Fitch Ratings expects most rated China city-gas distributors’ financial metrics to remain robust in the next few years, despite a sales drop over 1H25. Stable dollar margins and diversification into non-gas business should mitigate the impact from subdued gas sales growth, with lower capex also supporting free cash flow (FCF).
China’s natural gas consumption fell by 0.9% yoy in 1H25, but we still expect growth over full-year 2025 to be around 2% as weather effects become less of a drag on demand, and sales volumes recover in 2H25. Gas demand from industrial customers in ceramic and glass manufacturing was weak in 1H25, reflecting the difficult economic backdrop, and we believe industrial gas demand will remain relatively soft in 2H25. However, most Fitch-rated city-gas distributors have lower exposure to large industrial customers than the sector as a whole. We expect rated distributors’ sales volume to increase by 2%-4% in 2025.
Prospects for long-term demand remain supported by the authorities’ view that gas is an important transition fuel as the country’s energy transition progresses. They consider gas-fired power an efficient peak-period energy source to balance the intermittency of renewable power. Industrial demand could also strengthen if gas becomes more cost-competitive amid increased supply, as we expect.
Nonetheless, we project gas sales growth will slow to the mid-single digits in the medium term, from the high-single digits in 2022-2024, due to base effects and the higher penetration rate. This is encouraging diversification into non-gas segments, such as integrated-energy and smart-home services. The share of the sector’s profit from non-gas segments rose to 14% in 2024, from 11% in 2021. Growth in revenue from non-gas segments could accelerate if distributors successfully leverage their existing residential and industrial users for cross-selling opportunities.
We expect city-gas distributors’ profitability will be supported over the medium term by lower procurement costs. Domestic gas costs fell in 1H25, as increases in supply outpaced demand, and we expect supply to grow more in the future even as demand recovers. China’s gas production rose by roughly 6.6% in 2024, and could continue to expand in the mid-single digits through 2030 as the government encourages supply from unconventional gas and enhanced recovery of mature basins.
Meanwhile, supplies of imported piped natural gas grew by 10.5% yoy in 1H25, as supply via the Power of Siberia pipeline from Russia ramped up. The completion of the Central Asia-China Line D pipeline, probably around mid-2026, could provide additional low-cost piped gas imports.
International spot LNG prices remain high, but the impact on distributors’ costs has been limited as the share of imported LNG in their supply mix has fallen significantly. Fitch projects spot LNG price to trend lower amid new supply from North America and the Middle East over 2026-2030, which could put additional downward pressure on China gas costs.
We also expect further increases in gas storage capacity over the next few years to smooth out the price differences between the peak and non-peak seasons, reducing the profit hit that gas utilities used to suffer due to insufficient cost pass-through for high-cost gas purchased in peak periods.
Our rated Chinese city-gas distributors tend to generate strong operating cash flow, underpinned by stable margins and resilient gas demand. The largest distributors have balance-sheet strengths and ample rating headroom, which should provide greater capacity to absorb potential credit-profile strains in a hypothetical stress scenario where gas demand continues to decline. In contrast, Binhai Investment Company Limited (BB+/Stable) has much reduced headroom after a greater sales volume decline than the sector in 1H25.
It could see greater downward pressure on ratings from a sustained fall in demand.
Source: Fitch Ratings