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Wood Mackenzie: China could overtake Japan as top LNG importer by 2022

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LNG Industry,

Wood Mackenzie has released a new report which claims Japan could be dethroned by China as the world’s top LNG importer as early as 2022.

By 2022, Wood Mackenzie claims LNG imports in Japan are expected to fall by 12% from 2018 to 72.8 million tpy. In China, meanwhile, import volumes are expected to rise by 37.5% to 74.1 million tpy. Nonetheless, the consultancy goes on to say that, despite losing its leadership position, Japanese buyers will continue to have a leading role in contracting innovation with developments such as hybrid deals, coal indexation, joint procurement and carbon neutral cargoes. As a number of long-term contracts wind down from the early 2020s, and with gas and power market liberalisation underway, this innovation will provide purchasers with more leverage and opportunities in future contracting talks.

Meanwhile, the consultancy adds that ensuring security of supply through diversity of supply sources will remain a primary concern. Japanese buyers are expected to continue leading the market in sourcing LNG from new supply regions.

Senior analyst Lucy Cullen said: “While LNG demand is declining, Japanese imports will remain above 70 million tpy through much of the 2020s. It will remain the second largest LNG consumer in the world until at least 2040, with demand still exceeding 60 million tpy. As such Japan still provides ample opportunities for LNG sellers, particularly as existing contracts expire.

“The decline in Japanese imports will be driven by competition from coal, nuclear and renewables in the power sector and slow macroeconomic growth.”

In the statement, Wood Mackenzie claims Japan is an outlier as a developed power market that has still prioritised the construction of new coal capacity. Opinions on coal within the country vary significantly with pro-coal policy targets at odds with both public sentiment and corporate and investment activities.

Despite sustained low LNG spot prices, the consultancy claims that Japan’s electricity market does not favour switching from coal to gas on a wide scale. The country remains well-contracted in LNG to the early 2020s as US and Australian supplies begin to ramp-up. As a consequence, the consultancy claims that the average price of gas for Japanese utilities remains well above spot price, and coal is still the cheapest form of electricity generation after nuclear and renewables on a short-run marginal cost basis.

Under Japan’s 5th Strategic Energy Plan (2018), the country’s government is planning to reduce its gas and coal generation (down to 27% and 26% shares, respectively) and offset with greater low-carbon nuclear and renewable generation.

Cullen added: “The tide appears to be turning with increasing restrictions on financing and building coal. As such, we expect this policy target and such a robust share of coal in the generation mix will be increasingly difficult to sustain. This would improve the outlook for LNG.”

In terms of the nuclear industry, Japan restarted five plants alone last year.

With the next batch of restarts planned for mid-2020 and 2021, this will place downward pressure on LNG import requirements in the early 2020s. However, Wood Mackenzie adds that nuclear outages continue to be a risk in this period if anti-terrorism measures are not met on time.

Cullen said: “We assume 15 reactors will be back online by 2030, accounting for 12% of power generation, much lower than the official target of 20 – 22%. While nuclear restarts generally dampen gas generation, our lower nuclear number implies a more optimistic view of LNG demand compared to the government.”

In line with its vision of a low-carbon future, the consultancy claims Japan is also targeting 22 – 24% of its 2030 generation mix to come from renewables (including hydro). While Wood Mackenzie forecasts aggressive additions of wind and solar capacities, further investment will also be needed on power grid infrastructure in order to handle this level of renewable generation.

Cullen concluded: “Japan will just miss its ambitious 2030 target with renewable generation (including hydro) comprising just over 20% of the 2030 mix.”

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