China’s Downstream Natural Gas Distributors See Positives from Price Cut

A decrease in China’s benchmark city-gate natural gas prices is a positive for downstream gas distributors. This will “stimulate natural gas consumption and improve the earnings of the distributors,” according to Moody’s Investors Service.

“It is also a credit positive to the gas distributors, given the expected result of higher gas sales volumes,” said Moody’s Analyst Ralph Ng in a release. “The reduction in city-gate prices will encourage consumption because it lowers the overall production costs of nonresidential users, assuming a timely cost pass-through from the distributor to end-users,” Ng added.

Benchmark city-gate prices are “the regulated procurement costs of natural gas for downstream gas distributors in China,” according to the Moody’s release. Prices will be cut 4.6% to 8.7% on average by the National Development and Reform Commission. This is effective Sept. 1. The price drop will “enhance the competitiveness of natural gas against alternative fuel sources, and thereby increase gas consumption,” said Moody’s.

The downstream distributors will see an increase in gas sales volumes without an impact on the dollar margins of sales. Even with previous discounts to nonresidential customers, downstream distributors will earn more clearance and flexibility to adjust prices and maintain margins, said Moody’s.

The cuts will also “reduce the financial burden of corporates and promote the usage of natural gas as a major energy source,” said Moody’s.

– Michael Miller, editorial associate

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