South Korean LNG imports totalled 3.0 Mt last month, a sharp 1.3 Mt (30%) lower y/y. Even amid a loose supply-demand balance, the drop was notable as the largest y/y fall in imports for any month in over seven years. The weak LNG intake has helped to normalise South Korea’s LNG inventory levels, with LNG stocks ending the month up by 0.5 Mt y/y, compared to a lofty 1.9 Mt higher a month earlier. Even so, as a lighter nuclear maintenance schedule is expected to lead to some y/y power sector gas demand losses across the rest of the summer, the country is likely to retain higher incremental stocks until at least the start of Q3 19. Some very big y/y increases in nuclear availability in April will weigh on gas demand, despite the gas-supportive change in generation tax rates introduced on 1 April. The rest of summer 2019 will see less dramatic y/y changes in nuclear availability, but across Q2 19 and Q3 19 we forecast that LNG imports into Korea will fall by 0.98 Mt y/y.
The mild weather that dampened South Korean demand in January and February carried on into March. Although HDDs were 5% higher y/y last month, that came against a very low base, as March 2018 was the mildest March in at least 11 years. As such, HDDs were still 14% below the past 10-year average. The country managed to shave an impressive 2.4 Mt y/y off LNG imports in Q1 19, leaving stocks a more comfortable 0.6 Mt higher y/y, compared to a 2.0 Mt y/y surplus at the start of the year.
Fundamentals for the rest of 2019 remain broadly unchanged. A big increase in expected available nuclear capacity is the main headwind to more gas demand, and could shave 0.72 Mt y/y off power sector gas demand across April-December. Some support could come from the change in generation taxes from 1 April, which have been adjusted to favour LNG at the expense of coal, and could mean an increase in the competitiveness of gas-fired plants in the merit order when combined with low JKM prices. However, Kogas gas prices charged for power are still high, and that does mean that the change to the tax rates will have just a marginal impact on most power generation. Only KOMIPO is active in sourcing LNG at JKM prices, so only they will have an incentive to swap put gas for coal.
Given the strong reduction in imports in March, South Korea is looking like it will be less oversupplied by Q3 19 than indications suggested a month ago. This means late summer and early winter (September-December) restocking should be higher than previously expected.
One supportive development for South Korean LNG imports by year-end is the planned 0.75 Mtpa expansion of the Gwangyang import terminal, scheduled for completion in December. Since starting up in Q4 16, Gwangyang has ramped up quickly and has been an important source of incremental LNG demand in the last two years for the Korean market. The boost in capacity at Gwangyang from another storage tank, which is currently under construction, will provide some incremental demand upside in 2020.
|Fig 1: Coal-to-gas switching triggers, $/mmbtu||Fig 2: Korean LNG stock movement, Mt|
|Source: Kogas, Refinitiv, Energy Aspects||Source: JODI, Energy Aspects|