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Even at US$100 for coal, Asia's LNG industry struggles to compete

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The liquefied natural gas (LNG) sector has watched with joy how thermal coal prices have soared this year, hoping that the unexpected spike would at last make LNG price competitive in Asia.

[SINGAPORE] The liquefied natural gas (LNG) sector has watched with joy how thermal coal prices have soared this year, hoping that the unexpected spike would at last make LNG price competitive in Asia.

Although much cleaner than coal in terms of pollution and carbon emissions, natural gas has struggled to make inroads in Asia's power generation mix since it is typically more expensive to produce electricity from gas than coal.

Despite an over 90 per cent coal price rally to almost US$100 a tonne, and even with relatively low LNG prices of US$6.50 per million British thermal units (mmBtu), versus US$20 per mmBtu in 2014, gas still can not compete with coal in Asia.

"Even though coal prices have reached $90 per tonne, it (LNG) is still not competitive," said Chong Zhi Xin, principal LNG analyst for Asia Pacific at energy consultancy Wood Mackenzie.

For Asian LNG to become competitive, Reuters calculations based on fuel and power generation costs show that coal - by far the fuel most widely used for electricity generation in Asia - needs to rise further from its current three-year highs, towards US$110 a tonne.

Coal prices are currently near that level. Pushed by a domestic mining operation cap in China, which forced its power generators to increase imports, prices for coal from Australia's Newcastle port soared by 95 per cent this year, to almost US$95 per tonne, in what has been one of the commodity's steepest rallies ever.

"2016 has delivered its fair share of commodity market surprises. But none have been more unexpected than the sharp recovery in coal prices," Olly Spinks and David Stokes of Timera Energy wrote in a note on Monday.

But a continuation of the rally, or even a sustained period of coal at current prices, is seen as unlikely.

Goldman Sachs said in a note this month that "risks are now skewed to the downside" for coal prices.

The coal price forward curve is already in deep backwardation, where cargoes for future delivery are cheaper than those for immediate loading, showing an over US$20 per tonne price fall between the fourth quarter of this year and the end of 2017, to little more than US$70 a tonne.

Coal futures for 2017 delivery are also much lower than prompt cargoes at US$66 per tonne.

"This is consistent with market expectations that some of the shorter term constraints of 2016 will ease into next year," Goldman said.

That would mean that LNG will continue to struggle to compete against coal on price alone.

REUTERS