the government will endeavour to push forward the establishment of a natural gas exchange as a key part of market-based reform. A mature natural gas exchange will change the current natural gas production and trading pattern and system.

Natural gas price marketization to invigorate natural gas market, policy dividend soon to be released. Despite incurring around Rmb25bn loss on upstream gas suppliers after price cut for incremental natural gas, this round of price adjustment is positive to the overall development of natural gas market. Downstream players and users will enjoy lower gas price. Besides, the policy has liberalized citygate price for natural gas directly supplied to users, which means upstream players can partly offset the loss from citygate price reduction through supplying natural gas to big users directly.

For natural gas retailers, citygate price reduction helps increase their profit. This is because lagged price adjustment of retail gas increases profit potential while lower gas price induces higher gas usage and scales up retail gas sales.

Consequently, stock market reacted positively to this round of natural gas price adjustment with ENN Energy Holdings Ltd. (2688.HK), Towngas China Co Ltd (1083.HK) and China Resources Gas Group Ltd (1193.HK) rose sharply early this week.

According to natural gas pricing regulations, natural gas price adjustment may have been re-scheduled to conduct twice a year. The new price is the average level in 2H2014. On calculation, citygate price in Jan 2015 was approximately Rmb2.21/cubic metre. Besides western provinces such as Inner Mongolia, Xinjiang and Qinghai, citygate price in most provinces stays above the Rmb2.21/cubic metre level. Accordingly, under the backdrop of an unlikely significant rebound of crude oil price, 2H2015 may see another round of natural gas price reduction which further boosts profit of gas retailers.

The hotly debated documentary “Under the Dome” by Chai Jing, a former presenter and journalist with China Central Television, has again raised people’s awareness on environmental protection. Natural gas as the only clean fuel possible for large-scale supply and usage, will the major alternative energy to abate air pollution in the next decade. The government will roll out more policies and measures to encourage natural gas usage, including grant and tax rebate.Natural gas pricing marketization provides clearer visibility for natural gas industry outlook which helps attract different kinds of capital to invest in this area, leading to fast market expansion.

Transportation industry’s natural gas demand to resume growth. As one of the key growth points of natural gas usage, transportation industry no longer sees natural gas as the most cost-effective fuel given the continuous drop in refined oil price. This not only slowed down the process of alternative energy usage, but also led to drop in demand of gas-fueled cars in 2H2014. We expect the completion of natural gas marketization reform to sustain the cost advantage of natural gas over refined oil and to shortly resume natural gas demand from transportation industry. We see increasing gas station investment and increasing demand for gas equipment in future.

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