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China’s rising LNG use an opportunity

Daryl Guppy
Daryl Guppy10/16/2017 08:00 AM GMT+08  • 5 min read
China’s rising LNG use an opportunity
(Oct 16): Chinese Premier Li Keqiang reputedly said he relied on China electricity consumption figures as a guide to economic activity rather than the official statistics. While this is often used to cast doubt on China’s statistics, it is also a good m
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(Oct 16): Chinese Premier Li Keqiang reputedly said he relied on China electricity consumption figures as a guide to economic activity rather than the official statistics. While this is often used to cast doubt on China’s statistics, it is also a good method to apply more broadly to gauge China’s economic performance.

One practical measure is the continued steady growth in Chinese tourism. This reflects both a capacity to spend, along with a continued expectation that economic growth will continue for at least long enough to pay off the credit card bills. Tourism, not Prada, is the ultimate expression of discretionary expenditure. Tourism costs a lot more and it rests upon a favourable vision of the future.

Over the golden week holidays, I observed a very high number of Chinese tourists in New Zealand. Most of these were not package tours. These were independent travellers. They were family groups or small groups of friends. This was not the cheaper option and New Zealand has positioned itself very well to tap into this market with a high level of genuine China-ready tourism ventures tailored specifically to the independent traveller market.

Tourism gives a short-term outlook. Premier Li prefers to track electricity consumption — and, by implication, energy — as a measure of economic growth in the longer term. The very strong growth in China’s imports of liquefied natural gas this year suggests the country will become the world’s biggest importer of the fuel in as little as five years.

China is likely to overtake South Korea to become the second-largest LNG importer next year and could take the top spot from Japan in 2022. This is the conclusion in an analysis by Tony Regan, a respected LNG consultant and managing director of consultancy DataFusion Associates.

This augurs well, not just for the economy but also for investors who want to position themselves for growth in this area. There are currently eight companies in China that import LNG, but this could increase to around 20 companies over the next five years.

Currently, Chinese LNG buyers have more purchase contracts for the fuel than they need. So, this aggressive growth forecast points to significant demand for further supply commitments. This demand structure suggests longer-term confidence in economic growth.

Over the next five years, gas demand growth is expected to be driven by the intensifying effort to cut air pollution in the Beijing-Tianjin- Hebei area, with several cities required to be coal-free by October.

Investors wary of direct exposure to Chinese companies may find China gas-related opportunities elsewhere. China currently sources nearly half its LNG from Australia. With a market share of 48% in 1H2017, Australia is by far the largest supplier of LNG to China.

China’s imports of LNG in the first eight months of 2017 were up 44% from a year earlier at 22.2 million tonnes, driven by the ramp-up of supplies from Origin Energy’s project in Queensland and Chevron’s project in Western Australia.

The blip on this investment horizon is the growth of sovereign risk in Australia, with the government’s legislation to force gas companies to renege on international supply contracts.

The Shanghai Index has rebounded strongly from the upper edge of the long-term group of averages in the Guppy Multiple Moving Average indicator. This bullish behaviour was expected. The long-term group is a guide to the way investors are thinking. The wide separation in the longterm GMMA shows strong investor confidence. So, it was no surprise when the rally rebound developed. When the index pulled back, investors stayed in the market as buyers.

The rebound from the long-term GMMA is strong. This strong move has also moved quickly above the long-term resistance level near 3,360.

The 3,390 level has developed as a new and temporary resistance level. The slight pullback around 3,380 suggests the Shanghai Index is developing a small consolidation pattern prior to continuing the new uptrend rally. This consolidation shows a mature and stable uptrend development.

There are four aspects to the bullish GMMA analysis and trend rebound.

The first feature is the steady degree of wide separation in the long-term GMMA. This separation is now around 36 points, down from a 39-indexpoint separation last week. This is a small reduction in the degree of sepa ration, but it still shows very good trend strength. This shows investors remain very confident about the future of the trend and suggests they will be strong buyers when the rebound rally continues to develop.

The second feature is the way the upper edge of the long-term GMMA has moved well above the resistance level near 3,290.

The third feature is the continued rise of the lower edge of the longterm GMMA above the resistance level near 3,290.

Investors were ready to enter the market again when the index used the upper edge of the long-term GMMA as a support level. This new rebound rally signals a resumption of the uptrend with a move above 3,360.

The longer-term upside target is near 3,640. This is a previous longterm resistance level created in November 2015 and January 2016.

This is a steady, low-momentum uptrend, where the index has successfully tested and then rebounded from the GMMA support level. Any future expansion of the longterm GMMA will indicate increased investor confidence.

Daryl Guppy is an international financial technical analysis expert and special consultant to AxiCorp. He has provided weekly Shanghai Index analysis for mainland Chinese media for more than a decade. Guppy appears regularly on CNBC Asia and is known as ‘The Chart Man’. He is a national board member of the Australia China Business Council.

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