Japan Builds Gas Markets in Asia to Boost LNG Trading, Energy Security

Energy

Summary:

Companies invest in downstream gas assets in Asia. Japanese firms build gas markets to help sell excess LNG. LNG seen as transitional fuel in move to renewables…

Japanese companies foreseeing a growing surplus in stocks of liquefied natural gas (LNG) as their demand for the fuel wanes in coming years, are scrambling to invest in regional markets to provide potential outlets to sell the gas.

As more nuclear plants restart and renewable energy gains momentum, Japan's LNG imports are at their lowest in over a decade, spurring companies to turn to Asia to unload supplies contracted during past market shocks, such as Russia's 2022 invasion of Ukraine. Japan Builds Gas Markets in Asia to Boost LNG Trading, Energy Security_1

Japan Builds Gas Markets in Asia to Boost LNG Trading, Energy Security_1

Energy flexibility and security concerns ensure that Japan wants to stay a big player in LNG, but it is looking for markets to sell its excess, in line with a government strategy to keep volumes at 100 million tonnes by building gas demand in Asia.

This year, Tokyo Gas announced a study for 1.5-gigawatt LNG-to-power project in Vietnam and bought a stake in an LNG regasification terminal in the Philippines, while trading houses Marubeni and Sojitz launched a 1.8 GW-big LNG-fired power plant in Indonesia.

Led by JERA, Tokyo Gas, Osaka Gas and Kansai Electric Power, Japan is a stakeholder, feedstock provider or participant in studies for more than 30 gas-related projects, data from the Institute for Energy Economic and Financial Analysis (IEEFA) and Reuters shows.

Whether operating or yet to be launched, these are located in Bangladesh, India, Indonesia, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam.

"Japanese LNG demand is uncertain, but the government wants to secure stable supply over the long term," said Yoko Nobuoka, senior analyst for Japan power research at LSEG.

"Developing its own trading capability and creating an Asia-wide gas market would help to increase energy security and hedge risks of LNG surplus," she said.

Japan stepped up imports of LNG after the Fukushima nuclear disaster of 2011 led to closure of all its nuclear power reactors, and Tokyo has increased participation in LNG projects globally to secure supply.

But the comeback of nuclear power and the roll-out of renewable energy have led resource-scarce Japan to cut LNG imports for its own needs, with shipments falling by 8% last year to the lowest since 2009.

In 2020, the industry ministry adopted a plan to hold LNG handling capacity, including trade, at 100 million tons a year by 2030, a key feature of which was building Asian gas markets.

"There are various pathways towards achieving carbon neutrality or net-zero emissions in Asia," METI said in emailed comments. "Gas and LNG, along with renewables and energy conservation, can play a role in the pathways."

Japan's shipments, both for domestic use and sent to third countries, were 102 million tons of LNG, in the year that ended in March 2023. Japan Builds Gas Markets in Asia to Boost LNG Trading, Energy Security_2

Japan Builds Gas Markets in Asia to Boost LNG Trading, Energy Security_2

Tokyo Gas, the country's top city gas supplier, has set a target of trading 5 million tons of LNG annually by 2030, up from about 3 million now.

"We have a chance to sell LNG to these projects and it will contribute to an increase in our LNG trading volume," Tokyo Gas officials told Reuters in emailed comments.

Since 2019, Japanese firms have invested in new LNG import terminals with combined capacity of 16.2 million tons in Bangladesh, Indonesia and the Philippines, according to Reuters calculations based on the International Gas Union data.

Another 13 million tons a year of LNG import capacity is to come in Vietnam and India with Japan's investment before 2030, taking the total such volume to 29.2 million tons - close to what Japan traded in the year ended in March 2023.

Japan's LNG sales to third countries doubled to 31.6 million tons in fiscal 2022 from fiscal 2018, boosted by participation in upstream projects globally and supply contracts, the Japan Organization for Metals and Energy Security (JOGMEC) says.

Of Japan's 102 million tons of LNG imports in fiscal 2022, domestic use accounted for 71 million tons.

With Japan's own LNG demand projected to fall another quarter by the end of the decade to some 50 million tons, top utilities JERA, Tokyo Gas, Osaka Gas and Kansai Electric could have 12 million tons of LNG oversupply, the IEEFA estimates.

