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    Home > Chemial News > Valuable News > How long will Asian LNG prices continue to skyrocket?

    How long will Asian LNG prices continue to skyrocket?

    Echemi 2021-01-22

    In the past month, the spot price of Asian liquefied natural gas (LNG) has risen rapidly. In December 2020, the average spot price of Japan-Korea benchmark LNG (JKM) was almost twice the average price in November and five times the average price in the summer of 2020. As of January 12, JKM has soared to 28 US dollars / million British thermal units. This price and increase are much higher than the European and North American markets. Is such a high price sustainable? How long can this increase last? In order to answer these questions, we need to first understand the driving factors of this round of Asian LNG price surge and how long these factors can last.


    The soaring spot price of JKM is the result of multiple factors, including the strong growth of natural gas demand in Asia, the temporary suspension of LNG supply, and the tension in the international shipping market.



    Strong growth in natural gas demand


    In December 2020, Asian LNG demand increased by 14% year-on-year, reaching the highest value ever (26 million tons). From a regional perspective, most of the increase in demand comes from China and Japan, and the demand from other major LNG importing countries in Asia has remained stable.


    The strong growth of LNG demand in Asia is mainly driven by several factors: One is the unusually cold winter. This winter, the average daily temperature in Asia is much lower than the average for the past five years. For example, the number of days (HHDs) with indoor temperatures below 18 degrees Celsius in December 2020 in Japan is 18% higher than the average of the past 5 years, and HHDs in China in December 2020 are 19% higher than the average of the past 5 years. In early January, the temperature in Seoul, South Korea, dropped to minus 18.6 degrees Celsius, the lowest temperature in 35 years in the city. The cold wave continued to ravage countries in Northeast Asia in January. Second, the COVID-19 epidemic has increased ventilation in a large number of public places, which has further increased the heating and electricity demand of North Asian countries. For example, in response to the new crown pneumonia epidemic, many public venues in Japan have kept windows open 24 hours a day, which partly explains the 13% year-on-year increase in LNG demand in Japan in December 2020. Third, the recovery speed of China's industrial production is not only significantly higher than that of other countries in the world, but also exceeds the expectations of most market analysts. China's LNG imports in December 2020 increased by 34% year-on-year. In addition, South Korea's LNG demand has also grown steadily, mainly because the new environmental protection policy means that a large number of coal power plants are gradually withdrawing from operation. Eight of the 60 coal-fired power plants in South Korea have been shut down, and the severe cold has further increased the demand for LNG in power plants.



    Temporary suspension of LNG supply


    On the supply side, Europe’s largest LNG producer, Hammerfest, Norway, announced in October 2020 that it would suspend production for at least one year. The plant needed extensive refurbishment after the fire in September of that year. In addition, a large number of LNG projects in Australia, Malaysia and other countries have been suspended due to the impact of the epidemic.


    To add fuel to the fire, since December last year, several large LNG producers scattered around the world (such as the United States, Australia, Algeria and Qatar) have reported various project operation failures. The global natural gas liquefaction capacity utilization rate dropped from 94% in the fourth quarter of 2019 to 88% in April 2020.



    The shipping market is tight


    In order to prevent and control the epidemic, the number of LNG cargo ships allowed to pass through the Panama Canal every day has been reduced to half of what it was before the epidemic. As a result, the transportation time of most LNG cargo ships passing through the canal to Asia has been artificially extended. The congestion and flow restriction of the Panama Canal make many ships have to choose to detour, greatly increasing the voyage of LNG cargo ships. For example, the LNG cargo ship from the U.S. Gulf of Mexico to Asia has increased its round-trip travel by nearly 20 days. According to the official statement of the Panama Canal administration, this kind of congestion and flow restriction will be difficult to change before this summer.


    The increase in voyage and the tightness of capacity directly caused the increase in freight. According to data from Spark Commodities, the daily rent of LNG spot cargo ships on Atlantic routes more than tripled in the week starting on January 5. Rising freight rates have further pushed up the total cost of LNG spot.



    How long can the spot price rise?


    In summary, we can see: On the one hand, the fundamental problem in the transportation and supply sectors lies in the impact of the epidemic. How long the tension in the shipping market will last, and how long the supply interruption or shortage will last, basically depends on our judgment on how long the epidemic will continue to raging. On the other hand, the fundamental reason for the strong Asian LNG spot demand lies in the abnormally cold winter and the non-permanent demand growth caused by the epidemic. Cold winters often end in March. In general, I believe that the probability that LNG demand will continue to remain strong after March is relatively low.


    As an optimistic analyst, I tend to believe that vaccines are likely to bring the end of the epidemic around the world, so the soaring LNG spot price will probably only be a flash in the pan. The high LNG spot price is likely to continue to exist in January and February, but it may be difficult to continue beyond March.


    From a longer time horizon, tight supply in the LNG spot market will no longer be a problem. Major LNG exporting countries such as Australia, the United States, Russia, and Qatar began to put into production a large number of new projects before the outbreak, and in the next five years or so, global LNG supply will gradually ease. This easing will make the excessively high prices lose their basis.






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