2020 energy trends in Asia and what they mean for Australia
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Australia has long looked to Asia as a destination for its energy exports, both gas and coal; in 2020 several trends in the region are set to influence both exports and what price they fetch.
The overall picture is one of falling prices, as the cost to buy both thermal coal and LNG remain low, and the impact of a glut of chemicals manufactured from crude oil in China begins to flow backwards throughout the region.
However, strong demand for more electricity could be the making of Asian economies, and therefore also those which can deliver it, according to consultancy Wood Mackenzie.
Here are the trends it says you should be watching in Asia this year.
The price of thermal coal slumped to almost $US66 ($95) in late December, as “dirt cheap LNG” and strong renewables displacement of coal power in Europe drove down prices, says Wood Mackenzie head of thermal coal research Dale Hazelton.
But the low price is attracting buyers.
Australian thermal coal exports hit a record $26 billion in 2018-19, even though the Department of Industry expects this to fall to $18 billion in the current financial year as the impact of price falls offsets higher export volumes.
Minister for Resources and Northern Australia Matt Canavan said in August he believed India was likely to be a key buyer of Australian thermal coal.
This week Ame Research said India’s largest power generator, NTPC, had commissioned the first unit of the 800-megawatt (MW) Darlipali super thermal power project in Odisha, bringing the group’s total installed coal power capacity to 107,851MW.
The International Energy Agency is predicting coal demand to grow by 4.6 per cent a year in India, and by 5 per cent a year in southeast Asia, led by Indonesia and Vietnam, until 2024.
Wood Mackenzie’s Hazelton said demand within Asia remained strong throughout the year as China relaxed import restrictions, Vietnam doubled its imports, and Indian demand continued to rise.
However, he believes low LNG prices in 2020 will “keep a lid on coal prices and lead to production cuts”.
“We see a recovery in traditional coal markets. This sets the stage for supply to be over-cut throughout the first half of the year and, when LNG prices finally rise and winter restocking begins, coal prices could soar as they did in 2016.”
The LNG market has been oversupplied as fast growing Australia beat Qatar for the top exporting nation tag in 2019, and the US is moving equally quickly to get its once-locked in gas onto international markets.
Late last year, Asian LNG spot prices dipped below $6 per million British thermal units (MMBtu), according to data from Reuters.
This has translated into new demand for LNG as it’s become cheap enough for Japan to switch from coal and increase gas plant utilisation, says Wood Mackenzie Asia-Pacific head of markets and transitions Prakash Sharma.
“Meanwhile, LNG suppliers are looking to secure demand with innovative pricing models in an oversupplied market,” he said in a note.
“In April 2019, Tokyo Gas announced a 10-year agreement with Shell Eastern Trading for supply of 0.5 million tonnes per annum of LNG from 2020. The contract price is said to include coal indexation.
“We understand this is the first such LNG contract for supply to Japan. The new pricing mechanism improves LNG competitiveness in the power sector, and the trend is set to pick up in Asia next year.”
Low LNG prices could also spur India to restart stranded gas-fired power plants, in a bid to do something about the country’s appalling air pollution.
Wood Mackenzie gas and LNG research director for the region, Robert Sims, says some “influential Indian financial groups” who had outstanding loans to loss-making gas power plants were pushing the government to reintroduce subsidies for gas.
When subsidies were paid in 2015 and 2016 it boosted demand by 2 million tonnes per annum.
“If they are reintroduced, we would expect a similar demand increase,” Sims said. “And wouldn’t the global LNG market welcome that right now?”
China is the new bad boy of oil, and its impact will be felt in 2020.
The country has commissioned two mega crude-to-chemical refineries: the 400,00-barrels-of-oil-per-day (bopd) Hengli started in Liaoning province and the 200,000-bopd Zhejiang Petrochemical started in Zhejiang province.
This has made China self-sufficient in paraxylene-naphtha, important feedstocks for chemical manufacturing, which has reduced demand for imports from elsewhere in the region and therefore crude oil.
It has also turned China into the region’s largest gasoline exporter.
And while the maritime industry needs a massive ramp up in low-sulphur fuel to meet new fuel content rules, declining demand in the Atlantic may outweigh that.
“The net result will be the gasoline crack spread (gasoline price versus crude) in 2020 narrowing to some of the lowest levels seen over the past 15 years,” says Wood Mackenzie Asia Pacific oils and refining research director Sushant Gupta.
“In short, 2020 could therefore mark the beginning of a long-term trend of gasoline weakness as the impact of the energy transition hits home.”
Asian countries are set to dominate power demand growth rankings in 2020, driven by thriving economies.
South Korea will overtake Germany to become the world’s sixth largest power market, while China, India and Japan will retain their spots at numbers one, three and five respectively, says Wood Mackenzie Asia Pacific power and renewable research director, Alex Whitworth,
“Perhaps more striking is that China’s provinces now also feature amongst global rankings on an individual basis.
“We expect that eight of China’s provinces will rank in the top 20 power markets in the world by the end of 2020, led by Shandong which will move to eighth place ahead of Germany and other European countries.
“And it doesn’t end there. Indonesia and Vietnam will continue strong demand growth (benefiting from the US-China trade war) and will overtake Spain and Egypt respectively.”