Japanese LNG imports hit a two-year low of 5.55 Mt in June—down by 0.64 Mt y/y—despite unseasonably hot weather, as increased nuclear availability curbed power sector gas demand. With a total of 4.7 GW of nuclear capacity now returned to service since March, power sector gas demand should continue to ease, although unusually hot weather could mitigate some of those losses in gas demand this month, particularly with estimated LNG stock draws in June. We now forecast that in y/y terms Japan will import 0.24 Mt more LNG in Q3 18 and 1.3 Mt less in Q4 18 as demand eases on higher nuclear availability and a return to normal weather.
Kpler data show July LNG imports set to be lower by 0.3 Mt y/y at 6.5 Mt. Lower temperatures y/y will have eased cooling demand over 1-18 July, when CDDs were 6% lower y/y, albeit on a very high base—July 2017 CDDs were the highest for the month for 10 years. Temperatures are forecast to rise higher y/y through the rest of the month, boosting cooling demand and leaving aggregate July CDDs broadly flat y/y, and 12% above the past five-year norm. Further ahead, the Japan Meteorological Agency forecasts a warmer-than-normal August–September period.
Very hot weather is continuing to support aggregate Japanese power demand this summer, but higher available nuclear capacity y/y means power sector gas demand is weakening. June CDDs were up by 28% y/y and the highest since 2013, and aggregate power demand was 69.9 TWh last month, 2 TWh higher (3%) y/y. Yet LNG imports were down y/y, suggesting that nuclear generation took some of gas’s share of the generation mix despite some new CCGTs coming online. Chubu Electric’s 1.19 GW Nishi-Nagoya Block-1 CCGT began operations in November, and in late March was declared the world’s most-efficient CCGT (achieving 63.08% gross efficiency). The second 1.19 GW Nishi-Nagoya unit was online at the start of April. The start-up of both units, coinciding with a period of increasing nuclear availability, seems to have meant that that those plants are now likely replacing generation from less-efficient gas plants.
Four nuclear units, totalling 4.7 GW of capacity (out of a total fleet of 33 GW) have returned to service since mid-March 2018, resulting in power sector gas demand in April (the latest data available) slumping by 0.33 Mt (8%) y/y to 3.85 Mt, the first y/y fall since January. The question now is when the next nuclear units likely to start up amid the rigorous Japanese regulatory approval process.
Reports indicate that the next nuclear units likely to be online could be Takahama units 1 and 2 (0.8 GW each), which could potentially return to service in Q4 18 or Q1 19, although no firm scheduled date has been set. The units have been cleared as meeting the new safety standards, and their location on the western coast—further away from the site of the Fukushima disaster—could made local opposition less of an issue than the return of eastern units, such as the 2 GW Tokai unit 1, which also meets new standards but has not yet received start-up approval from the local governor. The 0.8 GW Mihama unit 3 has been confirmed as meeting new safety standards, but is undergoing renovations that will preclude it from returning to service until early 2020.
With domestic gas consumption data appearing to be delayed, our implied LNG storage numbers suggest a draw over June, unless power sector gas demand fell by more than our estimate of 11% y/y. As such, the next few months could see some added volumes coming into LNG tanks in Japan before the start of the heating season. Also, some efficient gas-fired plants (above 55% efficiency) could be in merit against less-efficient coal-fired plants (30% or below) with JKM gas prices currently below 10 $/mmbtu for Sep-19, although still out of the money against more-efficient coal plants. We expect a smaller call on gas-fired power over the coming winter and not much coal-to-gas fuel switching with JKM LNG now pricing over 11.0 $/mmbtu for winter delivery and with delivered coal to Japan above 125 $/t. The exception could be US contract gas, which could arrive into Japan at a full cost of just 6-7 $/mmbtu, which could support some gas burn in power.
|Fig 1: Power demand & LNG imports, GW/ Mt||Fig 2: Japanese fuel switch, $/mmbtu|
|Source: Bloomberg, Energy Aspects||Source: Reuters, Energy Aspects|