From energy prices to energy supply
Despite lower dependence on Russian energy supplies, Asia won’t be spared from the winter energy crisis. Vulnerabilities stem from higher import dependence, which has been felt so far in higher fuel prices taking the headline inflation in the region to fresh highs. This has taken a heavy toll on the emerging and frontier markets, such as Sri Lanka, Bangladesh and Pakistan which have been pushed to the brink of a collapse.
The next and the more severe risk is seen from shortage of energy supplies to Asia which raises the risk of blackouts, manufacturing halts, involuntary demand destruction, calculated energy rationing, depleting forex reserves and market volatility. The shortage of gas supplies in Europe from Russia is switching demand to LNG and dictating global spot LNG prices. Asia is losing LNG cargoes to Europe in a bidding war, and inflows to Asia are expected to drop for the rest of the year. The countries most exposed in Asia from the global shortage of energy supplies are Japan, China and South Korea. The International Energy Agency (IEA), which has forecast that Asian economies will account for almost half of global gas consumption to 2025, expects LNG to play a pivotal role in meeting rising gas demand in Asia.
LNG bidding wars: Asia vs. Europe
Asian spot LNG prices for the summer of 2022 are at their highest level on record, about 7x the average price in 2017-2021. India and China have posted some of the largest declines in LNG imports as the spot LNG inflows have largely evaporated. China's LNG imports in the first six months of 2022 are down more than 20% year on year, while India's spot LNG imports are down around 14% year on year. Japan and South Korea are also seeing declining LNG imports. Global exports have risen by just over 10 million tonnes to 234.83 million in the first seven months, even as LNG producers try to maximise output and minimise outages.
Strategic shifts remain likely
Much of the energy pain has been priced in for Europe, a lot may well be in store for EM assets. Meanwhile, there are reports that natural gas inventory levels in Europe are reaching near 80% capacity targets. LNG terminals in Poland may be coming online, and more countries like Germany itself may add LNG capacity as well. So even as Europe may survive the energy crisis, the same is hard to say for the weaker emerging markets.
Demand destruction is possibly the only way forward in Europe and Asia. Several provinces and cities in China have issued plans for "orderly" electricity consumption in 2022 to prepare for the risk of insufficient power supply in peak summer, and Chinese Premier Li Keqiang has repeatedly called for maximizing domestic coal production and energy supply from all sources.
In the medium-to-long term, the lack of fuel supply will pose a serious threat to EM fundamental factors as it may slow down urbanization and improvements in living standards. This suggests investments in LNG infrastructure will likely ramp up to counter that threat, especially in China which remains committed to LNG use. Meanwhile, Japan’s new strategic energy plan to 2030 envisions the share of LNG in the power mix to fall to 20% by 2030 from the current 37%.
This means Asia will also diversify its energy sources and shift towards broader energy dependence on a variety of sources including the traditional coal and the renewable sources such as solar, hydro, wind, hydrogen etc. Japan’s re-embrace of nuclear is a first step towards more such measures to come in the region.