WoodMac: China to overtake Japan as top LNG importer by 2022

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

WoodMac said on Tuesday that Japan’s LNG imports in 2022 are expected to decline 12 percent to 72.8 mmtpa compared to 2018, while China’s import volume rises 37.5 percent to 74.1 mmtpa.

The consultancy firm added that Japanese buyers would continue to take the 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 liberalization underway, this innovation will provide buyers more leverage and opportunities in future contracting discussions, WoodMac said.

Meanwhile, ensuring the security of supply through the diversity of supply sources will remain a primary concern. As a result, Japanese buyers should continue to lead the market in sourcing LNG from new supply regions.

Senior analyst Lucy Cullen stated, “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.

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

Despite sustained low LNG spot prices, Japan’s electricity market does not favor coal to gas switching on a wide scale. The country remains well-contracted in LNG to the early 2020s as U.S. and Australian supplies ramp-up.

In turn, 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.

The Japanese government has set a goal to decrease gas and coal generation to 27 and 26 percent 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. This would improve the outlook for LNG,” added Cullen.

On the nuclear front, Japan restarted five plants in 2018 alone. With restarts scheduled for the mid-2020 and 2021, this will put pressure on LNG import requirements in the early 2020s.

Some 15 reactors will be back online by 2030, accounting for 12 percent of power generation, much lower than the official target of 20-22 percent. In line with its pursuit of a low-carbon future, Japan is also targeting 22-24 percent of its 2030 generation mix to come from renewables including hydro.

Cullen also estimated that Japan would miss its ambitious 2030 target with renewable generation comprising just over 20 percent of the 2030 mix.