Destination Clauses

Tokyo's growing LNG ambitions are reshaping its procurement strategy.

In fiscal 2021, 53% of gas bought by Japanese firms, or 45 million tons, was under contracts banning resale, a condition imposed by producers such as Qatar, according to JOGMEC.

That share fell to 42% last fiscal year, its survey showed, partly also because Tokyo clinched more deals with more flexible producers, such as the United States and Australia.

"However, by 2030, 60% of contracts will not have destination restrictions, meaning that Japan's ability to trade LNG is likely to increase this decade," said Christopher Doleman, an LNG specialist at IEEFA.

Trading competition with China, which surpassed Japan as the biggest LNG buyer last year and is expanding into global trade, also plays a role.

China's LNG imports are forecast to grow by up to 12% this year, to 80 million tons, PetroChina says, and Beijing is reselling some LNG to third countries.

"In the medium term to 2030, trading competition could become fierce, as the next bearish cycle begins with a wave of new supply," LSEG's Nobuoka said, referring to new LNG projects set to go onstream in coming years that need buyers.

Transition Pushback

Climate activists increasingly say Japan, with a quarter of its power generated by non-nuclear renewable energy, should bypass gas, which the industry considers a "transition" fuel, and help other countries to decarbonise by moving straight to renewables from coal.

Australian Market Forces, a climate activist group that holds shares in Chubu Electric Power and Tokyo Electric Power, co-owners of top utility JERA, has urged it to rethink plans for Asia and sharpen focus on renewables instead.

"One of the greatest threats to climate action globally is the proposed build out of LNG-to-power infrastructure in emerging Asia," said Will van de Pol, chief executive of Market Forces.

As a transitional fuel, LNG is 'indispensable for achieving decarbonisation,' JERA, which has both gas and renewable energy projects in Asia, told Reuters by email.

Source: Reuters

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Devin

Economic

The UK economy grew by 0.4 per cent in May, double the expected figure, driven by continued expansion in the services sector and a rebound in housebuilding.

The month-on-month rise followed zero growth in April, the Office for National Statistics said on Thursday, and exceeded a 0.2 per cent forecast for May by economists polled by Reuters.

Sterling rose 0.7 per cent against the dollar to $1.2941, its highest in almost a year, boosted by the UK GDP numbers and then lower than expected US inflation data.

The strong growth in May suggests the quarterly expansion might exceed the Bank of England's forecasts, potentially complicating its decision on whether to start cutting interest rates in August from their 16-year high of 5.25 per cent.

Traders in swaps markets remained evenly split on the chances of the BoE keeping rates on hold and cutting them at its August meeting.

The economic data brings the UK's annual GDP growth to 1.4 per cent, higher than the 1.2 per cent economists had forecast.

"Stronger services consumption raises the risk that service CPI inflation will remain too strong for the Bank of England to cut [interest rates]," said Tomasz Wieladek, chief European economist at T Rowe Price. "The data today makes a cut in August less likely. It is becoming more probable that the bank only cuts once this year."

Although recorded under the previous Conservative government, the data comes as a boost to Labour, which has declared growth its "national mission".

Chancellor Rachel Reeves said: "This week I have already taken the urgent action necessary to fix the foundations of our economy to rebuild Britain and make every part of Britain better off. A decade of national renewal has begun, and we are just getting started."

Ashley Webb, economist at Capital Economics, said: "The improving economic outlook suggests the government may benefit from the economic recovery being stronger than most forecasters anticipate."

Webb said the rise in GDP in May was the fourth increase in the past five months, "which supports the idea that the dual drags on activity from higher interest rates and higher inflation are starting to fade".

Although recorded under the previous Conservative government, the data comes as a boost to Labour, which has declared growth its "national mission".

Ashley Webb, economist at Capital Economics, said: "The improving economic outlook suggests the government may benefit from the economic recovery being stronger than most forecasters anticipate."

The economy has largely stagnated over the past two years, reflecting the hit from the cost of living crisis. In the first quarter, GDP a head was still 1 per cent below the fourth quarter of 2019.

However, the economy has bounced back from last year's technical recession. Strong growth of 0.7 per cent in the first quarter was the fastest expansion in the G7 group of advanced economies.

