Anger is growing in China's cities about untenable levels of air pollution. China is still heavily dependent on coal as its major energy source, causing mounting pollution and carbon emission problems that have forced the Chinese government to look for alternative, cleaner energy sources.
Promoting natural gas consumption is one viable solution and China has been actively promoting many energy sources: natural gas as a substitute for coal and heavy oil for industrial use; liquefied petroleum gas for residential and commercial uses; and diesel and gasoline for vehicular use. China's natural gas consumption has grown fivefold in the past decade, yet it still accounts for only around 5% of China's total energy consumption. This is among the lowest levels in the world and far below the world average. The government has set clear targets to increase the role of natural gas as a primary energy source, aiming to double its use by 2020.
This is key to reducing China's heavy reliance on coal. China plans to build pipelines and liquefied natural gas terminals for gas imports. Increasing the gas supply will also mean new uses, including vehicles and heating. Power generation will also continue to be a major driver of gas consumption.
As a result, we have a positive outlook for city gas distributors, which should benefit from a strong compound annual growth rate over the next few years. We believe this is a structural growth story, and these names are well-represented in our portfolios.