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Highlights

LNG inventories high prior to COVID-19 after weak demand in winter

Plunge in tourism arrivals hits hotel, retail power demand

Coal contracts prevent some utilities from switching to cheaper gas

Singapore — The outlook for LNG consumption in Japan heading into the June-August peak summer season remains bearish despite the lifting of the country's state of emergency to contain the spread of COVID-19 this week, according to industry participants surveyed by S&P Global Platts.

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Several Japanese gas and power utility sources said they remained pessimistic about demand throughout the third quarter due to relatively high inventory levels, tepid power demand and coal-to-gas switching constraints.

The bearish sentiment could damage the hopes of Japan's energy market for a strengthening of electricity demand during the summer season.

The COVID-19 pandemic remains the most significant dampener of LNG consumption, with the impact in the industrial, manufacturing and hospitality sectors expected to be prolonged. While electricity demand data for May is not yet available, power demand does not appear to have snapped back like usual after the country's Golden Week holiday earlier in the month, sources said.

While most Japanese end-users are still analyzing when downstream demand could recover, most agreed it was unlikely to be in the next few months.

"The state of emergency is lifted but with fears of a second wave of virus spread, demand recovery is going to be slow for the next three months. A full recovery is probably unlikely for the remainder of 2020," a source at one Japanese power utility said.

A source at a Japanese gas company said: "Industrial demand will definitely not recover this summer, with global recession."

Electricity demand from hotels, restaurants, department stores and office buildings was likely to remain weak amid widespread caution about venturing outdoors and a plunge in tourist arrivals. International arrivals in Japan were down 99.99% year on year at just 2,900 tourists in April, according to the Japan Tourism Agency.

DEMAND WEAK

The weakness in power and gas demand was most pronounced in industrial regions.

In Chubu, power demand fell more than 12% on year for April, according to the Organization for Cross-Regional Coordination of Transmission Operators. Market participants attributed the fall to automakers in the region lowering operating rates. However, a source at Japanese power utility located further west in a less industrial region said its demand decline was "less than 5%."

City gas consumption averaged 124.5 million cubic meters/day over January-February, down from 139 million cu m/d a year earlier, Ministry of Economy, Trade and Industry data showed.

Several Japanese end-users have already exercised downward quality tolerance or DQT clauses in their long-term LNG procurement contracts due to high inventory, and many buyers have negotiated with suppliers to defer cargo deliveries to later in the fiscal year.

According to Platts Analytics, Japan has roughly 100 million mt/year of contracted LNG capacity and imports are projected at around 75 million mt/year, indicating Japanese importers will need to defer or cancel roughly 25%.

"For July, we are no longer selling in the spot market because our supplier agreed to our deferment request," a third gas utility source said. A fourth source at a power utility said that company had also reached agreement with their seller to defer cargoes.

Several sources at Japanese end-users said it was unclear how much of the drop in LNG imports was due to COVID-19 and how much was the lasting effect of already high inventories due to weaker-than-usual demand last winter. Japan's LNG imports in April were 228.7 million cu m/d, down from 244.2 million cu m/d a year earlier, according to cFlow, Platts trade-flow software.

Several firms said they were maintaining a cautious approach to buying spot LNG to avoid reaching maximum storage capacity in coming months. METI's most recent inventory data was for January at 6,289 million cu m, up from 5,856 million cu m a year earlier.

COAL CONTRACT DILEMMA

Coal-to-gas switching also remains more subdued than usual in May, exacerbating the problem of high LNG stock levels, market sources said.

Despite LNG becoming more price-competitive than coal, not all Japanese power utilities have been able to make the switch due to constraints in their long-term coal contracts.

"In theory, we would like to stop using coal and switch to using LNG, but we have to receive the coal from long-term contracts - so we can't do what makes most economical sense, but do what is operationally required," a source at a power utility in western Japan said.

The differential between the JKM benchmark price for spot LNG in Northeast Asia and the Northeast Asia Thermal or NEAT coal benchmark was negative throughout April, with the JKM averaging 40 cents/MMBtu lower than NEAT. Prior to 2020, the lowest differential on record was May 31 last year at $1.073/MMBtu, when buyers in South Korea and India were finding LNG more price-competitive than importing coal.

"Coal is maintaining its market share and gas is taking a hit, so even though electricity demand isn't falling as much as expected, it's still impacting gas," Jeff Moore from Platts Analytics said.

However, an uptick in demand could still materialize, with the Japan Meteorological Agency forecasting a hotter-than-average summer.

All regions in the country are facing the 60%-70% probability of above-average temperatures over May 30-June 29, according to the JMA.