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Japan demand to push Asia LNG prices up

Due to nuclear shutdowns, Japan started buying cargoes from South America for the first time

Asian liquefied natural gas (LNG) prices climbed this week, spurred by Japan, which started buying cargoes from South America for the first time, indicating tightness in the market.

Trader said Japanese nuclear shutdowns are likely to push Asian spot LNG prices above $13/million British thermal units (Btu) ahead of summer, with Japan’s nuclear fleet utilisation slipping to a three-year low and pointing toward more LNG imports to meet electricity demand.

“Some quotes are already $13/million Btu, but this level is closer to the sellers’ price. Probably the next physical cargo deals will be done above the $13/million Btu level,” an LNG trader said. “Sellers are quite bullish, because unaffected Japanese power producers are in trouble.”

Spot cargoes were sold in the upper range of $12/million Btu in Asia over the past week, traders said.

The utilisation rates of Japan's nuclear power plants fell to a three-year low of 50.9% in April, the industry group Federation of Electric Power Companies in Japan said. Immediate improvements in the rate are unlikely as restarts of nuclear units, which have been shut for routine inspections, are likely to delayed.

To make up for the loss in nuclear power capacity, for the first time, Japan imported a cargo of LNG from Hunt Oil-operated Peru LNG project this week.

Delayed response

The buyer was Tokyo Electric Power (Tepco) and it used an existing time-swap deal with Korea Gas (Kogas), traders said. This means the Japanese utility is to return an equivalent volume to Kogas in the autumn, when South Korean heating demand typically picks up. The swap deal was done in April, when market was at around $10/million Btu, traders said.

The trader also said the market turned bullish in a delayed response to the shutdown of Chubu Electric Power’s Hamaoka nuclear power plant for safety inspections. Japanese prime minister Naoto Kan requested the nuclear plant – which lies on a major fault line – be shut until its earthquake and tsunami defences are strenghtened.

More diverted LNG cargoes from the Americas may join those from regular suppliers to Japan. With US Henry Hub gas prices flat at around $4.2/million Btu, a rare re-exported LNG cargo from the US is to be delivered to Osaka Gas's Senboku terminal, according to media reports.

Investment bank Barclays Capital (BarCap) said the demand from Japan could lead to a tight market by the end of this year.

"LNG output should be able to meet global needs in 2011; but the market is notably tighter than expected," BarCap said in a research note. "We see risks for supply tightness at the end of 2011. The balance of liquefaction and regasification capacity additions in 2012 suggests the market is heading for further tightening next year."

Meanwhile, Taiwan’s CPC has signed an agreement to secure 2 million tonnes of LNG from Shell for 20 years from 2016, the supermajor said. The deal is not connected to supplies source from a specific project.

The deal followed the similar agreement struck earlier in May between Japan’s Chubu and BG Group to buy 122 cargoes over 24 years from 2014, which again was not connected to a specific development. 

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