Japan's Russian coal import ban to impact LNG, fuel oil procurements

Japan's abrupt announcement to phase-out and ultimately ban Russian coal imports will have a series of impact across commodities -- especially LNG and fuel oil as alternative supplies from its major sellers Australia and Indonesia grow tight, sources told S&P Global Commodity Insights April 11.

Market sources trading Indonesian and Australian coal said that replacing Russian coal with Indonesian or Australian alternatives may not be easy due to inelasticity of supply from these two countries and as new demand sources from Europe come to the fore.

Japan typically takes high-CV, low-ash coal from Russia, sources said.

Russia was the second-largest thermal coal supplier and third-largest coking coal supplier to Japan in 2021, when it supplied 12% and 8% of the country's total thermal coal and coking coal imports, according to the finance ministry data.

Japan's move to phase-out Russian coal imports would have an impact on local power utilities' LNG procurements, with some companies already moving to secure fuel oil, sources familiar with the matter said.

Japan will impose a ban on coal imports as part of additional sanctions against Russia following the latest commitment by leaders of the G-7 nations, Prime Minister Fumio Kishida said April 8, marking the country's first commitment to curb any commodity imports from Russia.

"We will reduce our dependency on Russia in the energy sector by reducing the [coal] imports in phases as well as quickly securing alternative solutions," Kishida told a press conference.

LNG impact

While Japan has not disclosed the timeline for the phase-out and ban of Russian coal imports, Japanese power utilities have started seeking alternative coal supplies, with some assessing impact on their LNG procurements, market sources said.

"If Japan were to completely replace their Russian thermal coal supply with LNG, it would add around 3 GW of additional gas fired power generation in 2022," said Jeff Moore, manager of LNG Analytics Asia at S&P Global.

"That said, there are questions around how fast Japan will phase out this supply, and it's likely that the supplies will be replaced by coal from other sources and potentially an uptick in LNG demand, as several utilities are currently importing below their contracted capacity."

If half of the Russian thermal coal supply were to be replaced by LNG, Moore said that Japanese LNG demand would increase by around 7 million cu m/d as they would require two-three more cargoes of LNG per month.

"However, this would likely mean Japan would have to compete for supplies which are currently heading to Europe as the continent is looking to use more LNG to help bolster inventories amid declining Russian pipeline supplies," he said.

A Japanese buyer of Russian thermal coal said that the company might see an impact on its LNG procurement from autumn onwards after having fulfilled their requirements until this summer.

For Japanese power utilities using oil-fired power generation, oil-fired power is more competitive than spot LNG for generation, Andre Lambine, senior analyst at S&P Global, said.

Taking a look at JERA and Tohoku Electric, for example, the power utilities used coal as preferred fuel in 2021, with average coal-fired power utilization rates of 79% and 76%, compared with 46% and 44% for gas, Lambine said.

The Platts JKM for May delivery reached $38.045/MMBtu on March 24, and has since been assessed lower between $30-$37/MMBtu on additional supply and lower prices in the Atlantic, as storage levels increase in Europe, according to S&P Global data.

The JKM for May delivery was assessed at $31.443/MMBtu on April 8, still significantly higher compared to the assessments on April 8 of 2021, 2020, and 2019 at $7.35/MMBtu, $2.4/MMBtu and 4.475/MMBtu, respectively.

Alternative supply

Looking at the impact on Japan's alternative coal procurements, traders said that the Japanese buyers could procure more of Australian coal as they anyway use the country's coal to meet most of their coal-fired power requirements.

However, the Australian coal is characterized by high-ash content which in some cases may not meet requirements of Japanese buyers, sources said.

"Australia is struggling to supply, and the 6,000 kcal/kg NAR from Australia is already well booked," a Singapore-based trader said.

The trader also said that a major producer in Australia of the grade may restrict supply of the grade to further lift its price.

The price of high-CV Newcastle coal has been elevated this year due to tight supply and new sources of demand. Australia has seen heavy rains impede production and at the same time demand from European buyers, in the aftermath of Russian invasion of Ukraine, has also pushed up prices.

Earlier in the year, export ban on Indonesian coal had also lifted Australian coal prices.

The benchmark price of North-East Asian Thermal coal has risen 68.4% since the start of the year to $231.56/mt CFR Kinuura, according to S&P Global data. The benchmark price is the delivery price to Kinuura in Japan of 5,750 kcal/kg NAR coal.

Japan imported 13.879 million mt of thermal coal from Russia in 2021, the second highest after Australia, which sent 81.669 million mt of volumes last year, accounting for 73% of the total thermal coal imports, according to the finance ministry data. Indonesian thermal coal imports totaled 10.010 million mt, or 9% of the total imports, in 2021.

Japan's Russian coking coal imports stood at 5.855 million mt, or 8% of the total imports, in 2021 after its imports of 37.787 million mt from Australia and 12.619 million mt from Indonesia, accounting for 54% and 18% of the total imports respectively, according to the data from the finance ministry.