Analysis: Low gas prices not enough for Asia to move away from coal

Singapore — Record low global gas prices may have hit the appetite for coal in the Americas and in Europe, but it may do little to snatch away the fuel's strong presence in Asia, thanks to the region's limited scope to switch between fuels.

While countries like Japan may witness some switching to LNG in the power sector, it won't be enough to offset the voracious appetite for coal in countries like China and India, where bulk of the power comes from coal-fired plants.

"There are limitations to coal-to-gas switching in Asia where cogeneration power plants are less common. So the ability for a power utility to switch generating fuel procurement to take advantage of low prices is quite limited. There are limitations in gas storage too," said Matthew Boyle, lead coal analyst at S&P Global Platts Analytics.

"Japan offers some coal-to-gas switching potential. However, overall volumes are expected to be small, as Japanese utilities are over-reliant on longer-term coal and gas supply agreements," he added.

While India has been making efforts to step up the share of gas in its energy basket, consumption is unlikely to move ahead at a pace the government is aiming for as infrastructural and pricing hurdles erode its competitiveness with relatively cheaper fuels such as coal.

The North Asian spot LNG benchmark, JKM, has plunged to historical lows this year as the market is grappling oversupplies and wide scale demand destruction. JKM is down close to 60% from the beginning of this year to $2.175/MMBtu.

But coal-to-gas switching in India needs to be spurred by governmental policies, since gas would be unable to displace coal on an outright economic basis, analysts said.

This means that India's insatiable appetite for coal is here to stay for now. On June 18, New Delhi kicked an auction of 41 coal mines for commercial mining that is open for domestic as well as international companies under 100% foreign direct investment.

"The majority of industries in India runs on coal. It's difficult for gas to substitute this demand," said an India-based trader.

YOUNG COAL-FIRED POWER PLANTS

In China, while the country's voracious appetite for coal may be nearing its peak consumption level, demand is unlikely to fall sharply anytime soon as many of its coal-fired plants are relatively young, industry sources and analysts said.

China's huge dependence on coal was evident in announcement published June 18 by the National Energy Administration and the National Development and Reform Commission that the country was planning to add 30 million mt in coal storage facilities across power plants in 2020 in order to ensure that coal stock levels are maintained at above 15 days supply for power plants.

"Coal capacity [in China] will continue to rise and is critical to keeping electricity prices low," Frank Yu, principal consultant at Wood Mackenzie, said in a recent note.

China's coal imports in the January-May period stood at 148.7 million mt, up 16.8% from a year earlier, preliminary data from the country's General Administration of Customs showed. While India's coal imports were affected in Q1 due to a lockdown in response to the coronavirus pandemic, the country is expected to import about 181 million mt of coal in 2020, compared with around 200 million mt last year, according to Platts Analytics.

Among other Asian countries, trade sources said that low gas prices are unlikely to hurt coal demand in South Korea and Taiwan due to constraints in their LNG facilities.

However, in Japan, sources expect that the anticipated rise in energy demand this summer would benefit gas more than coal in the spot market. Several Japanese power utilities were heard to have cut back on their coal procurement plan in Q2 due to availability of cheap LNG.

"There is limited spot demand for coal from Japanese power utilities. Coal prices will likely remain stable at the current level of around $50/mt FOB Newcastle for 6,000 kcal/kg NAR Australian coal," a Singapore-based trader said.

COAL DEMAND ROBUST IN SOUTHEAST ASIA

In Southeast Asia, coal procurement activities in Thailand and Vietnam remained robust in recent months.

Vietnam imported a record 7.5 million mt of coal in May, jumping 105% from the year-ago month, according to preliminary data released by Vietnam Customs on June 11. During January-April, Thailand imported 9.32 million mt of coal, up nearly 18% year on year.

A Dubai-based trader said that while low gas prices would fail to make a dent on Asia's appetite for coal, it's a different story in the western regions. "It is likely to have an impact on European coal demand."

In addition to Europe, even coal demand in the US has also witnessed a sharp fall in recent months.

"Coal demand from US power generation is down by roughly half since 2008, as coal-fired power plants are shut down and replaced by gas-fired and renewable energy," Moody's Investors Service said in a recent research note.