China policy reform to end losses for city-gas firms on household sales

(Reuters) - Policy reform in China will boost profit for city-gas distributors by letting them raise prices for residential sales above costs, after years of selling piped gas to households at a loss, according to utility officials and analysts.

The scheme, which allows retail residential tariffs to be adjusted twice a year in line with gas procurement costs, will inject billions of dollars in revenue into companies like ENN Energy Holdings, China Gas Holdings and China Resources Gas, utility officials said.

Higher households tariffs - as much as 20% higher in certain cities - should also help alleviate some of the pain distributors felt last year, when China's gas use declined for the first time in two decades as COVID hammered the economy and lofty global liquefied natural gas (LNG) prices hurt imports.

Regional piped gas distributors like Shanghai Gas, Chongqing Gas and Changchun Gas and other gas utilities suffered steep declines in profit or outright losses in 2022 as they were unable to pass on more of their costs to a sector accounting for over 20% of China's gas consumption.

The new market-based pricing system will also encourage distributors like ENN and China Gas that are expanding into global gas trading to look at importing LNG.

"The policy will help the whole (gas) distribution sector and restore utilities' profitability," said Tan Yuwei, general manager of capital management at China Gas Holdings.

The privately controlled firm, one of China's largest gas distributors with residential customers making up 36% of its gas sales, expects the initial price hike this year to generate 3.2 billion yuan ($444 million) in gross margin, Tan said.

A second major distributor estimated the policy will lift its gross margin by more than 10% and anticipated further improvement in 2024 as China's economy recovers, said an official who declined to be named due to company policy.

Shares for listed gas utility companies briefly reversed this year's trend downwards after the policy was announced, but they remain under pressure from lackluster industrial demand and China's struggling economy.

Phasing in price hikes

State planner the National Development and Reform Commission (NDRC) announced the policy last month, after the China Gas Association had lobbied in March for reform saying heavy losses at utilities could cause supply disruptions, officials with direct knowledge of the matter told Reuters.

Since then more than 30 cities - including Qingdao and Nanjing in the east, Shijiangzhuang in the north and Lanzhou in the northwest - and the provinces of Hubei, Guizhou and Shaanxi have hiked residential tariffs by between 6% and 20%, according to local governments and utility sources.

Officials said the increases probably won't hurt household demand much because each rise can add no more than about 100 yuan ($13.88) to the annual bill for a home burning 200 cubic meters of gas a year to fire stoves and water heaters.

The price hikes will also be introduced slowly to help minimize any hardship to poorer families, with the policy letting local authorities decide when to implement them and granting subsidies to low-income households, the officials said.

China in recent years has liberalized natural gas prices by allowing distributors to pass costs on to industrial and commercial customers, although Beijing maintained tight control over household prices to avoid a consumer backlash.

That left some households, such as in rural communities in northern Hebei province, short of gas during the 2022/2023 winter because distributors scaled back supplies as costs soared, utility officials said.

The new policy, though, will narrow the 0.50 to 0.60 yuan price gap per cubic meter between higher-tariff industrial users that make up 40% of China's gas consumption and residential users who up to now bought gas at lower prices, the officials said. This will help distribute fuel costs more evenly and is likely to prompt more buying from the global market, they said.

"This policy reform will result in more reasonable downstream gas prices in China, which will encourage city gas utilities to increase purchases from upstream importers," said Yi Cui, an analyst with consultancy Rystad Energy, referring to Chinese national oil companies.

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