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Commodities

China's newfound LNG appetite drives up Asian energy costs

Spot prices double in six months as Beijing battles air pollution

China's move away from coal-fired power plants is putting upward pressure on spot prices for liquefied natural gas.   © Reuters

TOKYO -- Spot prices for liquefied natural gas are climbing in Asia as China imports more of the cleaner-burning fuel to combat air pollution.

Spot prices have jumped 110% in the six months through mid-January. The rise is expected to ripple through energy markets across the region, pushing up electricity costs for households and manufacturers alike.

As of early February, Asian LNG spot prices were around $10 per million British thermal units, after peaking at around $11 earlier in the month. They are still near three-year highs.

LNG prices typically rise in the winter, when heating demand peaks, but they are trending 10% higher now than they were this time a year ago.

Chinese authorities are shifting the country's energy mix away from coal toward natural gas to clean up the air, but supplies are tight. "The Chinese government is increasing purchases in the spot market, as there is not enough LNG to meet heating demand in the winter," said Tatsufumi Okoshi, senior economist at Nomura Securities.

  © Not selection

China's LNG imports jumped 46% on the year to 38.1 million tons in 2017, exceeding gas imports delivered by pipeline for the first time, according to data from the country's customs agency. China's LNG imports are still relatively small compared with Japan, which imported 83.6 million tons last year. But China has overtaken South Korea to move into the No. 2 spot.

It is easier to adjust imports of LNG, which is transported by ship, depending on changes in spot prices, than is the case for natural gas transported by pipeline. But apparently the additional LNG imports were not sufficient to meet demand in China.

This has affected industrial users of gas in the country. In December, Yunnan Yuntianhua, a chemical company, reported to the Shanghai Stock Exchange that one of its units will suspend production of ammonia and urea due to a cutoff of natural gas for companies in southwestern China.

Worldwide, there is a glut of LNG. A large LNG project was launched in Russia's Yamal Peninsula in December. New facilities in the U.S. and Australia will start producing this year or later.

Chinese demand is not the only factor pushing up Asian LNG spot prices. U.S. investment bank Goldman Sachs said rising prices reflect a lack of storage capacity in the region and the need to transport LNG from remote locations to make up for shortages.

Many market observers predict spot prices will begin to ease once the weather turns warmer. "Volatility increased due to low temperatures in North America and other parts of the Northern Hemisphere, but LNG prices will settle toward spring," said Hiroshi Hashimoto, senior analyst at the Institute of Energy Economics, Japan.

China is working to reduce its dependence on coal over the long term. The International Energy Agency forecasts China's natural gas demand will rise upward of 4% a year through 2040. The country's growing appetite for LNG could lift spot prices skyward every winter.

 

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