Coal gets Asia boost as LNG proves risky

SINGAPORE: Coal’s trading flexibility and its huge reserves in Asia Pacific are polishing the allure of the dirty fuel for regional consumers, as recent gas output outages and scarce spot supplies create energy security concerns.
The soaring cost of natural gas has prompted growing consumers such as China and India to slow plans for using more of the cleaner fuel, effectively setting aside environmental goals.
Disruptions this winter to Russian gas exports to Europe and a frantic search for extra liquefied natural gas (LNG) in North Asia reaffirmed reservations about long-term import commitments.
“Everyone thought the future was gas but the price has not come down and the flexibility on supplies has not been there. Government policy is emphasising coal,” said Bishal Thapa of ICF Consulting in New Delhi.
Other Asian countries such as Pakistan and Thailand, hurt by the high cost of oil imports, are set to boost coal for power this decade, while major importers Japan and South Korea will maintain coal as a key part of their electricity generation mix.
Japanese firms may pay less for thermal coal this year, after a two-year price rally that still lagged gas, for which Asia will be heavily dependent on Middle Eastern and Russian supplies. Asia Pacific holds 8% of global natural gas reserves, but about a third of proven recoverable coal reserves.
“Most major electricity producers in Asia have the capacity to switch fuels according to availability, and given a shortage of natural gas/LNG, the majority would see coal in preference to oil,” said Gerard Burg, economist at the National Australia Bank.
“Coal is a more flexible fuel (than gas) from the point of view of an established spot market.”
Spot coal prices are based around Atlantic and Pacific markets, and a plethora of regional producers led by top exporter Australia, as well as the possibility of imports from the Atlantic market, gives plenty of supply reassurance, experts say.
Chinese thermal coal rallied to a record high in the past month, though a resulting premium against benchmark Australian prices meant imports from other suppliers such as Vietnam or Indonesia would be easier than obtaining scarce spot LNG.
The LNG price spike is deterring construction of planned gas import terminals for China’s booming east, while almost 90% of an expected 80 gigawatts of new power generation in China this year will be coal-fired, state media said.
“It may mean China can’t reduce the contribution of coal-fired plants as originally estimated,” said Joseph Jacobelli, analyst at Merrill Lynch. “Other countries that have started a love affair with coal are Thailand and Malaysia.”
Thailand is racing to build power capacity, with coal exporter Banpu building a new plant this year and investing in more around Asia. Malaysia is the world’s number two LNG exporter, but is building two coal plants for power.
“It’s for security of supply, as Malaysia will end up needing gas imports. Eighty percent dependency on gas is too high,” said a manager at a Malaysian fuel supply firm. “It’s also for shipping flexibility – LNG is like a marriage.”
The growth in coal demand from developing Asia is expected to outstrip industrialised North Asia.
“The old Asian coal consumers such as Japan, Taiwan and South Korea have added only lacklustre demand and imports growth, despite nuclear problems in Japan,” said Alexandre Kervinio of SG Commodities.
While more infrastructure, such as railways and ports, is needed to support coal in developing Asia – $200bn in the next 25 years according to International Energy Agency figures – this is just half the sum needed for gas.
These higher infrastructure costs mean gas producers look to sell long-term ahead of development, resulting in a lack of spare cargoes and spot prices higher than Asian consumers want to pay.
Pakistan is pushing ahead with its first LNG terminal despite lacking a supply deal. But it also has large coal reserves and is aiming to boost domestic production.
India already imports LNG but high prices have left Royal Dutch Shell’s terminal underused. Plans to build three gas pipelines from Iran via Pakistan, Myanmar or Turkmenistan also remain hostage to geopolitics.
“The flip side is the environment – compensating for emissions,” said Thapa.
Asia-Pacific countries other than Japan are not bound by limits to cut greenhouse gases under the UN Kyoto Protocol, unlike the European Union, giving them the flexibility to use the dirtier fuel even if this contradicts environmental goals.
Countries hope to trap carbon dioxide emissions from coal plants and pump them underground. In China, Shell’s coal gasification plant will come online this year, the first in Asia, while a “demonstration” coal-to-oil plant is planned for 2008. – Reuters