LAUNCESTON, Australia: The price of spot cargoes of liquefied natural gas (LNG) has ticked up recently in Asia amid tent
LAUNCESTON, Australia: The price of spot cargoes of liquefied natural gas (LNG) has ticked up recently in Asia amid tentative signs of some peak summer demand, but the problem remains that for many buyers the cost is still too high.
While the market focuses on the spot price as a way of assessing the extent of oversupply, or the strength of demand, it's worth noting that the market for short-term cargoes is dwarfed by the far greater volumes procured under long-term, mainly crude oil-linked contracts.
This means that for many consumers of LNG, especially in the top- and third-ranked buyers Japan and South Korea, the decline in spot prices is largely irrelevant.
For weak spot prices to become relevant, demand in those countries has to be so strong that additional cargoes over and above contracted volumes are needed.
The spot price for cargoes delivered to North Asia <LNG-AS> rose to $5 per million British thermal units (mmBtu) in the week ending Aug. 16, the highest since late June and 25% above the $4 trough reached in early August.
It's also worth noting that the spot price reached a northern summer peak last year of $12 in June, and was at $11 in the week to Aug. 17, 2018, more than double the current price.
But while spot prices have slumped as producers in Australia and the United States commissioned new plants, the long-term contract price, which accounts for about two-thirds of the global market, has fallen by a considerably smaller margin.
South Korea paid $9.40 per mmBtu for its LNG imports in July, which is only 6% less than the $10.01 it paid for them in July 2018, according to customs data. This price would mainly reflect volumes under long-term contract, but would also include cargoes under spot contracts.
For the first seven months of the year, South Korea paid an average $10.22 per mmBtu for LNG, which was 6.9% higher than for the same period last year.
Japan's LNG cost an average $9.14 per mmBtu in June this year, down only marginally from $9.79 for the same month a year ago, according to official data.
The fact that both Japan and South Korea haven't seen much benefit from lower spot prices for LNG is largely a reflection of the higher cost of Brent crude oil for much of the first half of 2019, with the price rising from a closing low of $50.47 a barrel in November last year to a peak of $74.57 in late April.
While Brent and other crudes have been dropping since the April high, the price is still above the November low, which is reflected in the still relatively high price of contract LNG compared to spot supplies.
ASIAN LNG DEMAND STRUGGLES
It's therefore not surprising that LNG imports in both Japan and South Korea have been falling.
For the first seven months of the year South Korea's imports were 22.9 million tonnes, down from 25.4 million in the same period last year.
In Japan, imports for the first half were 38.6 million tonnes, a drop of 8.2% compared to the same period last year.
China, the world's second-biggest LNG importer, is still growing imports, but at a far slower pace than before.
China's January to July imports of the super-chilled fuel were 32.8 million tonnes, up 18.8% on 27.6 million in the same period a year ago, according to vessel-tracking and port data compiled by Refinitiv.
However, for the whole of 2018, China's imports were 38.6% higher than for 2017.
China also buys a greater percentage of its LNG on the spot market, meaning it has managed to secure some of the benefits of a lower spot price.
It also has a fixed, low-priced long-term contract with Australia's Northwest Shelf venture, which also lowers the cost of LNG supplied to China.
The reliance on long-term contracts for much of Asia's supplies is probably largely responsible for the mediocre growth in demand so far this year, with Refinitiv data showing the continent imported 139.3 million tonnes in the first seven months of the year, up a mere 2.9% from the same period in 2018.
In contrast, Europe's imports of 51.5 million tonnes in the January to July period are up 87% from the 27.5 million in the same period last year, showing the continent's ability to take greater spot volumes is paying dividends for its natural gas utilities.
The problem for LNG producers is that they need to boost demand for their product in order to sell their existing output, not to mention all the future production now in the pipeline.
But in order to do so they will have to accept lower prices and more flexible pricing systems, and by doing so they will undermine the economics of existing and new ventures.