Charting relative cost of thermal coal vs LNG in Northeast Asia reveals fresh insights

For power plant operators in Northeast Asia striving to optimize their operational efficiency, the prices of imported gas and thermal coal are clearly key considerations.

But a direct comparison between the two fuel sources for power generation is not an easy one to make, given they are traded in different units of energy content.

Thermal coal is traded on the basis of its calorific value or heating content on a kilocalories per kilogram basis, and its volume priced in US dollars per metric ton.

LNG is priced on the basis of US dollars per million British thermal units, or $/MMBtu.

The most common way to compare like with like is to convert seaborne thermal coal prices into the same unit of measurement as LNG, in this case $/MMBtu.

S&P Global Platts publishes a daily price assessment for LNG shipped to Japan, South Korea and Taiwan on a delivered ex-ship basis -- its JKM Marker.

Platts also publishes a daily price assessment for Australian thermal coal shipped to Japan’s Kinuura port -- the Northeast Asia Thermal Coal index, abbreviated to NEAT.

The NEAT index is for 5,750 kcal/kg NAR thermal coal shipped from Australia’s Newcastle port to Japan and includes indicative freight for Panamax vessels on this trading route.

NEAT has accumulated almost two years of price history since its launch in early January 2017, which is enough to glean some interesting trends and information.

Plotting the NEAT price index against the JKM Marker on a graph in $/MMBtu reveals some thought-provoking details that are not immediately apparent when looking at their price histories separately.

On a delivered-Japan $/MMBtu price basis, seaborne-traded thermal coal has been significantly and consistently lower in price than LNG cargoes over the past two years.

Secondly, thermal coal on a $/MMBtu price basis has mostly traded in a range of $3.50-$4.50/MMBtu over the past two years, while LNG prices have fluctuated in a wider and higher range of $5.50-$11.50/MMBtu over the same period, with significant seasonal peaks and troughs.

Thirdly, the difference between prices for thermal coal and LNG cargoes on a delivered Japan basis has varied from $1.80/MMBtu to $8/MMBtu since January 2017.

Electricity generation companies can use Platts' prices for thermal coal and LNG delivered to the Northeast Asian market, and China, in various ways.

They can assess the relative merits of each fuel within their individual business plans, make informed decisions about when to buy thermal coal or LNG at different seasonal times, plan ahead for their fuel needs, and plant operators with the capability can switch between the LNG and thermal coal.

Thermal coal is mostly used in baseload power generation, to supply a stable flow of electricity to the grid, while LNG generation can be used for times when electricity demand peaks.

China has been importing more LNG, and last winter ramped up its intake to satisfy domestic heating demand during periods of extreme cold weather.

At the same time, China is reliant on billions of tons of thermal coal, both domestic and export volumes, to sustain its industrial base and vast city infrastructures.

The fuel choices made in the Chinese market in the lead-up to winter this year look set to spur considerable interest across both the LNG and thermal coal markets in Northeast Asia -- and impact the plotting of the price graph in the weeks to come.