Liquified Natural Gas (LNG) prices in Asia have surged 50% so far this month, hitting a series of record levels this week as China battled more problems with drought and European gas prices were sent soaring because of a looming shortage of supplies from Russia.
The price surge to successive records in Asia on Wednesday and Thursday came as the Chinese government finally revealed a $US146 billion plan to boost activity in the infrastructure sector which has been hurt by the continuing slide in property, which in turn chopped demand for steel and concrete in the past two months.
The move was first floated six weeks ago and disappeared while the central bank, government and banks argued over the details.
China’s State Council, China’s outlined a 19-point policy package this week, including another 300 billion yuan that state policy banks can invest in infrastructure projects, on top of 300 billion yuan already revealed at the end of June. Local governments will be allocated 500 billion yuan of special bonds from previously unused quotas.
In reality, the only new money is the 300 billion yuan (or $US44 billion) from the state banks – an idea that was also leaked six weeks ago, then allowed to fade.
The announcement bore no relation to the most serious problem in China at the moment – the expanding drought in the southwest and centre of the country that is threatening crop yields and the all-important autumn grain harvest.
The worsening drought is adding pressures on China’s delicate energy supply situation. At the same time the strained gas supply situation in Europe, Russian threats to cut supplies and a shortage of coal across Asia is an extra worry and has breathed new life into gas prices in Europe and Asia.
European prices are at record levels and in Asia, they have bounced from $US48 a million British thermal units (mBtu’s) at the start of this month to just over $US58 a mBtu’s on Tuesday and then $US68.135 cents a mBtus on Thursday, before surging further to $US72.945 a mBtu, the highest ever recorded on the Nymex JKM LNG futures market.
The surge in prices reflects the shortage of gas globally and the high prices will not help Australian producers such as Woodside, Santos, Shell or others (Chevron) because much of their production is already committed to contracts and any extras has long been sold.
Uniper, the troubled German gas company has even suggested swapping its US LNG purchases with Woodside’s to get the US gas to Germany faster than it would if it bought directly from Australia.
Woodside sells one million tonnes a year of LNG to Uniper and that is expected to double by 2026 under a contract signed at the start of 2021.
As the same time the price of Australian thermal coal remained over $US400 a tonne, down a fraction from the near record $US440 a tonne hit earlier in the week. That has boosted returns for Whitehaven, Yancoal, BHP and other producers which as Glencore which doesn’t open up its Australian operations.
Even though drought is crippling activity across the southwest of China, along the Yangtze River Basin, its impact is broader, forcing more coal to be mined and burned in power stations to replace supplies lost via the suspension of production from hydroelectric plants in Sichuan and nearby areas.
There are around 70 days to the start of China’s autumn grain harvest (mostly wheat, rice, corn and pulses) and there are rising fears it will fall short of planned because of falling yields due to the drought which is now 75 days long.
August and September are the critical months for grain development and yield determination. This month has been hot and dry and the forecast for September not much better.
The Yangtze River basin is one of the major grain-producing regions in China, contributing nearly half of the country’s crop output, including over two-thirds of the total rice production.
The drought is worst in Sichuan, home to 94 million people. It provides hydroelectricity for itself with the surplus being sent to other parts of China as a top up.
The hydropower shortage has affected dozens of cities in the east of the country, including Shanghai where outdoor lights have been turned off and businesses such as car plants by Tesla and SAIC have been shut because of component shortages.
To ease the power crunch, China has been boosting coal output and imports to generate electricity.
Nationwide, power plants burnt 8.16 million tonnes of thermal coal a day in the first two weeks of August, up 15% from a year ago (when the country was first encountering rationing and rolling blackouts).
According to most recent data from the National Development and Reform Commission daily thermal coal consumption hit a record high of 8.5 million tonnes on August 3.
The drought has made China more reliant on coal for power than it was last year. In July, electricity generated from coal increased 22% from June, accounting for 69% of the total. Last year, coal-fired power made up 67.4% of China’s electricity supply.
Coal output during the first seven months rose 11.5% to 2.65 billion tonnes compared with the same period of the previous year. China says it currently has adequate stocks of thermal coal, a record 170 million tonnes – that can last 23 days.
China imported 23.52 million tons of coal in July, (up 23.9% from June) after months of weak or falling imports.
Crude oil and gas output rose during the first seven months. Crude output rose 3.7%year-on-year to 120 million tons while that for natural gas was up 5.4% at 126.7 billion cubic meters.
China is importing coal from Russia, Indonesia and Mongolia at prices well below the Newcastle ICE levels of more than $US400 a tonne. Indonesia prices were around $US75 a tonne this week but that coal is low quality, 4,600 kilocalories of energy against 6,000 for Australian thermal coal from Newcastle of Central Queensland.
Indonesia also supplies India and several other Asian countries and yet they can’t get prices of the sort Australia has been seeing.
Before February’s invasion of Ukraine, Indonesian coal was at $US77 a tonne, a discount of 67.6% to then $US237.70 a tonne futures price for Newcastle coal. That gap has now widened more than 80%.
China has banned Australian coal and has been supporting Russia by buying its coal at huge discounts. Australia has major customers for its thermal coal in Asia in the shape of Japan, South Korea and Taiwan who have dropped Russia as a supplier and won’t buy Indonesian coal because it is too weak and causes too much pollution.
India has huge reserves and production, but can’t mine enough to guarantee energy security. Nor can Indonesia without a domestic supply reservation system of 25% imposed on all exporters.
