China city gas price reductions positive for volume

BEIJING -- China's decision to reduce natural gas prices for commercial entities for the first time in a decade will benefit city gas distributors, according to a Fitch report.

"The revision may boost natural gas demand in the short term, without hurting operational margins," said the report.

The National Development and Reform Commission (NDRC) announced last Saturday that it would set a universal price for non-residential natural gas and liberalize pricing for jet fuel and natural gas supplied directly to industrial users.

Ceiling city gate prices for new incremental non-residential gas customers will fall 0.44 yuan (less than 1 US cent) per cubic meter as of April 1, in line with drops to the price of fuel and liquefied natural gas (LPG) since the second half of 2014.

Meanwhile, the ceiling city gate prices for existing non-residential gas customers will rise marginally by 0.04 yuan per cubic meter. Thus, existing and new customers will pay the same price.

Fitch expects the price adjustment to help city gas distributors boost gas volume in the short term.

In 2014, China's total natural gas consumption volume recorded a growth rate of just 5.1 percent to 176 billion cubic meters, its weakest growth in the past decade.

This move, albeit only for commercial users currently, is also a further step towards a truly market oriented pricing model for gas in China, said Fitch.

In addition, the NDRC's announcement affirmed its plan to adopt a multi-level natural gas tariff for residential users nationwide by end of 2015, which could also increase the gas distributors' profits from the residential segment, according to Fitch.