Growth in May was driven by the services sector, which expanded 0.3 per cent in May and registered the fastest growth over three months since December 2021, when Covid-19 restrictions were still in place.

Manufacturing production was up 0.4 per cent in May and construction rebounded 1.9 per cent following a sharp contraction in April, when wet weather hit activity.

Rainfall in April was 155 per cent of the long-term average for the month while May was the warmest since records began in 1884, according to the Met Office.

Source: FT

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Cohen

Economic

Investors are looking at UK markets as a potential haven as political uncertainty rises in the U.S. and elsewhere in Europe, in what could mark a stunning turnaround for a country that appeared to have lost its traditional appeal to global capital.

A landslide election victory for Britain's centre-left Labour government last week offers the prospect of predictable policy and improved trade with the European Union to reboot an economy that has struggled since the 2016 Brexit vote.

Meanwhile, parliamentary gridlock in debt-laden France has stirred memories of previous euro zone crises, and investors are scrambling to guess what former U.S. President Donald Trump regaining the White House might mean for markets.

Britain's economy is picking up, and some bankers expect a revival for UK stock markets shrivelled by relentless selling during years of turbulence under successive Conservative governments.

BlackRock Investment Institute, a research arm of the world's largest asset manager, said on Tuesday it was bullish on UK stocks, potentially heralding a mood shift among major global institutions that have cooled on Britain since 2016.

But even those moving funds into the UK warned that its haven appeal may be short lived unless new Prime Minister Keir Starmer pulls off a bold plan to boost living standards without straining the nation's stressed finances further.

"The (UK) election improves things at the margin and the uncertainty on Europe driven by France means there could be a honeymoon period for Britain for a bit," said Pictet Wealth Management chief investment officer César Pérez Ruiz.

"The market is going to be asking for more detail on fiscal spending and (Starmer) hasn't given us a lot of information."

Pérez Ruiz said he sold some European corporate debt because of French political risk and bought UK equivalents instead, but may not hold the position beyond six months. Shunned UK Markets Emerge as Haven from Global Storms_1

Shunned UK Markets Emerge as Haven from Global Storms_1

Green shoots?

Investors have kept pulling money out of UK equity funds and stock market trackers since the July 4 election, daily data from information provider Lipper showed.

Yet there are also some positive signs.

After a dearth of London listings, potential large offerings are on the horizon from the likes of Shein and De Beers, with some bankers predicting the UK market will revive more broadly next year. On Thursday, the UK market regulator fast-tracked a swathe of listing rule changes in a bid to encourage more IPOs.

London's share of European IPO volumes dwindled to just 1% in the year to mid-May, down from 28% in the same period in 2021 when the market boomed.

"There's a couple of reasons to be positive and certainly relatively more positive about the UK than other regions," said Peel Hunt equity capital markets head Brian Hanratty.

"I don't want to say it is like a dam breaking."

He had observed companies holding early stage investor meetings and more discussions with accountants about IPOs, he added.

Some big investors are turning more optimistic too.

"We see a virtuous cycle taking hold," Fidelity International head of multi-asset Salman Ahmed said, if Labour rebuilds EU trade links and revives business spending. Fidelity has a neutral view on Britain although some funds are increasing exposure.

Matt Evans, portfolio manager at NinetyOne, said UK companies he meets with were readying investment projects that they had delayed under the Conservatives.

Debt Jitters

Weak UK public finances remain a source of concern, as state borrowing approaches 100% of economic output, and the 2022 market chaos unleashed by Conservative Prime Minister Liz Truss' under-funded mini-Budget remains fresh in memories.

Labour wants to attract private investment into infrastructure and housing, potentially boosting 2024 growth beyond the 0.7% economists polled by Reuters expect.

Gilts had short-term support from expected Bank of England rate cuts but the UK was not a debt market haven unless Labour could prove an untested commitment to budgetary caution, said James Athey, fixed income manager at London investment group Marlborough.

Shunned UK Markets Emerge as Haven from Global Storms_3

While off highs hit in 2023, Britain's 10-year bond yield has still risen 60 basis points this year to 4.15%, underperforming U.S. and German peers.

BlueBay Asset Management chief investment officer Mark Dowding said he would not increase UK exposure while inflationary pressures remained.

