January 11, 2018 7:24 am JST

China's factories sputter as gas shortage bites

Xi's clampdown on coal leaves households and industry scrambling for alternative

YUSHO CHO and SHUNSUKE TABETA, Nikkei staff writers

A chemical factory in Yunnan Province, where some companies have suspended operations due to a lack of natural gas.

SHANGHAI/CHONGQING -- Chinese President Xi Jinping's campaign to curb air pollution by reining in coal use has created natural gas shortages nationwide, forcing businesses that rely on the clean but increasingly scarce fuel to halt production.

The switch to natural gas has not been smooth since China relies heavily on coal for power generation and heating. Domestic supplies are falling well short of demand -- despite a global glut -- and prices have spiked. The average price of liquefied natural gas briefly topped 10,000 yuan ($1,500) per ton in December, tripling from a year earlier.

Businesses starved

The government has told gas suppliers to prioritize households over industry, leaving little left over for businesses in many regions.

Chemical maker Yunnan Yuntianhua was forced to halt a majority of operations at a plant in the southern province of Yunnan last month after its natural gas supply stopped. The plant has the capacity to produce 500,000 tons of ammonia and 800,000 tons of urea a year.

Production stopped on Dec. 11 and the lull had taken a 25 million yuan bite out of net profit as of year-end. Its Shanghai-listed parent company's share price is down by nearly a fifth compared with where it stood at the end of September.

Production equipment that does not require natural gas is operating, a worker on his lunch break said late last month. The company does not appear to have let go of any workers so far, and the regional economy has seen only a limited impact. But there is still no timeline for when production will return to normal.

Hubei Yihua Chemical Industry also halted operations at plants in the Inner Mongolia Autonomous Region and Guizhou Province. The stoppages resulted in 17 million yuan in lost earnings in 2017 for the Hubei Province-based company, which likely suffered a net loss for the year ended in December. It will have a hard time turning a profit this year if it cannot restart operations.

Energy and chemicals supplier Inner Mongolia Yuan Xing Energy stopped production of methanol in its home region in December. German chemical group BASF also took production lines in Chongqing offline.

Over 80% of ceramics makers in the Hebei Province city of Shijiazhuang switched from coal- to gas-fired kilns last summer. But staying profitable using the more expensive fuel has been difficult, and many have suspended production.

Gas pains

China's government is working to stem further economic disruption. State-owned Sinopec Group announced the creation of a special task force to deal with the natural gas shortage on Dec. 25. The oil giant will boost domestic gas production starting this month and increase imports through the port city of Qingdao. China National Petroleum Corp. and a Sinopec group company have been forced to halt production at fertilizer plants and other facilities.

Yet there is little prospect that gas supplies for industry will improve as winter demand for heating rises. As important as the government's environmental policy may be, little thought appears to have been given to its side effects. Local officials may be getting overzealous in their desire to show they are making progress on Xi's national clean air campaign.

"They could have predicted that shifting to natural gas faster than initially planned would produce shortages and disrupt the economy," a senior official at an oil company grumbled.

The impact is going beyond the industrial sector. There are reports that consumer spending is suffering because shopping centers are turning their heat off and taxis fueled by natural gas are not operating as normal.

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