There is an increasing disconnect between the price of thermal coal and liquefied natural gas (LNG) in Asia, with the dirtier fuel holding its value while LNG is dragged down by the collapse in crude oil.
In theory, the crash in LNG prices, both spot and contract, should result in several Asian countries switching more electricity generation to LNG and away from coal, but as yet there is little evidence this is occurring.
The spot price of LNG in Asia LNG-AS fell to $2.80 per million British thermal units (mmBtu) in the week to March 27, down from $3.50 the prior week and only just above the record low of $2.70 from the week of Feb. 14.
It has dropped 59% from its winter 2019-20 peak of $6.80 per mmBtu, reached in mid-October, and is 86% below its all-time high of $20.50 in February 2014.
The spot market accounts for about a third of LNG volumes, with the rest being sold under mainly longer-term contracts linked to the price of crude oil.
The contract prices will also be dropping rapidly, given the 66% drop in Brent crude futures since the peak this year of $71.75 a barrel on Jan. 8 to the close on Wednesday of $24.74.
While the terms of the contracts vary, it’s likely that the cost of LNG supplied will soon drop below $4 per mmBtu for many, although the price reduction won’t come as quickly as for spot deals, given most contracts have built in lags when it comes to implementing price changes.
While LNG prices are plummeting, the same cannot be said for Australian thermal coal, the main grade used for power generation in Japan, South Korea and Taiwan.
Newcastle coal futures ended at $66.70 a tonne on Wednesday, down from the prior close $67.85.
However, the contract has been remarkably steady so far this year, despite the mayhem being wreaked on other commodities as the coronavirus that started in China spreads across the world.
It ended last year at $67.70 a tonne, rose as high as $72.25 on Jan. 13, before dropping to the low so far this year of $65.15 on March 9, and has traded in a gentle uptrend since then.
The stability of Australian thermal coal and the plunge in LNG prices has altered the economics of power generation in Japan and South Korea, the two Asian countries most able to switch fuels.
According to Refinitiv data, the current average coal-to-gas switching price is $4.76 per mmBtu for a combined cycle gas turbine in Japan and $6.61 in South Korea.
This means the current spot LNG price, and quite likely the contract prices from next month onwards, are below the level at which it becomes cheaper to use natural gas than coal to generate power.
In theory, Japanese and South Korean utilities should now be planning to use more LNG and less coal, although this has yet to show up in the trade flows data.
Japan, the world’s biggest LNG buyer, imported 6.67 million tonnes in March, down from 7.18 million in February and 7.06 million in March last year, according to vessel-tracking data compiled by Refinitiv.
South Korea, the third-biggest buyer behind China, imported 3.83 million tonnes in March, down from 4.42 million in February, but slightly higher than the 3.28 million in March 2019.
Turning to coal, and Japan imported 7.5 million tonnes of thermal coal in March, down slightly from 7.74 million in February and 7.58 million in March last year, according to the Refinitiv data, which was filtered to show only cargoes identified as thermal coal, thereby excluding coking coal volumes.
South Korea’s thermal coal imports rose to 4.76 million tonnes in March, up from February’s 4.48 million, but below the 5.0 million from March last year.
The drop in imports for LNG in both countries could be partly explained by the slowing of the economies due to the coronavirus and the passing of peak winter demand.
But it’s worth noting that the imports of thermal coal didn’t drop by as much in Japan’s case, and actually rose month-on-month in South Korea.
If Japanese and South Korean utilities do start to switch from coal to LNG, it may not do much for the LNG price, given the global surplus and the looming world recession.
However, a switch away from coal should lead to a fall in prices as demand will drop, and thermal coal may end up joining other commodities in feeling the coronavirus chill.