Price calculations and estimates of a fuel displacement need to take into account that Pacific coal prices are free to move with coal’s supply-demand fundamentals, while the oil-indexed LNG cost is only tied to what is happening in the oil market.
“Any large-scale displacement of Australian coal from the Korean import mix would weigh heavily on coal prices,” analysts said, noting the drop in coal prices might help preserve the use of some coal-fired generation units.
Fuel switch might trigger further coal closures in Korea
But analysts also think the fuel switch window could receive policy tailwinds in South Korea and lead to further mandatory closures of coal power plants which would “allow for greater oil-indexed imports at a time when they are cheapest.”
“This would prevent KOGAS from having to sell its long-term supply on the global spot market,” Energy Aspects said, adding the Korean gas company recently noted a considerable month-on-month downturn in its April gas sales to the domestic power sector, as the mandated coal plant closure ended and while oil-indexed LNG was still uncompetitive against coal and spot LNG in power.
China may halt Australian coal imports if dispute escalates
The thermal coal market in Asia Pacific faces another source of downward pressure from a reduction in Chinese buying as China is in a trade dispute with Australia, after the latter supported an U.S. investigation into the origins of the coronavirus.
If the feud is escalating, analysts see a risk that China might halt its coal imports from Australia which would have a knock-on effect on global coal and LNG markets.
“If China displaces a share of Australian coal with its own domestic production, rather than just importing from another supplier, then it could drag down seaborne coal prices in the Pacific,” analysts said. China’s National People’s Congress last week stressed the importance of domestic ‘clean coal’ in the topic of energy security, indicating support for a domestic output push.
“Collapsing Pacific coal prices would be a headwind against South Korean fuel switching, as well as spot LNG being competitive against coal elsewhere in Asia’s power sector,” analyst said, concluding the affordability of LNG in Asia will continue to lead to demand growth despite residual lockdowns in some countries.
Independent buyers in Korea and India snap up cheap spot LNG
There has been ample LNG buying from Korean independents, second-tier Chinese LNG importers and even Indian refiners returning to the market in recent weeks. A lot of this buying is likely a decision by these firms to capture the low point in global prices, but there will be support for LNG buying through the year.
Starting from late August, a two-month time spread starts is expected to “become economic for [cargoes with] JKM delivery.” According to Energy Aspects, “this will allow for US exports even if the prompt arbitrage remains shut. But the start of this trade will put further pressure on JKM winter2020/21 prices.”