TOKYO -- The price of liquefied natural gas has plunged 43% from a year ago as supply outstripped demand, and analysts say there's little room for an uptick in the near future given strong competition and a slowing global economy.
Despite the prospect of winter, spot LNG prices in Asia have fallen to around $5.70 per million British thermal units, from over $10 in the same period last year. This is in large part due to the production of the gas at new fields in the U.S., Australia and elsewhere. LNG prices were even higher at nearly $20 in the winter of 2014.
In May, the Cameron project in the U.S. state of Louisiana began full production, followed by the Freeport project in Texas this autumn. Projects that secured investments in the early 2010s, when emerging markets were growing rapidly, are also kicking into action in Australia and Russia.
Yet the global economy is losing steam in the face of U.S.-China trade frictions. Demand for electricity from large customers is slowing, putting the brakes on LNG growth. This has led to a rise in inventories among importers such as some European countries and China. Spot prices in Asia fell to a three-year low of around $4 in the summer when demand from households declined.
Electricity and gas companies in Japan sign long-term contracts for most of the LNG they buy, and import prices move in line with crude oil prices. Electricity companies reported higher half-year earnings through March 2020, thanks to lower fuel prices brought on by falling crude oil prices. But for some, falling LNG prices dragged on their earnings.
Kyushu Electric Power posted a loss of sales of 13 billion yen ($120 million) due to its LNG inventory, and its net profit declined. Lower demand for electricity due to a long rainy season caused the operating rate of thermal power plants to fall, and LNG inventory remained high. This prompted the company to resell LNG, but at a lower price than what the utility paid for it.
Procured by long-term contracts, LNG is "sometimes unloaded no matter whether there's demand or not," said Kyushu Electric. Utility companies have to face excess inventories when power output falls.
Tokyo Gas was also hit, posting a loss due to an impairment cost of 7.6 billion yen for Ichthys, an LNG project in Australia in which it has a stake. The company attributed the loss to a lower crude price projection, which is used to decide LNG prices, and lower profit potential from the sale of LNG.
"If LNG prices remain low for long, development projects could come to a halt," Yasuo Ryoki, an adviser to Osaka Gas, said at the FT Commodities Global Summit hosted by The Financial Times on Nov. 1 in Tokyo.
It was reported at the summit that China is importing more LNG as the country reduces dependence on coal. Japan first imported LNG 50 years ago. The drastically changing global market means that Japan, as the biggest consumer of LNG, needs a procurement strategy that takes supply-demand fluctuations into account, market watchers said.