In 2023, China's appetite for LNG set to rise amid tepid demand across Asia

(Reuters) - China's LNG demand is forecast to recover in 2023 as the country emerges from COVID-19 controls to become the bright spot in Asia's consumption for the super-chilled fuel.

China's demand is set to rebound to between 70 MM and 72 MMt in 2023, 9% to 14% higher than in 2022, say analysts at Rystad Energy, Wood Mackenzie and ICIS.

But imports to China, which has the world's second-largest economy, would likely fall short of record 2021 levels, because prices would stay high and lingering effects of the pandemic would limit appetite, they added.

Those high prices would continue to suppress demand from the Chinese industrial and power sectors, both highly sensitive to energy costs, said Wei Xiong, a senior analyst at Rystad Energy.

"Growth momentum across sectors may only be restored after the high infections subside and when employees are back to work," she said. "It will be a gradual process and may take a few months to restore."

State energy officials have estimated that in 2022 China's annual demand for natural gas may have fallen for the first time in two decades, because of weak demand from industries disrupted by pandemic controls.

China was the world's top LNG importer in 2021 but Japan held the position last year.

Gas prices spiked last year after Russia, following its invasion of Ukraine, cut supplies to Europe. This led Europe to import record amounts of LNG, pushing Asian spot LNG prices to historical highs.

NUCLEAR SWITCH

China's 2023 demand rebound would be offset by lower consumption from Japan, South Korea and South Asian nations, analysts said. As a result, Asia's share of global LNG demand would remain just above 60% for a second straight year.

In response to high LNG prices, Japan and South Korea aim to increase nuclear power's contribution to their energy supply, leading analysts to cut estimates of 2023 LNG demand from those countries.

South Korea plans to defer decommissioning of reactors while Japan will restart some that have been idled.

High gas storage levels and growth in coal consumption and nuclear power generation will limit 2023 LNG demand in South Korea and Japan, said Alex Siow, ICIS's lead Asia gas analyst.

But Japanese demand must be viewed cautiously, he added. "Its tight power grid will mean that LNG will need to come in stronger if there are any unexpected outages."

Siow expects China, South Korea and Japan to need less LNG this year than they have contracted for, so they should be able to release 18 million tonnes of excess contracted LNG, or 4% of global supplies, into the spot market in 2023.

While gas prices could cool slightly from last year's record levels, they will need to be elevated enough to ensure demand is kept within control, Rystad Energy said.

Asian LNG prices could fall to an average of $32 per MM British thermal units (MMBtu) this year, $2 lower than 2022, while the Dutch benchmark gas price could average at $38/MMBTU, down $3, it added.

Emerging markets will have to continue to limit LNG purchases, and may be priced out altogether, for a second straight year in 2023. ICIS sees 2023 global demand at 404.4 million tonnes, compared with supply of 408.2 MMt.

"This means the global market is now slightly long by 3.8 MMt next year," said Siow.

"The global demand response – especially the Asian demand destruction due to high prices – made this possible."

LARGELY FLAT SUPPLY

While new production is scheduled to come online this year from the likes of Tango FLNG in Congo, the Tortue FLNG project in West Africa and a third production unit, or train, at Indonesia's Tangguh LNG, most of the projects are small, so supply will, at most, grow only slightly in 2023.

Production should also rise with expected resumption of output from Freeport LNG in the United States and from Malaysia LNG. Both have suffered outages.

(Reporting by Emily Chow; Editing by Florence Tan and Bradley Perrett)

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