Spot LNG prices in Asia are the lowest in years. Asia’s LNG prices have been in freefall since September 2018, as ample supply, sluggish demand and robust early stockpiling by China’s SOEs largely capped prices over the peak winter months. These factors next to elevated growth headwinds and a forecast cooler summer, look set to keep a lid on prices over what should typically be a stronger season for gas demand. Indeed, the Singapore SLInG benchmark has averaged USD4.3/mnBTU over May-June (USD5.1/mnBTU, YTD), a low not tested since at least mid-2016, and down nearly 45% from 2018’s average of USD9.3/mnBTU. After expanding by 18% y-o-y in 2018, Asia’s LNG imports rose by a mere 1% through the first five months of 2019.
China, South Korea Provide Biggest LNG Push
Asia - Change In LNG Import Volumes 2017-2018, bcm
Source: Bloomberg, Fitch Solutions
85% of the increase in LNG imports in 2018 was driven by China and South Korea. The two countries imported a combined 134bcm in the past year, an increase of 29% y-o-y, on the back of robust state-driven gasification efforts, to cut pollution and diversify away from coal. However, YTD imports are up by just 4% on year, with policy-induced demand growth seemingly taking a breather amid elevated economic and external headwinds and a consequential downturn in consumer sentiment. The governments of both China and South Korea envision gas to play a larger role in the national energy mix moving forward, and this stands to be positive for LNG. Nonetheless, short-term risks for the fuel lie to the downside, as China adopts a more measured approach to its coal-to-gas switching efforts while navigating the economic downturn, and as South Korea’s new LNG and renewables-oriented energy plan starts to draw political, social opposition.
Modest Outlook For LNG Prices In Asia
Singapore SLInG Monthly Spot Prices & Forecasts, USD/mnBTU
f = forecast. Source: Bloomberg, Fitch Solutions
We note further headwinds ahead for LNG prices in Asia, and expect the benchmark to be largely range bound between USD5-8/mnBTU over the next five years. This is in spite of our expectation for Asia’s gas demand to grow at a healthy annual rate of 4% over the next five years, as gas grows in stature as a viable clean fuel. However, the effects of strong demand stands to be partly mitigated by similarly robust growth in the supply side, as a wave of new LNG supply additions globally, led by North America, Russia and Africa, prepare to flood the Asia market. On top of ample supply, LNG also faces competition from a growing abundance of both pipeline and indigenous gas, both of which are typically cost-competitive against LNG. In particular, China’s ability to absorb the growing LNG surplus is likely to be compromised by significant volume of pipeline gas imports it is contracted to purchase over the coming years. The impending start of new pipeline gas deals with Russia and Central Asia would deliver as much as 43bcm by 2020, and a further 60bcm could be on the cards by 2023, depending on the outcome of several ongoing negotiations. These hefty pipeline commitments would severely limit China's capacity and will to significantly raise LNG imports beyond the 80-83bcm mark that we currently project over the coming years, barring a significant upturn in domestic gas demand beyond our expectations. India, while not yet a pipeline gas importer, is also exploring the option of several cross-border pipelines with the likes of Afghanistan, Iran, Pakistan and Turkmenistan, although geopolitical tensions have understandably limited traction.
LNG Faces Competition From Domestic & Pipeline Gas
China - Natural Gas Supply Mix & Consumption, bcm
f = forecast. Source: JODI, Fitch Solutions
Another potential deterrent to LNG could be indigenous gas production, as more countries step up efforts to boost exploration and focus on domestic output growth. Such efforts are already manifesting in several of Asia’s legacy gas producers, such as China and to smaller extents, India, Pakistan, Thailand and Vietnam. SOEs in these countries are increasingly urged to prioritise spending on domestic oil and gas projects, next to accelerating regulatory and contract reforms to enable more FDI inflows. In contrast to oil, for which Asia’s conventional reserves remain on a decline, the region’s untapped below-ground potential for gas, particularly for unconventionals, could prove to be vast, with China, Australia, Pakistan and Indonesia often touted to be among the world’s biggest holders of shale gas and coal-bed methane (CBM).
Coal To Remain Cost-Competitive
Global - Thermal Coal, USD/tonne
f = forecast. Source: Bloomberg, Fitch Solutions
The prospect of a prolonged LNG price downturn is nonetheless positive for Asia’s LNG importers, many of which are relative newcomers to the practice and are gradually re-orienting towards cleaner energy sources, but are also facing challenges weaning off of cheaper coal. In addition to Bangladesh, which started importing LNG for the first time in 2018, five more countries are forecast to become LNG importers over 2020-2023, namely Australia, Myanmar, Philippines, Sri Lanka and Vietnam. The integration of LNG into the energy mix will be made more palatable by lower spot prices, although on the whole, coal will continue to reign supreme as the region’s dominant power source. Asia’s LNG importers will also benefit from a buyer’s market for the fuel for some time, which will incentivise suppliers to accommodate buyers’ demand for greater flexibility in LNG contracts, regarding pricing formula, duration, cargo size and destination restrictions, in order to win market share and expand into new markets.
Source: This article from Fitch Solutions Macro Research is a product of Fitch Solutions Group Ltd, UK Company registration number 08789939 ('FSG'). FSG is an affiliate of Fitch Ratings Inc. ('Fitch Ratings'). FSG is solely responsible for the content of this report, without any input from Fitch Ratings. Copyright © 2019 Fitch Solutions Group Limited.