Coal restriction easing boosts South Korean coal market

Seoul has lifted voluntary restrictions across the state-owned Kepco coal fleet for the autumn period, boosting the demand outlook for spot coal in South Korea.

Concurrently, one of the state-owned utilities is reportedly affected by a force majeure declared by Russian producer Suek, after a fire hit its Vanino Daltransugol terminal this week, further tightening availability.

The South Korean government and state-owned utility Kepco reportedly came to an agreement on 14 October to lift voluntary restrictions across the country's coal-fired fleet, although they will still implement the seasonal fine-dust management measure during December-March, according to sources familiar with the matter.

Although gas remains competitive versus coal in the South Korean power sector currently as a result of the prevalence of oil indexation in state-owned Kogas' LNG import costs, firm gas demand has led Kepco utilities to become increasingly exposed to the spot LNG market and associated high prices, which has driven up costs, while the tight restrictions on coal-fired capacity have limited coal-switching flexibility. This has led to mounting pressure to ease the restrictions.

The government has not made an official announcement on the relaxation, but the latest plant maintenance schedule published by the Korea Power Exchange shows that the start date for coal-fired units that are currently under the voluntary restrictions was brought forward this week. Based on the current schedule, no coal units are scheduled to go off line for voluntary restrictions after 17 October, bringing average restrictions across the whole of October to 1.7GW, according to Argus analysis. By comparison, based on last week's schedule, around 4.5GW of Kepco's coal-fired capacity was scheduled to be unavailable in October.

October coal availability

Kepco's coal availability is now scheduled to average around 24GW in October, up from 22.9GW average availability based on last week's schedule.

This 1.1GW rise in coal availability is equivalent to 235,000t more NAR 6,000 kcal/kg coal burnt across the month in 40pc-efficient plants at an 80pc load factor, Argus calculations show.

The plant maintenance schedule is updated every week, but it is unlikely that the government will bring back the restrictions as utilities are already facing difficulties procuring coal amid frequent schedule changes, according to a source from the state-owned utilities.

Softer restrictions across Kepco's coal-fired units should lift utility spot coal demand, while one of the utilities was reportedly affected by the force majeure declaration at the Daltransugol terminal, tightening the outlook for spot market availability. The utility was scheduled to receive 155,000t of thermal coal from the Vanino port in October, but only 110,000t were loaded owing to disruption caused by a fire, according to a source familiar with the matter.

Fellow state-owned Korea Western Power (Kowepo) closed a five-year term tender today, procuring a Capesize cargo of NAR 5,800 kcal/kg at around $215/t fob Newcastle on a NAR 6,080 kcal/kg basis for January 2022 loading.

Argus assessed NAR 5,800 kcal/kg coal at $228.64/t cfr South Korea and $208.81/t fob Newcastle, up by $13.66/t and $22.90/t on the week, respectively.

Headwinds for Japanese coal demand outlook

Firmer spot demand expectations across the Asia-Pacific region, a market already buoyed by acute coal shortages in China and India, continued to boost implied landed prices for Japan this week.

Despite the regional strength, firmer nuclear availability and relatively competitive oil-indexed LNG prices are weighing on the demand outlook for coal-fired generation in Japan, although upside risks remain in the event of La Nina weather.

Japanese monthly nuclear availability is scheduled to increase by 4.4GW on the year to 7.8GW on average during October-March, while a 1.5GW year-on-year rise in nuclear availability dented coal-fired power generation by 317GWh in June, despite a 1.3TWh increase in overall power demand.

Combined coal and gas-fired output dropped by 776.3GWh on the year to 43.6TWh in June amid firmer nuclear availability, but oil-fired generation increased by 33pc, or 245.2GWh, on the year to 997.2GWh, as rallies in spot LNG prices incentivised gas-to-oil fuel switching.

Theoretical margins for the most economical 58pc-efficient gas-fired units in Japan averaged minus 11,158 yen/MWh during 8-14 October, based on Argus' des northeast Asia spot LNG assessment and the day-ahead system price from the Japan Electric Power Exchange.

By Evelyn Lee

Seven-day avg. Korean peak power demand GW

Weekly Kepco coal-fired availability GW

Japanese coal-fired generation GW

Seven-day avg Japanese power demand GW