TOKYO -- Japan, China and South Korea have become locked in a scramble for limited supplies of liquefied natural gas, sending prices spiking amid a cold snap.
Asian LNG spot prices have roughly tripled over the past month to more than $30 per million British thermal unit. Even as U.S. Henry Hub spot prices hold steady around $3 per million Btu, the Asian LNG benchmark, which dates back more than a decade, sets records on a daily basis.
In Japan -- the world's largest importer of LNG -- such trading houses as Mitsubishi Corp. and Mitsui & Co. that sell the fuel have been inundated with calls from electric companies desperate to get their hands on whatever they can.
The direct cause is the cold wave that has swept over not only Japan, but East Asia more broadly. "When bidding starts for new tanker [cargoes], bids come in right away from China, or from South Korea, which has been switching from coal power to LNG," a source from Mitsubishi said.
But the weather is not the only problem. A longer-term factor is increased buying by China, which is ramping up a pivot from coal to cleaner LNG as it looks to address environmental issues while also maintaining strong economic growth.
Japan accounts for roughly 20% of global LNG imports. China is expected to surpass it within the coming years, possibly giving it an edge in negotiations.
China purchased 59.5 million tons of the fuel from abroad during the first 11 months of 2020, up about 10% from the same period of 2019, while Japan's imports over that time dipped 5% to 66.7 million tons. For December, Chinese imports are believed to have jumped 20% to around 8 million tons, a monthly record and well over Japan's total for the month.
Japanese trading houses are looking into purchasing gas from such markets as the U.S. that have a glut, but they face another issue: a shortage of tankers. Cold weather has spurred an upswing in LNG purchases in Europe as well, squeezing global shipping capacity. The cost of shipping LNG via tanker from Australia to Japan has jumped to $1.45 per million Btu, up more than 50% from a month earlier.
The situation has exposed the inability of Japan's procurement capacity to adapt to difficult circumstances. LNG must be shipped at temperatures of minus 162 C to remain liquid -- and because it gradually boils off, companies cannot build up large stockpiles. The pandemic has led power companies to pare back supplies as well.
Japan depends on natural gas for about 40% of its electricity generation. Major utilities such as Kansai Electric Power have responded to the shortage by seeking LNG from gas companies and having domestic shipments redirected to plants in urgent need of fuel.
Being forced to buy more LNG at a high price "is going to affect our earnings this fiscal year by tens of billions of yen," or hundreds of millions of dollars, an executive at an electric company in western Japan said. Many industry experts do not expect the shortage to be resolved for another month or two.
Cross-border arrangements to share LNG can be difficult because of so-called destination clauses in contracts that bar the buyer from reselling cargoes to a third party.
But gas producers have been making more deals without such restrictions lately, owing partly to the increase in supply from U.S. shale gas. Some industry players say that more frameworks could emerge to enable LNG-consuming countries and companies to share supplies.