Japan's August LNG demand recovers on heatwave; outlook still bearish

Singapore — Japanese power utilities' LNG demand has partially recovered in August due to high temperatures, especially in western Japan, but the demand outlook for autumn and winter remains bearish due to weak economic activity, which has dampened industrial sector demand.

Even a colder-than-expected winter may not translate to additional buying interest from Japanese power and gas utilities, as their commitment to long-term contract volumes for winter is high, market sources said. Furthermore, most Japanese end-users have continuously deferred their earlier commitment for this year due to weak demand and high inventory. While the length of deferment varies between contracts, LNG importers are of the view that most will have high inventory due to their obligation to take cargoes in fourth-quarter 2020 or Q1 2021.

Recovery in western and eastern Japan

Among the Japanese power utilities depending on LNG for power generation, there was a noticeable difference between utilities based in the western and eastern half of the country.

According to S&P Global Platts Analytics, as of Aug. 26, power demand for the Kyushu and Shikoku region in August is 5% higher compared with a year ago. On the other hand, the largest year-on-year decline in power demand for the Tohoku and Hokuriku region were approximately 6%.

On Aug. 26, a power utility based in the western half of the country said: "LNG consumption should be healthy for this week and next week for western Japan. On a daily average, prices are around Yen 10-plus kWh, which is not much higher compared with previous years. But at peak hours, electricity prices shoot up to Yen 40-50 kWh. During mid-day, we definitely turn on our LNG power plants to generate electricity".

Platts Analytics estimates Japanese power demand in August to average 124 GW, which is only 0.4 GW higher compared with August 2019. Nevertheless, August is the first month in 2020 that a year-on-year increase has been recorded.

Two other Japanese utilities, that had noted the recent strengthening in power demand, are prompted to consume additional LNG, particularly for the second half of August.

"We can still purchase multiple cargoes within this year," another utility in the western half of the country said.

On the other hand, a major Japanese LNG importer based in eastern Japan has offered to sell an October-delivery cargo in the LNG spot market, according to multiple market participants. Other Japanese utilities in this region reported that a combination of weak industrial demand, mild weather and relatively cheaper coal prices as factors for the muted LNG demand.

On Aug. 24, Platts had assessed Northeast Asia Thermal Coal, or NEAT, at $52.02/mt, the lowest thus far in August.

GAS UTILITIES STILL FACE HIGH INVENTORY

As Japan's strengthening summer LNG demand is concentrated in the power sector, its city gas companies' high inventories remain a challenge.

"August demand has been improving slightly. But because inventory has been high, it is difficult for the high inventory situation to change and will take a while for us to actually buy in the spot market," a major gas utility said.

Several gas utilities have also noted the likelihood of experiencing high inventory levels for autumn onwards, according to their estimates.

"A few years ago, it was unthinkable for gas companies to hit high inventories for winter. This shows how weak demand is," a source at a Japanese trading house said.

A mid-scale Japanese gas utility noted that industrial sector demand for gas is unlikely to recover fully for the remainder of the year, regardless of the weather.