November 6, 2017 10:45 am JST

Asian spot fuel prices spike on Chinese demand, Australian strikes

China's tough regulations to wean country from coal are driving LNG costs up

TAKESHI KUMON, Nikkei staff writer

A liquefied natural gas tanker moored at a thermal power station near Tokyo. © Reuters

TOKYO -- Rising demand for fuel used to generate electricity is pushing up prices in the Asian spot market, with liquefied natural gas and thermal coal trading 70% and 30% higher than their year-to-date lows, respectively.

The hike in spot LNG prices comes as demand grows, driven by China's desire to reduce dependence on coal for heating in favor of cleaner natural gas.

If the upward trend continues, prices for fuels that Japan imports under long-term contracts could also rise, possibly pushing electricity rates higher next year and beyond.

LNG prices on the Asian spot market had held steady since March, hovering around $5 per million British thermal units, until starting to climb in late July. They are currently around $9 per million Btu, the highest level in nine and a half months, due to China ramping up imports before winter.

LNG demand has grown "on the back of [China's] push to convert heating fuels from coal to natural gas," said Mikiko Tate, a senior analyst at Sumitomo Corp. Global Research. According to British research firm Wood Mackenzie, China's LNG imports ballooned 39% in August from a year earlier.

Coal and crude also up

Meanwhile, spot prices for thermal coal -- used for coal-fired power generation -- have also risen in recent months, with benchmark Australian thermal coal fetching around $100 per ton. Prices had soared from just over $70 per ton in May to the upper $90 range in August after strikes at a number of coal mines.

Tohoku Electric Power recently contracted with Swiss commodities giant Glencore to buy thermal coal for $94.75 per ton over a year from October. The price, which is about 10% higher than a previous one-year contract that started in April, serves as a benchmark for other electric utilities.

Crude oil prices, which are reflected in large-lot transactions for bunker C fuel oil used to generate electricity, are also rising amid speculation that the Organization of the Petroleum Exporting Countries will again extend production cuts.

Spot prices for Asia's benchmark Dubai crude are in the $58 range per barrel, up roughly 30% from their year-to-date lows recorded in June.

Looming rate hikes?

In response to higher crude prices, JXTG Nippon Oil & Energy, Japan's top oil refiner-cum-wholesaler, raised bunker C fuel oil large-lot transaction prices for the October-December period by 10-12%, compared with the July-September period.

Japan imports almost all its crude oil, coal and natural gas, the latter as LNG. Electric utilities adjust their rates monthly based on average prices -- released by the Finance Ministry -- for the fuels over three recent months. For example, electricity rates for November were calculated based on average prices for crude oil, LNG and coal imported between June and August.

Much of this fuel is purchased under long-term contracts. But prolonged high prices could force utilities to buy more on the spot market.

Tohoku Electric Power Co., Inc.

Japan

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