In another sign of some caution, London's FTSE-100 index, valued on a price-to-earnings ratio almost 50% below that of U.S. stocks, has underperformed global benchmarks so far this month.

"The (UK) risk-reward is pretty favourable," BNP Paribas head of equity strategy Dennis Jose said.

But as for capital coming back? "Not yet. It will take a little more time."

Source: Reuters

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Westpac

Economic

Central Bank

The 'two wolves' inside monetary policy are demand shocks and supply shocks. It is important to know which is which.

There is a story in Native American folklore that inside each of us are two wolves, one evil, one good. The one that wins – the one you become – goes the saying, is the one you feed.

So too for monetary policy. In that case, though, the two wolves are demand shocks and supply shocks. The demand shocks are well known and well understood. Policymakers know how to respond to these. When demand is strong, tighten policy to keep inflation in check. When it is weak, ease policy to support demand.

In contrast, supply shocks create a trade-off between keeping inflation at target and stabilising output or employment. It is an easy trade-off to stomach when the supply shocks are benign and inflation is showing a tendency to undershoot your target. Adverse supply shocks are less comfortable, with higher prices and lower output.

We can see this conflict of narratives in the Reserve Bank's own analysis of the economy, as well as in some of the discourse from other quarters. Some observers frame the situation as demand-driven. They focus on fiscal and monetary support during the pandemic and argue that this has resulted in an economy where demand is simply too strong for the economy's supply capacity to meet it. No wonder we see repeated stories worrying about every extra dollar going into households' pockets, afraid that this will boost inflation. Perhaps this is right, but there are a lot of assumptions going into that argument.

A demand-led narrative is also more comfortable for the economics profession. Most of the models we learned at university primarily capture demand-side relationships. Supply capacity is usually treated as given or driven by unpredictable (and transitory) 'productivity shocks'.

Don't assume, test

We should grant that advanced economy governments and central banks provided massive stimulus during the peak of the pandemic. In Australia and a handful of other economies, fiscal support managed to overfill the income hole created by lockdowns – an understandable outcome given the many uncertainties at the time. We should recognise the possibility that some of the resulting strength in demand might not have unwound fully. But we should test this proposition, not assume it.

Recognising and understanding the supply shocks – much like making the virtuous choices involved in feeding the good wolf – can be hard. Hitting the strong demand 'nail' with the policy hammer is so much more straightforward. Even when supply shocks are recognised, it is sometimes assumed that the response still needs to be to hammer down demand to fit supply. We see some flavour of this view in the June 2024 RBA Minutes, which said, 'The case to raise the cash rate could be further strengthened if members judged that aggregate supply was likely to be more constrained than had been assumed.'

Again, there are some unstated assumptions here: that the supply constraint is persistent, or fading so slowly that demand-based policy still needs to respond to keep inflation in check. It would be a mistake to assume that a particular supply constraint lasts forever; better to understand what is driving it before reaching that conclusion.

Curves, shifts and other fruit

We must bear a few things in mind when assessing whether something is a supply constraint and how it might play out.

Firstly, and as we have said before, simultaneous increases in prices and volumes for some goods and services are not necessarily evidence of strong overall demand. We could be dealing with an 'other fruit' problem, where supply shocks affecting some goods and services displace demand elsewhere.

Another thing to be aware of is that some economic relationships are nonlinear and others can shift. The RBA knows this: it has long recognised that the Phillips Curve is indeed a curve, not a straight line. It has also, commendably, recognised that the unemployment rate consistent with the full employment concept in its mandate can shift.

There are other labour market phenomena that we should recognise are nonlinear, or shifting, or some combination of the two. As discussed in a recent note, Fed Governor Waller and others at the Federal Reserve have argued that theory would suggest that when job vacancies are high enough, they can fall back to more usual levels without unemployment rising much. The relationship between the two variables is nonlinear.

Subsequent events, including in other countries, have supported Waller's thesis. For some countries, like the Netherlands, the high vacancy rate was in line with the normal nonlinear relationship, and it could reverse without unemployment rising by much. For others, like the United States, United Kingdom – and possibly Australia – there was a bit more going on. But that 'bit more' was a pandemic-related shock to labour supply. As the shock faded and participation recovered, the historical relationship re-asserted itself.

