Chinese gas distributors pummelled by surprise Zhejiang price cap

PUBLISHED : Wednesday, 20 April, 2016, 1:07pm
UPDATED : Wednesday, 20 April, 2016, 2:35pm

Shares of mainland Chinese natural gas distributors fell sharply on news that the Zheijiang provincial government had announced a price cut for wholesale gas price and imposed a ceiling on end-user gas prices as part of wider measures to cut corporate costs amid an economic downturn.

A lack of clarity on how the measures may affect distributors’ profit margins and whether they will spread to other provinces saw investors dump distributors’ shares.

“Overall earnings impact [should be] limited given diversified locations [of the distributors’ projects],” Credit Suisse’s regional head of utilities research, Dave Dai, said in a note. “What may concern the market is whether more provinces will follow suit.”

What may concern the market is whether more provinces will follow suit
Dave Dai, Credit Suisse

ENN Energy closed the morning session 10.5 per cent lower at HK$42.20, compared with a 9.7 per cent fall for China Gas to HK$11.38 and a 7.2 per cent decline for China Resources Gas to HK$21.95.

The trio are among the mainland’s largest city-gas distributors.

The Zhejiang government held a press conference a week ago on its directive to cut an estimated 100 billion yuan (HK$120 billion) of corporate operating costs by slashing a wide array of taxes and fees, including labour social security charges, land-use taxes, ports, airport and toll road fees, and electricity and natural gas charges.

The current business tax paid by some companies will be replaced by value-added tax, resulting in 30 billion yuan of savings.

The measures will be implemented on May 1.

Zhejiang Daily reported the wholesale city-gate gas price for non-residential customers will be lowered by 0.1 yuan a cubic metre, while end-user prices for the whole province will be capped at 3.4 yuan a cubic metre.

Manufacturers will pay lower prices on gas consumed by their staff quarters and canteens, at rates currently charged to residential users, it added.

Natural gas pipeline transmission charges will also be lowered by more than 20 per cent.

Dai said since the ceiling represented a 0.2 to 0.3 yuan per cubic metre price cut from the current average end-user price, which could not be offset by the 0.1 yuan upstream gas cost reduction, meaning the policy could hurt distributors’ profit margins.

“What remains unclear is whether gas transmission [fees] can be reduced to offset the margin pressure and whether Zhejiang’s initiatives could be adopted in other locations,” he said.

A ENN spokeswoman said its gas sales in Zhejiang affected by the ceiling represented less than 2 per cent of its mainland-wide sales, and the margin erosion would be “very limited” since the transmission fee cuts formed part of, and were not additional to, the impact of the price cap.

The transmission fee cuts pertain to fees charged by the distributors to customers on gas transmitted by pipelines they own within their project areas, not fees they paid to third-party pipeline owners to move the gas into their project areas, she added.

“What’s more, we believe this is only an individual case and similar measures will not be spread on a nationwide basis,” she said.

A senior executive at China Gas said lower gas prices should be positive for demand, and declined to comment on the measures’ impact on profit margins.

Another gas industry executive said investors were probably spooked by the provincial government’s unexpected intervention in energy prices, given Beijing had a clear plan to let market forces play a bigger role in determining prices.