China, the King of Coal, Is Getting Gassy

With factories and power plants across China burning half the world’s coal, the government’s latest targets for using more natural gas to ease the country’s worsening air pollution seemed too ambitious.

Though gas remains a small and expensive component in China’s fuel mix, demand is rising faster than expected for domestic and imported supplies. In April, consumption was 22 percent higher than the same month in 2016, and the total for the first four months of the year is up more than 12 percent, data from the National Development and Reform Commission show.

The government recognizes it must make gas more a cost-effective alternative, UBS analysts including Ken Liu wrote in a February report. It cut prices twice in 2015 to make gas cheaper for wholesale buyers than competing propane and fuel oil. The total cost was still higher because of fees distributors charged for transporting gas, UBS said. The government is trying to fix that with plans to cap the rate of return on assets for urban gas distributors and pipeline companies.

In the second half of the year, the government is likely to cap distributors’ profits, introduce coal taxes and gas subsidies, allow more joint ventures between state and private companies, and push to diversify gas supply sources, Nomura Holdings Inc. analysts including Jamie Wang said in a research note. Regulators haven’t released details and timelines of any industry reforms yet.

“One of the big policy agendas is liberalization of the gas market,” said Neil Beveridge, an analyst at Bernstein in Hong Kong. “That is really the ultimate direction in which the government wants to head in.”

After the demand data for April was disclosed, Yu at Jefferies said his 10 percent growth forecast for this year is “now looking quite conservative.” Morgan Stanley said the expansion may overtake the bank’s estimate, which it already upgraded in March to 13 percent from 10 percent. Keeping pace with this year’s consumption growth, domestic production reached a record and, along with imports, is running above seasonal levels.

“I was suspicious that the target may ever be met,” Yu said. “But the reality is that this year the government is delivering.”

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