Japanese LNG buyers expect a ban on Russian coal imports to have minimal impact on Japan's LNG demand, as utilities prioritise replacing lost coal volumes. But buyers will continue to monitor the situation from the sidelines.
The Japanese government on 8 April announced its plans to phase out and ultimately ban coal imports from Russia as part of a broader escalation of sanctions against the country for its actions in Ukraine and against Ukrainian civilians.
"We will have to assess the impact first and will take steps toward the Russian coal ban by securing alternatives," Japanese prime minister Fumio Kishida said on 8 April. He noted that Russian coal imports are crucial to Japan's power generation, as well as to the steel and cement industries.
But most Japanese buyers are not expecting a substantial increase in LNG demand to make up for a shortfall in coal receipts from Russia for now.
"Japan imports [rather] limited volumes of Russian coal… I doubt it would encourage us or other [utilities] to buy LNG straight away, especially at current prices," a Japanese buyer said.
The front half-month ANEA, the Argus assessment for spot LNG deliveries to northeast Asia, was last assessed at $25.93/mn Btu for second-half May deliveries on 19 April, $4.235/mn Btu lower than $30.165/mn Btu for first-half May deliveries on 12 April but significantly higher than the $8.180/mn Btu assessment for second-half May deliveries on 19 April 2021.
Russia accounted for about 11pc of Japan's total coal imports, or 14.1mn t, last year, according to government data. Most of the imports are for power generation needs from a handful of utilities, including Tohoku Electric, Hokoriku Electric and Hokkaido Electric, market participants said.
Several market participants shared a similar view that utilities with a large share of Russian coal in their energy mix would first try and source more coal from Australia or Indonesia. They also emphasised that switching from coal- to gas-fired power generation is not easy for utilities to do quickly, limiting the chances of them seeking LNG supplies to make up for the loss in coal supplies.
Many other market participants expect a reshuffling of trade flows following the ban, rather than an outright impact on demand for coal or alternative fuels to make up for the loss in coal imports.
"Russian coal is mostly mid-range, and it [would not be difficult] to find alternative sources to replace the volumes," an Australian producer said.
"I think as Japan [phases out] Russian coal, more Russian coal will find its way to China. China will soon see less incentive to import from Indonesia and Japan may then import [freed-up] Indonesian supplies," a trader said.
Some Japanese market participants suggest the timeline of the phase-out may be the deciding factor for whether Japan will need to source alternative fuels. Japan has yet to disclose the date of when the complete ban on Russian coal imports will take effect.
"I think if the phase-out is slow and lasts a few years, Japanese utilities can cope steadily and [arrange to buy] coal from other countries but if the Japanese government expects a complete ban in the next few months, Japanese utilities could seek some spot volumes to make up for the sudden shortfall without affecting downstream customers," a Japanese buyer said. "But I believe the former is more likely."
Curbing reliance on Russian supplies
Japanese LNG buyers also expect a minimal fallout from a government plan announced on 15 March to reduce reliance on Russian energy supplies in line with sanctions imposed by G7 countries against Russia.
Japanese buyers have so far avoided spot purchases of Russian LNG, but a number of firms have term offtake from the 9.6mn t/yr Sakhalin LNG project in Russia. These include Jera, Kyushu Electric, Tohoku Electric, Osaka Gas, Saibu Gas, Toho Gas and Tokyo Gas.
The firms have highlighted that they have a legal obligation to continue these term purchases despite the sanctions, based on their contracts with Sakhalin.
Buyers have also denied receiving any official instructions from the Japanese government to stock up on LNG reserves.
"We will not rush to try and replace Russian LNG volumes for now because the risk of overcommitment is much greater than the risk of Russian LNG supply actually being cut off," a Japanese buyer said.
Japan said on 1 April that it plans to keep its stakes in Russia's Sakhalin projects and the Arctic LNG 2 project to ensure energy security.
