Keeping Europe warm this winter will come down to Asia’s weather

As it turns away from Russian fuel and races to get enough natural gas and coal, Europe’s quest to stay warm this winter will depend heavily on three countries on the other side of the world: Japan, South Korea and China.

The Asian countries, one of the world’s largest importers of liquefied natural gas and sea coal, all have a seasonal winter heating peak with Europe. It’s too early for meteorologists to make accurate predictions for winter weather patterns, but any prediction of steep temperature drops across the three countries could spark a more intense battle for payloads.

International competition for fuel has intensified since the Russian invasion of Ukraine rocked global trade flows, pushing coal and natural gas prices to record levels. In Europe, the pressure is about to tighten. The European Commission will introduce a complete ban on Russian coal from next week, while Gazprom PJSC has reduced gas flows in pipelines to Europe. Russia has traditionally been the largest gas supplier to the European Union, covering about 40% of the demand.

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

European countries are rushing to prepare for winter, cutting gas consumption and boosting LNG imports to fill storage caverns, as well as restarting shut down coal plants. They’ve gotten a helping hand from Asia so far: China has cut coal and LNG imports after boosting domestic production, and is also suffering an economic slowdown due to virus lockdowns.

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

Still, additional purchases from Europe have pushed the cost of spot LNG and coal to record highs this year. Developing countries such as Bangladesh and Pakistan are already experiencing daily power cuts because they cannot afford to pay charges that could keep the lights on.

In the winter, the competition can get even fiercer. Once Japan and South Korea start building their gas reserves, the spot LNG market may see more purchases from those countries, according to BloombergNEF. Japan’s coal reserves are also extremely low, and the two countries will need to ramp up purchases of the fuel for the power plant by the end of the year.

“Charges of coal — especially the high-energy coal used by Japan and Korea — are in high demand and are mostly outsourced,” said BloombergNEF analyst Ali Asghar. “Japan and Korea will compete with Europe for the most spot charges.”

China is in a more comfortable position. Record production of coal, coupled with subdued electricity demand, pushed inventories to their all-time highs mid-year. And even as Russia cuts pipeline gas to Europe, it is increasing flows on a new line to eastern China, keeping supplies ample despite the decline in LNG imports.

“If a very cold winter comes, Japan and South Korea will likely need additional spot loads, in which case they will likely be able to compete with European buyers,” said Xizhou Zhou, head of Global Power and Renewables at IHS Markit. “China, on the other hand, would likely resort to more domestic coal.”

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