Getting Ready to “Gas Up” in China

03/09/2009 12:00 am EST

Focus: GLOBAL

Eoin Treacy

Global Strategist, Fullermoney.com

Eoin Treacy, global strategist at FullerMoney.com, says the Chinese natural gas industry may not benefit from China's stimulus plan, but the stocks are starting to look interesting.

From what I've seen, the Chinese natural gas industry doesn't feature highly on the list of essential infrastructure projects likely to receive increased government support through the stimulus package. This would suggest that [it] remains a relatively low priority, relative to the wider economy. That does not mean it will not grow, but this is a story which is likely to play out over a number of years rather than months.

It would seem to be only a matter of time before China cleans up its energy industry and from my experience of Beijing in November 2005, the public health benefits would be considerable. However, this is only likely to be given serious consideration when the economic environment is more benign.

Natural gas is relatively clean, but it is also comparatively expensive. I have little doubt the Chinese industry will grow, but time is needed. We should not forget that London had coal-fired power stations until the early 1980s and [the United Kingdom] was at the time one of the richest countries in the world. China is now much more prosperous than it was, but has a long way to come on environmental awareness and proactivity.

Natural gas is prone to upward spikes and has experienced a number of spectacular advances in the last decade. The most recent peaked near $14 [per thousand cubic feet,] and the commodity has retraced the entire upward move and more. It is now testing the $4 level once more-an area of psychological support on a number of previous occasions (see chart below).

Petrochina (HK: 0857.HK; NYSE: PTR), Sinopec (HK: 0386.HK; NYSE: SHI), and CNOOC (HK: 0883.HK; NYSE: CEO) all accelerated in late 2007 and peaked with the Shanghai A-Share Index in December of that year. They continue to share a relatively similar pattern. All three found support in late October and rallied well. They are now consolidating those gains and have sustained the majority of their advances to date.

All of these shares are performing more or less in line with the wider Chinese stock market. They did not benefit from oil's advance in 2008, and its decline does not appear to have affected them, either.

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