Wood Mackenzie : Japan to lose top LNG importer position to China by 2022

According to a new report by Wood Mackenzie, Japan could lose its position as the world’s top LNG importer to China as early as 2022.

By 2020 LNG imports in Japan are expected to decline 12% to 72.8 million tonnes per annum (mmtpa) compared to 2018, while China’s import volume rises 37.5% to 74.1 mmtpa according to Wood Mackenzie.

Wood Mackenzie believes Japanese buyers will continue to take a lead in contracting innovation with developments such as hybrid deals, coal indexation, joint procurement and carbon neutral cargoes. As several long-term contracts wind down from the early 2020s and with gas and power market liberalisation underway, this innovation will provide buyers more leverage and opportunities in future contracting discussions.

“While LNG demand is declining, Japanese imports will remain above 70 mmtpa 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 mmtpa. As such Japan still provides ample opportunities for LNG sellers, particularly as existing contracts expire,” said senior analyst Lucy Cullen. “The decline in Japanese imports will be driven by competition from coal, nuclear and renewables in the power sector and slow macroeconomic growth,” added Cullen.

Despite sustained low LNG spot prices, Japan’s electricity market does not favor coal to gas switching on a wide scale according to Wood Mackenzie. Japan remains well-contracted in LNG to the early 2020s as US and Australian supplies ramp-up. As a result, the average cost 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 government aims to decrease gas and coal generation (down to 27% and 26% shares, respectively) and offset with greater low-carbon nuclear and renewable generation.

“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,” noted Cullen.

On the nuclear front, Japan restarted five plants in 2018 alone. With next restarts scheduled for the mid-2020 and 2021, this will put downward pressure on LNG import requirements in the early 2020s. Although nuclear outages remain a risk in this period if anti-terrorism measures are not met on time.