Author: Hu Weijia
Posted: November 28, 2016
China formally launched its national-level energy trading center in Shanghai over the weekend, in an effort to gain a greater say in global commodity pricing. However, without sustained reform to reduce government control over the country’s oil and gas sector and in turn let the market play a bigger role in the economy, the world’s top energy consumer cannot expect to become a main energy pricing hub by simply setting up a trading platform.
Oil and gas are only two of the commodities over which China has no pricing power. The country is already the world’s largest net oil importer and the third-largest consumer of natural gas, with the Middle East and Russia leading the global market in exports. However, pricing power is usually in the hands of the US and the UK.
China’s dependence on imported oil has broken the 60 percent mark. With a growing demand for foreign oil and gas, China is in urgent need of efforts to seek a greater say in global commodity pricing.
The official operation of the Shanghai Petroleum and Natural Gas Exchange is China’s latest step to challenge the pricing hub status of the US and the UK, but it seems there is still a long way to go.
Two important spot prices for natural gas are set by the Henry Hub pricing point in the US and the National Balancing Point in the UK, competitive markets that serve as the basic elements of the platforms’ pricing systems. In China, several State-owned enterprises (SOEs) dominate its oil and gas industry, where prices are guided by the government.
The ability of China’s energy trading center to establish its authority in the global market depends on the modes of business operation adopted by the platform. The key to success will be in reducing government intervention in the trading center and allowing the market to play a bigger role so as to make its trading price index a valuable indicator that reflects the market supply and demand in the world’s largest energy consumption market.
It is estimated that transactions of natural gas at the Shanghai exchange will reach more than 15 billion cubic meters by the end of this year, accounting for roughly 8 percent of China’s total consumption. However, persuading SOEs to trade via the center is far from enough for finding equilibrium on the price in the Chinese market to make the country a new pricing hub. Broader market-oriented reforms in China’s energy industry that encourage participation from private investors and that readjust the pricing mechanism will be pivotal in turning the country into a genuine influencer in global commodity pricing.