Will NE Asia switch to LNG amid high imported coal prices?

The rally in global thermal coal prices in the past few months have once again made key coal importers like South Korea and Japan look for alternative options of liquified natural gas (LNG) for power generation.

More-than-usual hot summers in Asia, Chinese ban on Australian coal and consistent supply concerns in Indonesia and South Africa have made global thermal coal prices go up significantly. While Indonesian high CV (5,500 NAR) coal prices moved up by 48%, Australian thermal coal prices have risen by 73% and South African by 52% and since Jan'21.

On the other hand, rising demand for crude oil reversed course in August because of surging Covid-19 infections from the Delta strain bringing correction of 8% m-o-m in crude-oil linked LNG prices also. The crude oil prices are further expected to increase at a slower rate over the rest of 2021 amid speculations of rise in covid cases in few countries, according to the International Energy Agency (IEA), that would slower rise in LNG prices also.

Switching costs narrow in Japan and S. Korea

Now, amid elevated thermal coal prices and expected downtrend in LNG prices, countries like Japan and South Korea have started working out the cost of coal-to-gas switch as the price differential between coal and LNG has narrowed.

As per market reports, the natural gas switching price in Japan (the price at which generating electricity from coal is equal to that from LNG) has been moving in favour of the liquid fuel in recent weeks. It is currently $10.01 per million British thermal units (mmBtu), while the Brent crude oil-linked LNG price is $10.28 per mmBtu.

This means that it is almost as cheap to use LNG to generate power as coal, which is a reversal from recent history. At the end of last year, the switching price was $4.71 per mmBtu, while the Brent-linked LNG price was $7.03 meaning that coal was substantially cheaper to use than LNG.

However, in case of South Korea, the switching price is currently $12.5 per mmBtu, while the Brent-linked LNG price is $10.28 mmBtu meaning using LNG has already become cheaper here.

Is the switch likely?

It usually takes several months for the switch to take place as oil-linked LNG prices typically move with a lag to fluctuations in the crude price, whereas coal purchases are usually agreed on a quarterly basis. But if the current trends continue with flat to modestly lower crude prices and high coal prices, then in the coming months it is likely that some fuel switching will occur. If this happens, the thermal coal demand from these countries would subside in winter months, bringing a much-awaited correction in thermal coal prices.