Coal has dominated as the fuel of choice in Asia, even in the gas-centric power markets of southeast Asia since 2010 but downward pressure on gas prices as well as individual market conditions in Asia are creating conditions in which it might compete with coal in the region.
Wood Mackenzie research director for Asia gas and power Graham Tyler said: “While gas-coal competition is more commonplace in the US and Europe, in Asia, this is a new dynamic as coal and gas prices have not been at close enough levels for this to be a consideration.
“Spot LNG prices have fallen to around US$7 per million British thermal units in recent months and we do not forecast any sustained price recovery above $US10/MMBtu with over a 100 million tonnes per annum of new LNG expected to be operational by 2020.
“This looming supply glut will create an environment where coal versus gas competition in Asia is a real possibility.”
Asia’s near-term gas demand growth is slowing, primarily due to a weaker economic growth and structural changes in the key market of China.
Wood Mackenzie research director for Asia coal markets Prakash Sharma said: “Benchmark thermal coal prices in the seaborne market are trading below the marginal cost of supply for many producers, and therefore are unlikely to fall significantly lower in the future.
“Coal prices are sitting at multi-year lows due to several factors including weakening demand and domestic protectionism in China. Delivered thermal coal prices have fallen from a peak of around $US110 per tonne in 2012 to below $US80/t in recent months already and historically, coal prices only fluctuated within a narrow band of $US2-4/MMBtu.”
Currently coal accounts for half of all power generation across Asia, while gas only accounts for 11%. However with coal prices not expected to fall more dramatically and gas prices expected to see renewed softening after this summer, Wood Mackenzie said the price differential between gas and coal will be one to watch.
Tyler said: “The price differential is key but there is not one single price across Asia at which gas will compete with coal. Instead, environmental initiatives and individual market influencers will determine the points at which the scales will tip in favour to gas.
“This is because Asia is not a singular gas market. Rather, it is a diverse range of markets with differing characteristics such as levels of economic development, fuel resources, market structures and government policies. The power markets are also discrete and have different dynamics even within some countries. Consequently, the factors that set the price at which gas will compete with coal differs between each market.”
Asia’s strong long term economic growth will see power demand growth average 5% a year through to 2030, which will require over 2000 gigawatts of additional power generation capacity to be built between now and then. With gas prices set to remain soft and increasing environmental pressures, its likely gas will account for a higher proportion of this new power generation, according to Wood Mackenzie.
As long as gas prices remain low, industry players need to continue to watch for individual market influencers to see where the most upside for gas may emerge.
