European LNG influx to boost gas-fired plant profit margins

Author: Arun Toora

2019/04/01

LONDON (ICIS)--Major northwest European gas hubs are expected to receive further LNG cargoes in the second quarter with the British NBP and Dutch TTF holding premiums over equivalent spot LNG markets in Asia.

With this comes the added likelihood of gas prices for delivery over the second quarter falling further. This would in turn weigh on coal prices as sellers bring down the price to compete for a share of the European power generation mix.

On 28 March, the East Asian Index (EAX) spot LNG price for delivery over April and May dropped to $4.20/MMBtu and $4.275/MMBTu respectively with June at $4.70/MMBTu.

Both the NBP and TTF gas markets had closed at a $0.70/MMBTu and $0.60/MMBTu premium over the EAX April and May contracts on 27 March.

As a result, LNG sellers will still be looking to unload volumes to take advantage of more attractive hub prices across northwest Europe.

LNG surge

Weakness in Asian LNG prices has been driven by subdued demand in China on the back of a mild winter combined with increased global production capacity.

Greater export capacity coming online in Australia, Russia and the US has created a glut with gas prices across Europe wilting under the weight of oversupply.

Before the start of the gas winter, Asian spot prices were hovering around $12.50/MMBtu but have since shed up to 65%.

This has driven a surge of LNG vessels to unload across Europe with Britain taking the delivery of 78 cargoes compared to 20 over the same period last year.

The shipping cost from Cove Point US to the Isle of Grain is $0.44/MMBtu less than to Sendai in Japan which has driven a glut of Atlantic-produced LNG to Britain as well as to the Netherlands.

Fifteen US-sourced LNG vessels have unloaded across Britain’s three LNG terminals since October 2018. In the Netherlands, the Gate terminal has taken 44 vessels since October 2018, 39 more across the same time last year.

Cross-commodity impact

With the constant inflow of LNG, European hub prices have fallen to multi-year lows with the NBP May ’19 product trading almost 15p/th below its 100-day moving average, a key technical level for traders.

Similarly, with depressed gas prices over the continent the Rotterdam Cal ‘20 coal product has also shed considerable value, trading $5/tonne below its 50-day moving average on Thursday and falling 8% since the start of March.

Analysis of carbon and coal prices indicated that the NBP front-month was €2.76/MWh less than what would be required for a 49% efficiency gas plant to take a 35% efficiency coal plant out of the money if no taxes were included, highlighting how bearish the gas market has become.

In the Netherlands, the TTF front-month was around €2.80/MWh below the fuel switch level.

The European carbon market has seen upward moves recently, gaining across the last two sessions and was seemingly finding support at its 100-day moving average of €21.825/tonne CO2 equivalent (tCO2e) on Thursday.

A move up towards €22/tCO2e would hit the profit margins for coal generators further.

In Britain, the baseload clean spark spread including the carbon price support (CPS) for an industry-standard 49.13% efficient gas plant for May was £3.92/MWh on 28 March, while the 35% efficiency clean dark spread with CPS was -£14.18/MWh, further highlighting the profit margins of using gas over coal.