Japan could lose its pole position as the world’s top LNG importer to China as early as 2022.
By then, LNG imports in Japan are expected to decline 12% to 72.8 mill tonnes per annum, compared to 2018, while China’s import volume will rise 37.5% to 74.1 mill tones per annum, according to a new report published by Wood Mackenzie.
Despite losing its leadership position, Japanese buyers will continue to take a lead in contracting innovation, such as developing hybrid deals, coal indexation, joint procurement and carbon neutral cargoes.
As several long-term contracts wind down from the early 2020s and with gas and power market liberalisation underway, these innovations will provide buyers more leverage and opportunities in future contracting discussions.
Meanwhile, ensuring security of supply through diversity of sources will remain of primary concern. Japanese buyers should continue to lead the market in sourcing LNG from new supply regions, the report said.
“While LNG demand is declining, Japanese imports will remain above 70 mill tonnes per annum through much of the 2020s. It will remain the second largest LNG consumer in the world until at least 2040, with demand still exceeding 60 mill tonnes. As such Japan still provides ample opportunities for LNG sellers, particularly as existing contracts expire,” said senior analyst, Lucy Cullen.“The decline in Japanese imports will be driven by competition from coal, nuclear and renewables in the power sector and slow macroeconomic growth.”
Coal to gas
Despite sustained low LNG spot prices, Japan’s electricity market does not favour coal to gas switching on a wide scale. The country remains well-contracted in LNG to the early 2020s, as US and Australian supplies ramp-up.
As a result, the average cost of gas for Japanese utilities remains well above spot prices and coal is still the cheapest form of electricity generation after nuclear and renewables on a short-run marginal cost basis.
Under Japan’s 5th Strategic Energy Plan (2018), the government aims to decrease gas and coal generation (down to 27% and 26% shares, respectively) and offset this loss with greater low-carbon nuclear and renewable generation.
“The tide appears to be turning with increasing restrictions on financing and building coal. As such, we expect this policy target and such a robust share of coal in the generation mix will be increasingly difficult to sustain. This would improve the outlook for LNG,” Cullen added.