Japan is in a bitter battle to secure liquefied natural gas (LNG) for power generation. China and South Korea have also been purchasing LNG due to the cold snap, and LNG prices in Asia have skyrocketed to about three times the original price in 1 month due to shortages. Emergency imports are also not progressing due to the lack of transport vessels. In the medium to long term, there will be no change in China’s demand growth.
China, Japan and South Korea are snapping up LNG, the Nihon Keizai Shimbun reported today. Japan is the largest importer of LNG, but a dead end has been exposed in the procurement network.
Japanese power companies are believed to be asking for “as much as they can get,” and since the end of the year, Japanese power companies have been sending almost unhelpful requests to major importers of LNG from abroad, such as Mitsubishi Corporation and Mitsui & Co.
The LNG shortage comes against the backdrop of the historic overwhelming cold wave that hit East Asia. “As soon as tenders were invited for new carriers, China, which was the first to achieve economic recovery, and South Korea, which is converting from coal power generation to LNG power generation, also came to bid” (Mitsubishi Corporation). Asian spot prices for LNG exceeded $30 per 1 million BTU (British thermal unit) as of mid-January, rising to roughly three times the level of a month ago due to expanding local demand.
While LNG prices in the U.S. have been more stable at roughly $3 per 1 million BTU, the current price indicator has been updated day after day to its highest value since 2010.
In the long term, the shortage of LNG is not just a matter of a cold snap. China, which is promoting environmental protection measures along with economic growth, has increased its purchases. As a fuel to curb CO2 emissions, China has turned to LNG.
According to the report, Japan is the world’s largest buyer of LNG, accounting for 20% of global trade. There are also suggestions that China will overtake Japan as the largest buyer in a few years. China’s LNG imports accumulated about 59.5 million tons in January-November 2020, an increase of 10% from the previous year. Japan, on the other hand, imported about 66.7 million tons, down 5% from the previous year. China’s imports in December are thought to be 20% more than the same period of the previous year, reaching 8 million tons, which updated the highest single-month import record and also seems to have significantly exceeded Japan’s imports. If the import volume increases or decreases, there is also a possibility that the purchasing conditions will further turn favorable.
Currently, Japanese trading companies are also trying to procure from distant places such as the United States, where there is a surplus of LNG. However, there is a shortage of transport vessels to carry out transportation tasks. In Europe and other places that have seen a harsh winter, LNG procurement has increased and there is a tight supply and demand for carriers worldwide. The freight rate for carriers from Australia to Japan is $1.45 per 1 million BTU, up more than 50% in one month.
According to the Nihon Keizai Shimbun, the LNG scramble has exposed the vulnerability of Japanese procurement. LNG is transported by sea, so the gas has to be cooled to -162 degrees Celsius. Since it has to be gasified gradually, there are no large stocks. As the New Crown epidemic spreads, Japanese power companies’ inventories have also become low, exposing the inability of Japan’s usual procurement strategy to cope with unexpected developments.
Japan’s current dependence on LNG for power generation is relatively high, at about 40%. Large Japanese power companies such as Kansai Electric Power are currently responding by interchanging LNG with gas companies and urgently changing the supply of domestic vessels to power stations with tight inventories. “Since it is very difficult to procure, it will have an impact of about 10 billion yen on this fiscal year’s results” (executive of a major power company in West Japan). There are also views that it will take about one to two more months to eliminate the LNG supply crunch in Japan (major Japanese trading company).
According to the report, there is a “land supply clause” around LNG that prevents oil-producing countries from reselling LNG outside of the agreed countries, making it difficult for multiple countries to share. On the other hand, as the U.S. shale gas is being produced, there is an increase in the number of deals that do not limit the supply of LNG to other countries. There are also voices among industry stakeholders that consumer countries and companies are discussing mechanisms to increase interchangeability after buying LNG.
Recent Comments