South Korea’s LNG imports hit 3.8 Mt in January, 0.3 Mt (7%) less y/y, which is the first annualised decline since January 2018. While we had long expected much lower gas-fired generation to ease aggregate gas demand this winter, a third straight month of very mild weather has dented gas demand even further. As a result, LNG stocks ended January at a record high for the time of year at just below 3 Mt, higher y/y by 1.9 Mt (169%). Imports are on track to slow sharply this month, which will shrink some of that y/y stock surplus. However, very weak demand owing to rising nuclear availability will persist through the rest of the year, leaving stocks higher y/y until about mid-summer despite consistently lower imports. We forecast that LNG imports in Q1 19 will drop by 2.8 Mt (21%) y/y, while LNG imports over the summer are expected to be down by 1.1 Mt (5%) y/y.
South Korean HDDs were down by 12% y/y and 6% below the 10-year average in January, cutting res-com demand by 0.23 Mt y/y. Persistently mild weather this winter has cut res-com demand by a total of 0.4 Mt y/y over November–January, and forecasts for an exceptionally mild February—with HDDs set to be a hefty 20% lower y/y—will only exacerbate the demand loss. In addition, the y/y rise in nuclear availability we have seen since November is expected to grow between February and June, meaning even heavier losses in power sector gas demand.
With stocks at a seasonal high and a very bearish demand outlook, we expect to see a substantial y/y slowdown in imports at least through late summer. February imports are already on track to come in around 2.90 Mt, according to Kpler cargo-tracking data. This chunky 1.7 Mt y/y fall is the biggest annualised decline in at least four years.
The South Korean government has announced plans to again suspend generation from several of the country’s oldest coal-fired units over the March–June period, but given much higher nuclear availability this summer, we expect this to provide little support for gas-fired output. In January, a pollution warning for fine dust led to some coal generation curtailments, but power sector gas demand still posted a 0.24 Mt y/y decline—the largest since November 2017—owing to a 3.5 GW rise y/y in nuclear availability.
Higher nuclear generation and the oil-indexed price formula of Kogas-supplied LNG means that gas could still struggle to rise in the generation merit order for much of 2019. That said, slumping LNG prices for summer 2019 delivery could pare that loss. JKM prices for contracts extending through summer are now trading at $6.77 $/mmbtu, down from 7.66 $/mmbtu a month earlier and 60 cents/mmbtu lower than the corresponding contracts for summer 2018 were pricing this time last year. The tax changes on 1 April 2019 that will also change the relativities of the tax burden on generating with gas and coal (the levy on coal-fired generation will rise to 46,000 won per tonne (KRW/t) from 36,000 KRW/t, while the tax on LNG-fired output will fall to 23,000 KRW/t from 91,400 KRW/t) will improve the general competitiveness of gas vs coal at the margin. However, the shrinking call on thermal due to higher nuclear availability should hit both marginal gas and coal plants.
|Fig 1: Nuclear cap. & gas into power, GW, Mt||Fig 2: Korean LNG stock movement, Mt|
|Source: KHNP, Kogas, Energy Aspects||Source: JODI, Energy Aspects|