Weakening LNG prices may sap seaborne coal demand in near-term: sources

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Highlights

-to-LNG switch probable amid weak fundamentals

Coal structurally remains the main fuel source

Japan over-reliant on long term contracts

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Singapore —
Asian seaborne thermal coal traders voiced concerns over near-term demand as more utilities consider the feasibility of a coal-to- switching amid languishing LNG , sources told S&P Global Platts on Tuesday.

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The S&P Global Platts JKM for March was assessed at $4.184/MMbtu on Monday, down 10.5% on the week amid ample and scant demand.

Sources were cautious that a fall in LNG prices could disrupt the short term rise of thermal coal prices.

The recent uptick in the Indonesian low-cv thermal coal prices was due to prompt tightness amid Kalimantan rains and demand post-Christmas and New Year holidays, said a Singapore-based trader.

Demand for mid to high-cv Newcastle coal could take a hit as well, amid buyers’ unwillingness to lock in prices at the current level, said the trader.

Platts assessed the Australian 5,500 kcal/kg NAR coal with 23% ash at $54.90/mt FOB Newcastle on Monday, up 85 cents/mt on the week.

However, the real demand fundamentals remained tepid, said the trader.

“A lot of traders still hold unsold positions for February but China has entered holiday mood,” he said.

He reckoned the “catalyst” to boost market prices to be the Japan- negotiation for the April term contracts.

“However, Japan is not buying prompt spot cargoes now as they are fully committed for Q1 with South Korean demand tepid this year,” he said.

Should LNG prices have the trajectory to move lower, it will weigh on coal prices overall, he said.

“Especially when market participants are directionless and have yet to get a good grip of where the market is now,” he added.

A coal buyer based out of west India was of the opinion that there will not be an immediate effect on coal demand, but coal prices could dip, should LNG prices continue its downtrend for another week.

The LNG spot price for delivery into North was headed for a historic low in the coming months with the possibility of dropping below the $3/MMBtu level, as rising supply outpaces weak demand, said S&P Global Platts Analytics last Thursday.

Should LNG prices dip close to $3/MMBtu, end-users might find it more worthwhile to do a switch, said a Singapore-based coal trader.

“However, spot switching between LNG and coal is always present, but structurally, as coal is always the main [source of fuel] for our generation,” said the trader.

Limited switching

While coal-to-gas switching options are not widely available across Asia, there are several countries within the region which could utilize gas when generation becomes cheaper compared with coal.

India is stepping up efforts to raise the share of gas in its energy basket, but consumption is unlikely to move ahead at a pace the government is aiming for as infrastructural and pricing hurdles erode its competitiveness with relatively cheaper such as coal.

Analysts told S&P Global Platts that the campaign to boost the share of gas in the Indian energy mix from nearly 6% currently to 15% by 2030 is an ambitious target, as domestic production constraints would keep the country dependent on imported gas in the near to medium term.

India’s share of gas in its overall energy mix is much lower than the global average of more than 20%.

“If there was any potential coal-to-gas switching in Asia, it is likely to be in Japan,” according to a coal analyst from S&P Global Platts Analytics.

“However, overall volumes are expected to be small, as Japanese utilities are over-reliant on longer-term coal and gas supply agreements.”

The NEAT price forecast is likely to remain higher due to higher forecast of freight rates to Northeast Asian ports, contrary to lower JKM prices, but NEAT prices may dip in the amid bearishness to the forward curve in the FOB Newcastle high-CV market, said the analyst.

Platts assessed the Northeast Asia Thermal (NEAT) coal index at $73.99/mt CFR Kinnura on Monday, down 37 cents/mt from last Friday.

Source: Platts

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