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Will low LNG prices cloud the outlook for coal?

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World Coal,

Ravi Krishnaswamy, Frost & Sullivan.

LNG prices have been indexed to oil prices. As a result, recent drops in oil prices have led to lower LNG prices worldwide. LNG prices have fallen from US$16/Mmillion Btu last year to about US$7/million Btu by mid-February 2015 in Asia. What does this mean for the gas-to-power industry in Asia Pacific and how will the coal industry be impacted by this trend?

Developments in Asia’s largest LNG markets

Japan is the largest importer of LNG, accounting for one-third of the world's LNG imports. Shutting down its nuclear power plants after the Fukushima disaster forced the country to shift towards LNG to overcome the shortfall. Regional power utility monopolies constructed 12 LNG-based power plants with a cumulative installed capacity of 5.2 GW in 2014 alone to supply power to its industrial and commercial end-user segments.

As a result, one of the largest beneficiaries of the recent slump in LNG prices is Japan, as it would keep its energy import bill in check. LNG prices in the country is forecaste to decline further, as only a few nuclear plants are expected to come online this year, resulting in slightly weaker demand for LNG. However, in the long term (post-2020), Japanese investment in gas plants should provide support not only to keep prices high but also the gas-based power plant market buoyant.

In China, natural gas demand grew by 5.6% in 2014 to 178.6 bcm. Out of this, 127.9 bcm was locally produced and 57.8 bcm was imported by pipeline or LNG. The declining price of LNG, combined with increasing domestic gas price has created opportunities for importing LNG into China. Several private independent companies and China's state-run enterprises, such as China National Offshore Oil Corp (CNOOC), Sinopec and PetroChina, are actively looking forward to receiving LNG cargoes to capitalise on the current lower price of LNG. Lower-priced spot shipments are expected to arrive in East China around April this year.

Low LNG prices proved to be a catalyst for India to revive over 14 000 MW of gas-fired power plants that were shut down due to non-availability of gas along with another 30,000 – 40,000 MW of gas-fired power plants that got stuck at different stages of implementation due to several other issues. The government intends to supply additionally produced domestic gas and imported LNG to existing gas-fired power plants that are idle due to shortages in gas supply so that they can operate at a minimum 40% capacity.

Impact of lower LNG price on coal Industry

The recent slump in oil and natural gas prices have helped in reducing operating costs for miners and also in reducing freight rates. This helped to drive down global coal prices in 2014. More US coal, which found its way into the global market, and an oversupply of Australian thermal coal has also accelerated the price slump.

Even though coal prices seem to have rallied in the last few weeks due to cuts in Australian coal production by companies, such as Glencore, the outlook for demand and price recovery still looks clouded in its largest market, China.

In 2014, China produced more than 3.5 billion t of coal domestically, while importing nearly 200 t of thermal coal. Both of these look likely to fall in 2015 and beyond, as China focuses on limiting the pollution from coal mining and use. In the recent National People’s Congress, the government officials announced a reduction of coal consumption by 160 million t in the next 5 years. Despite the relatively low quantum, it is the overall direction of Chinese environmental policy and implementation that will impact the coal industry. As some of the major cities in the country are grappling with air pollution and smog issues, China can use this opportunity to clean up the environment and shift to gas-based power generation in a big way.

However the situation in India is different. The huge underinvestment in mining and power sector over the last several years has resulted in high energy deficit. Coal will continue to be the fastest growing source for power generation despite the short-term opportunity to accelerate gas-fired power plant development. During the recent budget, the government of India has announced the setting up of five more coal-based ultra-mega power projects each with 4000 MW capacity.

In order to keep its energy costs affordable for the industry in the crucial recovery phase, Japan will continue to import and use coal.

Frost & Sullivan has estimated that a total of 679 GW of coal-fired power capacity will be installed between 2012 and 2030, mostly in developing Asia. Demand growth is likely to be driven by India, Vietnam, Indonesia, Brazil and Turkey among others. By 2016, the current oversupply is likely to reduce a gradual rise in coal prices.

Written by Ravi Krishnaswamy. Edited by .

About the author: Ravi Krishnaswamy is Vice-President for Energy & Environment at Frost & Sullivan in the Asia Pacific.

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