Prices for liquefied natural gas (LNG) and thermal coal in Asia have skyrocketed in recent months amid strong demand, but while this is good news for commodity producers, the recovery is a longer-term boon for their main rival, renewables.
LNG-AS LNG spot prices have nearly doubled since the post-winter low of $ 5.60 per million British thermal units (mmBtu), ending last week at $ 10.95.
The recovery is mainly driven by increased demand, with the volume of super-refrigerated fuel unloaded at Asian ports reaching 22.33 million tonnes in May. That was up from 20.81 million in April and well above 18.96 million in May 2020, according to ship tracking data compiled by Refinitiv.
Demand was largely driven by China, which imported 7.31 million tonnes in May, up from 6.52 million in April and the strongest month since January.
China imported 33.22 million tonnes in the first five months of 2021, up nearly a third from the 25.62 million imported during the same period in 2020.
While China is the engine of LNG spot prices, it is also playing a role in the rise in thermal coal prices, although its imports are in fact lower so far this year.
China’s total coal imports were 21.04 million tonnes in May, up from 21.73 million in April, according to official customs data. And for the first five months of the year, China’s coal imports amounted to 111.17 million tonnes, down a quarter from the same period in 2020.
For the world’s largest importer to buy less would appear bearish. But it’s the nature of China’s buying that drives the market.
China’s unofficial ban on imports from Australia, the world’s second-largest shipper of thermal coal behind Indonesia, has shaken markets, forcing Chinese traders and utilities to scramble for coal from alternatives such as Indonesia and Russia.
This has driven up the prices of coal from these producers, in turn forcing India, the world’s second largest importer, to move further and further away from Indonesia, its former number one supplier, and buy instead. Australian coal.
This, coupled with strong demand from Japan and South Korea for high quality Australian coal, leaves the stars aligned for sharp price increases on Asian marine coal grades.
The weekly benchmark index for high-quality Australian thermal coal at the port of Newcastle ARGMCCINDX = ARG, as assessed by the commodity price information agency Argus, hit a decade-high at 121 , $ 48 per tonne during the week before June 4. That level is almost triple that of 2020’s low of $ 46.37, reached last September at a time when many Asian economies were stranded as part of efforts to fight the coronavirus pandemic.
Lower-grade Indonesian coal IDIDX42GRW1 = ARG also performed well, ending last week at $ 55.04 per tonne, up 143% from its September 2020 low.
While price gains from spot LNG and thermal coal will increase the fortunes of producers, who saw their profits plummet during the pandemic, it will also sharpen the minds of utilities and countries in Asia planning their energy future.
Already, coal and natural gas power plants are struggling to compete with renewables like solar and wind power, even when battery backup storage is factored in.
A recent report compiled by Australian science agency CSIRO and the Australian Energy Market Operator showed that the current capital cost of building a new coal-fired power plant using premium fuel is around $ 4,450. A ($ 3,435) per kilowatt.
A gas-fired combined cycle plant cost A $ 1,801 per kilowatt, while large-scale solar was A $ 1,408 and onshore wind was A $ 1,951.
An integrated solar power plant with two hours of battery storage had a capital cost of A $ 2,139, more than the cost of a gas-fired combined cycle power plant, but less than half of a new coal-fired power plant.
The figures in the report are for investment costs, and they did not assess operating costs, which strongly favor renewables because they do not require the purchase of fuel, operate with fewer workers and cost less. to ensure.
It also excludes the impact of any potential climate change policies being implemented, such as carbon taxes or emissions trading.
One indication of what a limited carbon future might mean for coal was that a coal-fired power plant with carbon capture and storage was valued at a capital cost of AU $ 9,311 per kilowatt, making it completely uncompetitive. with any other type of electricity production in the study.
Several Asian countries, such as Bangladesh and Pakistan, have recently reported the end of construction of coal-fired power plants, and the likelihood of building new import-dependent plants is rapidly declining in the region.
LNG producers see their fuel as a greener alternative to coal. But while capital costs are currently competitive with renewables, any utility opting for gas-fired power plants based on LNG imports faces hidden risks by opting for renewables instead.
Chief among them is what has happened in recent months to prices, with wild swings in the spot market: Uneven demand caused by a colder than expected northern winter has driven prices to an all-time high, few time after the pandemic caused a meltdown to an all-time high in the middle of last year.
Price volatility and security of supply could be LNG’s Achilles heel in Asia, as could the risk that fuel will be increasingly targeted by climate activists, which have already made it increasingly difficult the development of coal-fired power stations.
Source: Reuters (edited by Kenneth Maxwell)