China's COVID lockdowns spell relief for Europe's energy security concerns – POLITICO

China’s COVID lockdowns spell relief for Europe’s energy security concerns – POLITICO

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China’s President Xi Jinping has some good news for Europe — his country’s draconian zero-COVID policies aren’t likely to be dropped.

That’s a relief for European buyers of liquefied natural gas, as China’s economic slowdown has freed up LNG cargos crucial to replacing the Russian gas that used to supply about 40 percent of European demand.

“Regardless of what you think about the Chinese zero-COVID policy, simply looking at it only from the perspective of European gas supplies, it would be very helpful if China continued this policy,” said Dennis Hesseling, head of gas at the EU’s energy regulator agency ACER.

Xi took to the stage Sunday to kick off the week-long 20th Communist Party congress, and he doubled down on the zero-COVID approach, calling it a “people’s war to stop the spread of the virus.”

The once-in-five-year summit is “mostly a political meeting for within the party itself” but it does send crucial signals, said Jacob Gunter, a senior analyst at the China-focused MERICS think tank. So far it indicates China plans to “stick with [zero-COVID] for a while,” he said, adding that’s partly because government pandemic messaging has so spooked the population that lifting it would cause “chaos,” while Chinese vaccine hesitancy also remains high.

Since the outbreak of the pandemic in 2020, China has ruthlessly pursued its policy of crushing the coronavirus, involving snap lockdowns of entire cities accompanied by mass testing, surveillance and border closures. The slowdown in growth and depressed demand led to China’s LNG imports sinking by one-fifth, or 14 billion cubic meters, year-on-year for the first eight months of 2022, according to Jörg Wuttke, president of the EU Chamber of Commerce in China.

China and the EU each imported around 80 million tons of LNG in 2021, but China’s imports will fall to 64 million tons this year, according to data by market intelligence firm ICIS. That’s helping the EU buy gas on the global market and using it to fill the Continent’s storages ahead of the winter heating season.

“Europe is lucky that China has a severe economic downturn which will last well into 2023,” said Wuttke, adding that the drop in demand from China — historically the world’s largest LNG importer — is “roughly equivalent to the entire annual LNG imports of Britain .”

2023 worries

China’s President Xi Jinping | Anthony Wallace/Pool/AFP via Getty Images

With EU gas storage now over 90 percent full, the conversation in Brussels has already begun to shift to securing enough supplies for next year. At last week’s summit of EU energy ministers, International Energy Agency chief Fatih Birol warned that “next winter may well be even more difficult.”

As things stand, Beijing’s LNG imports are likely to rise back to 2021 levels next year, according to senior ICIS gas analyst Tom Marzec-Manser, with deliveries typically increasing around the winter season and then likely to ramp up again next summer.

China has already ordered its state-owned gas importers to stop reselling LNG to the EU to preserve stocks for the winter season at home.

But if the zero-COVID policy is scrapped, that could lead “to a step-change in growth again,” said Marzec-Manser.

European countries are well aware of this risk.

In a presentation given by ACER during last week’s informal Energy Council, ministers were told that “China’s COVID-driven demand decline in LNG volumes is currently being absorbed” by the bloc. “This raises questions as to when China’s LNG demand may turn back towards normal growth rates,” it added.

Although Russian shipments have fallen to less than 9 percent of EU demand, some Kremlin gas is still getting through. But “that may not be available at all next year,” said ACER’s Hesseling, adding that if there is no Russian gas and Chinese demand comes roaring back, more radical energy-saving measures would be needed in the EU.

EU leaders will meet later this week to discuss further measures to tackle sky-high energy prices in Europe, including measures for next year such as joint gas purchasing.

According to one senior EU diplomat, “competition from Asia [is] mentioned constantly,” adding that “it’s quite obvious” a change in Beijing’s lockdown policy “may raise global demand and raise prices.”

“China is indeed a competitor and that needs to be taken into account whatever we might be doing,” they said.

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