SunSirs: Tightening Supply and Rising Costs, China Domestic LNG Market Kicks Off with Strong Momentum

This week, the domestic liquefied natural gas (LNG) market exhibited the distinct characteristics of a "strong performance during the traditional off-season, accompanied by high-level volatility." Data from SunSirs indicates that on May 7, the benchmark price for LNG stood at 6,080 RMB/ton—a modest increase of 0.33% compared to the beginning of the month (6,060 RMB/ton). Prices have now reached a range marking a nearly one-year high. The interplay between market supply-and-demand dynamics and cost pressures has driven the market to demonstrate a robust performance that far exceeds typical expectations for the traditional off-season.

The Core Logic Supporting Current High Prices

Cost Side: The primary support for the market's high prices this week stems from the cost pressures generated by recent auctions for raw natural gas feedstock. During PetroChina's auction held on April 28—covering feedstock supplies for the first half of May—the starting bid was set at 2.8 RMB/cubic meter (unchanged from the previous month). However, the volume of gas offered was reduced by 2 million cubic meters per day compared to the daily average of the previous month. Consequently, final transaction prices surged significantly to a range of 3.6–4.25 RMB/cubic meter. This translates to an LNG production cost of approximately 5,945–6,887.5 RMB/ton. The upward shift in the central cost level has directly constrained the profit margins of liquefaction plants while simultaneously providing rigid support for market prices. For some enterprises, the excessively high auction prices have severely squeezed production profits, thereby dampening production enthusiasm and further intensifying expectations of a contraction in supply.

Supply Side: Regarding domestic liquefaction plants, market supply has been reduced as some facilities undergo scheduled maintenance shutdowns. Compounded by the high costs incurred during raw gas auctions, several liquefaction plants have proactively scaled back their operating loads; as a result, the volume of domestically sourced gas supply has declined compared to the previous period. On the import front, ongoing conflicts in the Middle East continue to disrupt global LNG trade. Shipping disruptions in the Strait of Hormuz have effectively removed nearly 20% of the global LNG supply from the market, causing international LNG prices to skyrocket. Domestically, coastal receiving terminals face tight shipping schedules and high landed costs, diminishing the capacity of imported resources to supplement the domestic market. Overall, the supply landscape presents a dual-tightening pattern characterized by "reduced domestic output plus restricted imports."

Demand Side: Overall demand performance remains relatively weak, characterized by a dynamic in which "rigid demand provides a baseline floor, while high prices act as a dampening factor." Procurement for both industrial gas and urban residential fuel sectors is currently driven primarily by essential restocking needs, with little appetite for large-scale purchasing. The vehicle fuel market has been significantly impacted by high LNG prices; consequently, some heavy-duty logistics trucks have opted to suspend operations due to excessive costs, resulting in a marked decline in sales volume. Concurrently, high prices have prompted certain industrial users to pivot toward lower-cost alternative energy sources—particularly electricity—allowing the electric energy market to seize the opportunity to expand and further erode demand for LNG. This paradoxical state—where "costs underpin supply while high prices suppress demand"—constitutes the core reason behind the market's current pattern of narrow-range fluctuation.

In the short term, the high cost of feedstock gas and a temporary tightening on the supply side will continue to provide price support. Coupled with uncertainties in the international geopolitical landscape, the market is highly likely to maintain a pattern of high-level, narrow-range volatility, with price fluctuations expected to remain limited in scope. However, from a medium-term perspective, the dampening effect of high prices on demand is becoming increasingly evident; a slowdown in downstream procurement and the expansion of alternative energy sources will gradually erode market support. Simultaneously, as the impact of high feedstock gas auction costs is gradually absorbed and liquefaction plants recover their production margins, operating rates are expected to rebound, leading to growing expectations of a loosening in supply conditions.

Furthermore, shifts in the international geopolitical landscape remain the single greatest source of uncertainty. Should tensions in the Middle East subside and international LNG prices retreat, the cost-based support for the domestic market would weaken in tandem. Combined with persistently sluggish demand during the traditional off-season, there is a possibility of a temporary market correction. From an operational standpoint, market participants should focus closely on changes in feedstock gas auction policies, liquefaction plant operating rates, import vessel schedules, and developments in the Middle East. It is advisable to avoid blindly chasing rising prices, to remain vigilant regarding the risks associated with a potential price retreat from current highs, and to prioritize capitalizing on temporary opportunities arising from marginal shifts in supply-demand dynamics, rather than making unilateral bets on broad market trends.

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