Global LNG Fundamentals

Published at 09:34 27 Nov 2015 by . Last edited 09:30 20 Apr 2016.

In October, LNG demand generally improved in Northeast Asia. Chinese LNG imports rose y/y by 0.22 Mt (16%), while South Korean takes increased y/y by 0.25 Mt (9%). The weak spot remains Japan, where imported volumes were down again y/y, falling by 0.89 Mt (-13%). India also saw some improvement in demand, with PPAC numbers indicating imports were up by 0.23 Mt (19%) over the month.

Despite last month’s increase in imports, Chinese demand has been weak this year, with cumulative takes down by around 0.37 Mt (-2%) y/y. Weak demand has been partly the result of El Niño conditions producing mild weather, and the continued expansion of Chinese renewable capacity. One bullish factor for gas was China’s National Development and Reform Commission’s (NDRC) decision to cut benchmark city gate gas prices for non-residential customers by almost 30%—from 2.5 RMB (about 11.2 $/mmbtu) to 1.8 RMB (8.1 $/mmbtu). Given the revision to prices, we are cautiously optimistic demand will improve y/y in China. We expect demand to be up by 0.6 Mt over Q4 15 and Q1 16, with support to the upside if a cold winter materialises.

The slow recovery of nuclear power in conjunction with mild weather has eaten into Japanese LNG demand. However, no other plants are likely to come online before H2 16, so nuclear generation is unlikely to see more growth in the near term. We continue to assume one more unit comes online in October 2016 and another in January 2017. This year we forecast imports will be down by 2.7 Mt as mild weather is likely to persist.

Despite total gas demand falling y/y, South Korean LNG imports were up y/y in October. Overall, the South Korean demand story has been similar to Japan, with nuclear restarts and mild weather limiting the country’s appetite for the liquefied fuel. In addition, gas-fired generation remains uncompetitive against coal.

Indian LNG imports rose in October as the country experienced hotter than average weather. Indian power demand has soared in the past few months, and increased by 8.3 TWh (9%) to a record high of 98.5 TWh in October. Although the hot weather likely contributed to the strong demand, the growth looks more due to increased usable power capacity meeting strong underlying demand. Most of the upside to gas demand will come from infrastructure improvements set in 2016. We see LNG imports increasing y/y by 1.1 Mt in 2016.

In Latin America, August LNG imports were weaker y/y by 0.14 Mt (-8%) at 1.55 Mt. Mexico accounted for the majority of the decline, with imports down by 0.27 Mt (-42%) y/y. Brazilian imports were also weak, lower y/y by around 0.08 Mt (-23%). Imports in Chile and Argentina were strong, up y/y by 0.03 Mt (14%) and 0.19 Mt (54%), respectively.

Despite some regionally higher LNG demand last month (in particular, China and Korea), we still see the overall global gas market as lacking sufficient hunger for LNG at current price levels. Over the next two years, Japanese and Korean demand will continue to face headwinds from renewables and nuclear capacity. China and India both have more convincing demand stories, although a number of structural issues need to be overcome for demand growth to be realised. With demand looking frail in Latin America, it will be up to Europe to absorb much of the wave of cargoes that hit the water over the next few years.

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