Covid-19 is heavily bearish for the global liquefied natural gas (LNG) sector, Trend reports citing Fitch Solutions Country Risk and Industry Research.
“The containment measures put in place to slow the spread of the virus led to widespread disruption to global economic activity. Our global economists now forecast a 2.8 percent contraction in global real GDP growth as of early May 2020, which is bleeding through into sharply lower natural gas demand in the power, industrial and commercial sector. Increased residential demand can provide a partial offset in some markets, but only to a limited degree. The loss of this gas demand is compounding the existing glut in the LNG market,” Fitch Solutions said in its report.
The company recalls that over the past five years, global liquefaction capacity has been rising rapidly, flooding the market with new supply.
“Initially, China was able to soak a substantial share of this excess, as the government’s gas-switching policies drove the domestic gas market deeper into deficit. However, Beijing has since softened its policy approach and import demand growth has collapsed as a result. As a result, the global market was already facing a significant oversupply in 2020 and the outbreak of Covid-19 has severely worsened the outlook, driving spot prices to record lows,” reads the report.
The negative price effects are being exacerbated by the outsize impact of Covid-19 on key consumer markets, according to Fitch Solutions.
“China, Japan and Western Europe are among those markets that have faced the sharpest deterioration in their economic outlooks as a result of the Covid-19. Combined they account for around two-thirds of global LNG imports and, as a result, demand losses in these markets will be hard to compensate for elsewhere,” the report says.
Fitch Solutions believes that the outlook is brighter for buyers, although absorbing contracted volumes will pose challenges over the near term.
“Most buyers are struggling to absorb contracted quantities of LNG, due to weak demand and storage limitations. Contract terms vary, but generally include some flexibility to reduce contract volumes or defer or divert cargoes. Some buyers have also invoked force majeure, although these buyers are in the minority. In order for force majeure to apply, certain conditions must be met. Generally speaking, an event must have occurred that was beyond the party’s control and which has prevented that party from fulfilling its obligations under the contract. It is by no means clear cut as to whether Covid-19 would meet these conditions,” reads the report.
Contracts are designed so that price risk is absorbed by the seller and volume risk by the buyer, as such, loss of demand in and of itself would not be grounds for force majeure, said Fitch Solutions.
“Additionally, the issue of force majeure is highly contract-specific and where the clause has been invoked, contract disputes have arisen. Despite these short-term challenges, market conditions are broadly favourable to LNG buyers and we see considerable scope for these buyers to negotiate more favourable contract and pricing terms. This trend was already in play in 2019, but the demand loss stemming from the Covid-19 outbreak has accelerated the trend. In light of this, we see upside to medium-term demand as low prices and flexible contract terms draw more buyers into the market.”