Keeping Europe warm this winter will depend on Asian weather

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(Bloomberg) – As it weans itself off Russian fuel and races to get enough natural gas and coal, Europe’s quest to stay warm this winter will hinge heavily on three nations halfway around the world : Japan, South Korea and China.

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Asian countries, among the world’s largest importers of liquefied natural gas and marine coal, all share with Europe a season of peak heating demand during the winter. It’s still too early for meteorologists to make an accurate prediction of winter weather conditions, but any forecast of sharp temperature drops in the three countries could trigger a more intense fight over cargoes.

International competition for fuel has intensified since Russia’s invasion of Ukraine disrupted global trade flows, helping to push coal and natural gas prices to record highs. In Europe, the pressure is about to tighten. The European Commission will implement a total ban on Russian coal from next week, while Gazprom PJSC has reduced pipeline flows to Europe. Russia has always been the largest gas supplier to the European Union, covering around 40% of demand.

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“Weather is of course a wild card, especially for Japan and Korea,” said BloombergNEF analyst Abhishek Rohatgi. “A colder-than-normal winter could drive prices up if Russian supplies to Europe remain low, as it will be very difficult to find additional spot cargoes.”

European nations are rushing to prepare for winter, cutting gas consumption and increasing LNG imports to fill storage caverns, and also restarting mothballed coal plants. So far, they have received a helping hand from Asia: China has reduced its imports of coal and LNG after increasing domestic production, and is also suffering an economic slowdown due to virus blockages.

All three Asian countries produced more energy from renewable sources. Japan and South Korea set records for solar power in May, while China burned less coal in the first half of the year as clean sources such as hydro increased.

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Even so, additional purchases from Europe have driven LNG and spot coal costs to record highs this year. Developing countries like Bangladesh and Pakistan are already suffering daily blackouts because they cannot afford cargo that could keep the lights on.

The competition could become even fiercer as winter approaches. Once Japan and South Korea start building their gas stocks, the LNG spot market could see more buying from those countries, according to BloombergNEF. Japanese coal stocks are also extremely low, and both countries will need to increase purchases of power plant fuel towards the end of the year.

“Coal shipments — especially high-energy ones used by Japan and Korea — are in high demand and mostly outsourced,” BloombergNEF analyst Ali Asghar said. “Japan and Korea will fight with Europe for most spot cargoes.”

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China is in a more comfortable position. Record coal production combined with subdued electricity demand left inventories at their highest level ever at mid-year. And even as Russia cuts pipeline gas supplies to Europe, it is increasing flows on a new line to eastern China, helping to maintain ample supplies despite falling LNG imports.

“In the event of a very cold winter, Japan and South Korea will likely need additional one-off cargoes, in which case they will likely be able to compete with European buyers,” said Xizhou Zhou, global head of energy and renewables. at IHS Markit. “China, on the other hand, would likely use more domestic coal.”