Economy May 01

Covid lockdowns in India and Japan slow LNG momentum

Tankers diverting away from India or waiting at sea as demand for cargoes of gas 'dries up' amid the dramatic coronavirus surge; pandemic problems in Japan are also taking a toll on markets for the super-cooled fuel

Covid lockdowns in India and Japan slow LNG momentum
China is now the world's largest gas consumer – and will soon be its largest LNG importer too. But suppliers are facing lower prices because of Covid lockdowns in India and Japan, which have hit demand. File photo by Getty/ AFP.

(ATF) Just as liquefied natural gas (LNG) spot markets in the Asia Pacific were gaining momentum, headwinds from the Covid-19 pandemic are again causing problems for suppliers of the super-cooled fuel.

The trouble for markets comes with the dramatic coronavirus surge in India. It has a knock-on effect of curbing power demand, including for LNG, in the country of around 1.4 billion people. Covid problems in Japan are also taking a toll on markets for the super-cooled fuel.

So far this year, Indian buyers have been averaging around three to four cargo purchases per week. However, with lockdowns declared in Indian states since the start of April, end-users have been reluctant to award new tenders for May and June, or possibly even further out, until the pandemic outbreak in the country stabilizes.  

One India-based trader told data commodities provider S&P Global Platts that Indian demand for spot cargoes had completely “dried up,” adding that domestic demand is uncertain and that regasification volumes are likely lower by double digits.

The government has estimated that gas demand is already down by at least 10% since the start of April.

Tankers diverted or waiting at sea

On Friday, India reported a record high 386,000 new Covid-19 cases scattered across the country, taking its total count to 18.7 million infections. The coronavirus crisis has caused at least five LNG tankers already bound for the country to either slow down or pause at sea to wait for further developments, or divert entirely to other destinations, vessel tracking data shows.

The diversions, slowdowns and idling of vessels reflect high stock levels at Indian terminals as restrictions and lockdowns impact India's LNG consumption, an Argus report said on Friday, citing market participants. Inventory levels at Dahej, for example, are close to 90% of capacity, compared to around 60-70% a month earlier, an India-based LNG trader said.

Gas demand in the country’s industrial and manufacturing sector have dipped by as much as 50% since the start of last month. Demand from city gas utilities and refineries has dropped around 10-20% and 5% respectively since the second wave of Covid-19 cases began.

And demand for LNG, which is used mostly for power generation, is likely to drop even more if the restrictions and lockdowns are extended further.

Last year, the Modi government pledged to make India a so-called natural gas-based economy, increasing use of the fuel from a current 6.2% of its energy mix for power generation to 15% by 2030.

Fresh Japanese headwinds

Meanwhile, headwinds for LNG are also coming from Japan, the world’s largest LNG importer, followed by China, South Korea, India and Taiwan.

The Asia-Pacific region accounts for around two-thirds of global LNG demand, with that amount to increase further amid newer LNG importers, including Bangladesh, Sri Lanka, Pakistan, the Philippines and Vietnam.

Emergency restriction measures were declared for Tokyo, Osaka, Kyoto and Hyogo prefectures last Sunday. The restrictions are slated to last until at least May 11 as a precaution ahead of the Golden Week national holidays, which run from late April to early May.

These new restrictions are the third for Japan since last April and cover nearly one-fourth of the country’s population of just under 130 million people. Despite its small population, Japan has the third largest economy in the world after the US and China. The last state of emergency in the country was lifted on March 21.

Less LNG procurement from India and Japan comes as spot prices for the super-cooled fuel in the Asia-Pacific were recovering from last year, when they dipped below the $2 per million British thermal units (MMBtu) price point – an historic low beneath the break-even price point of most, if not all, global LNG producers.

Market doldrums ahead

A colder than average winter in the northern hemisphere and a ship congestion at the Suez Canal, the fastest shipping route between Asia and Europe, had been boosting LNG prices since December.

Usually, prices for this time of the year pull back from winter highs as demand for heating dries up and more LNG supply, including from uncontracted volumes, hit the spot market.

At the start of April, prices for the fuel were fetching just over $8/MMBtu for deliveries into North Asia, as China started early refilling its storage levels to ward off another possible supply crunch that saw LNG prices temporarily spike above $30/MMBtu in January – a record high.

Chinese LNG imports also surged more than 30% in March as PipeChina, the country’s new pipeline operator, opened terminals to gas distributors under Beijing’s gas markets liberalisation and amid less restrictions on smaller state-run and private firms’ ability to import LNG through facilities owned by China’s three oil majors.

South Korea’s Kogas has also been ramping up LNG spot market, buying to replenish stocks that were depleted after winter’s multi-year low temperatures in the northern hemisphere. 

More demand has also been coming as countries in the region seek to replace dirtier burning coal used for thermal power generation with LNG. Gas when used for power generation emits around 50% less CO2 than coal, the dirtiest burning fossil fuel. The Asia-Pacific region has a decades long over-reliance on coal, mostly due to its lower cost compared to other fuel alternatives needed for power generation.

LNG imports for March ticked up some 5.8% from a year earlier, the biggest increase since March 2020, Bloomberg reported, citing ship-tracking data. However, the impact from India on overall LNG pricing could be limited.

Prices of gas delivered to North Asia, usually indexed against the Japan-Korea-Marker (JKM) benchmark, could widen against prices indexed against the West India Marker (WIM), often used for cargoes to India and sometimes the Middle East.

Currently, there’s around a 40 cents/ MMBtu spread between the two pricing benchmarks.

The ramp-up in LNG procurement in the region as well as in Europe, which is also refilling storage tanks earlier than this time last year, has also seen LNG exports from the US increase. 

The amount of gas flowing to US LNG export plants averaged 11 billion cubic feet per day (bcfd) by the third week in April, topping March’s monthly record of 10.8 bcfd. However, if lockdowns persist in India and Japan, it will cut demand for gas needed, and as such, LNG exports from the US will also decrease. 


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