Amidst strong electricity demand rising across economies due to the post-pandemic industrial recoveries and upcoming winter season, Europe has been struck by LNG shortage making it switch to cleaner sources of energy.
What has led to the LNG crisis in Europe?
Following the record fall in LNG prices last year and drop in power demand due to Covid-19, LNG producers slashed their production and reduced shipments. LNG exporters like Russia also had cut down on exports in order to keep more gas for domestic use during winter.
LNG inventories at European storage facilities currently are reportedly at their historical low levels this year as pipeline flows from Russia and Norway have been limited.
According to market experts, the natural gas crisis is set to intensify further in the upcoming days as the winter heating season approaches, with insufficient inventory to keep pace with the current demand.
This has come after Europe became increasingly dependent on intermittent sources of energy such as wind and solar while investments in thermal coal projects declined.
Clean environmental policy further pushed some European countries to shut their coal and nuclear facilities, reducing the number of power plants that could serve as back-up in times of shortages.
The sharp rise in global gas prices of 28% in a span of just one month in September has already forced many industrial units in Europe to cut their output, and forced commoners to queue up at gas stations.
Why are global thermal coal prices rallying?
Thermal coal has come under the spotlight amid global LNG shortage and price surge as economies using coal and gas alternatively for power generation have now turned to thermal coal. This has made global thermal coal prices shoot up by an average 35% m-o-m in September.
LNG is a cleaner but costlier alternative fuel to coal which is used widely across European and Asian countries.
In Asia, the world’s biggest economy, China’s LNG imports have almost doubled since last year but is still not sufficient to meets its energy demand making utilities procure coal.
However, the country is not getting required supplies of coal amid its ongoing ban on Australian coal imports coupled with domestic coal shortage making it opt for imported coal from Indonesia, South Africa in bulk quantities ahead of the winter season.
The situation is so grave in China that the country’s energy ministry has asked state-owned energy companies to get hold of supplies at all costs, making various origin coal prices shoot up.
Meanwhile, utilities in Japan and South Korea are largely supported by long-term LNG contracts that are indexed to oil. However, as a precaution, Korea Electric Power Co last week said that it will increase electricity prices for the first time in almost eight years.
Outlook
LNG shipments from exporters such as Qatar, Trinidad and Tobago, and the US are likely to remain limited on Covid-19-related project delays and the global energy sector’s preference for greener energy supplies. This has already slowed investment in LNG infrastructure. Subsequently, LNG supplies would remain short, keeping coal demand elevated and any correction in global thermal coal prices improbable till Dec’21.
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