There is a deeper question about why labour supply took a long time to come back in those countries, but not others, even after social distancing restrictions were removed. Indeed, in the United Kingdom it is going in the wrong direction again. In Australia, at least, the constraint was more about the borders than about participation. This means that we can reasonably conclude that this supply shock, to the extent it was relevant, has been fading of its own accord.

Of course, there might still be other supply constraints at play in Australia. Some supply shocks might persist, while others unwind without help from monetary policy. However, policymakers might not recognise that the shock will not persist. And even if they do, policymakers might still conclude – rightly or wrongly – that demand needs to be reduced to meet it.

It would be good to know what the RBA is assuming about supply constraints, their causes, and their likely persistence. Newish Deputy Governor Hauser mentioned the need to do more work on supply issues during the Q&A to his recent speech. Hopefully the post-Review changes will direct more resources into such activity than was previously available.

Which wolf should we feed? More importantly, which wolf is the RBA feeding?

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Alex

Economic

The biggest danger facing the American economy for years has been inflation.

Now, another problem is emerging as a credible threat on the horizon: Unemployment.

Just as inflation continues to cool, yellow lights are flashing in the still-strong jobs market. The Federal Reserve must now confront the risk that it's making a mistake by keeping interest rates too high for too long.

That's why some economists are pleading with the Fed to ease up its inflation fight—before high interest rates, which it's used to tame surging prices, grind the US economy into a recession.

"It's time to cut rates," said Joe Brusuelas, chief economist at RSM. "Inflation is fading as the primary focus of concern. The balance of risks is slowly tipping towards higher unemployment."

Mark Zandi, chief economist at Moody's Analytics, said the labor market is straining under the weight of high borrowing costs.

"The biggest danger is a policy mistake: The Fed keeps rates too high for too long," Zandi told CNN in a phone interview. "Right now, the Fed is signaling a September cut. I think that's okay, but if they wait any longer than that, I fear they are going to overdo it."

Even Fed Chair Jerome Powell is acknowledging a significant shift in the risk calculus.

"Elevated inflation is not the only risk we face," Powell told lawmakers on Tuesday, pointing to easing inflation and "cooling" in the labor market.

'The labor market may be turning'

To be clear, the jobs market is by no means imploding.

Jobs are still being created at a healthy pace — faster than many thought possible just a year ago.

Yet just beneath the surface, cracks have begun to emerge.

The unemployment rate remains historically low, but it has noticeably crept higher three months in a row — "a sign the labor market may be turning," according to economists at KPMG.

Hiring has slowed in leisure and hospitality, a key sector that is powered by consumer spending. The pace of workers quitting their jobs has dropped significantly. So has the rate of workers getting hired.

Powell highlighted these changes, telling lawmakers that recent indicators "send a pretty clear signal that labor market conditions have cooled considerably" from two years.

"This is no longer an overheated economy," Powell said.

Of course, that's exactly what the Fed wanted to accomplish when it began its historic rate hiking campaign.

The fear in 2022 was that the jobs market was so hot that it would add fuel to white-hot inflation growth and keep prices dangerously high, forcing the Fed to start a recession just to put the inflation fire out.

Overheated inflation and a historically over-abundant job market are no longer viewed as major concerns.

Waiting too long?

The current risk is that the Fed is injecting inflation-fighting medicine into an economy that no longer needs it. And that could turn a cooling job market into one that's frozen—leading to job losses.

The job market added 206,000 positions in June, according to the latest government figures released Friday. In other words, it's not too hot, and not too cold—it's "balanced," the Fed Chair said on Tuesday.

"A balanced labor market with too restrictive rates from the Fed will not remain balanced for long," Brusuelas said. "That means higher unemployment."

Brusuelas clarified that doesn't necessarily mean "skyrocketing" unemployment is on the horizon, but a premature recession may be, nonetheless, if the Fed waits too long to cut rates.

Source: CNN

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Thomas

Economic

Analysts believe the country has turned a corner with an end to deflation potentially on the horizon and corporate governance reforms starting to have an impact.

Investment experts are painting a relatively bright picture of the Japanese market, despite the country's ailing currency.

After decades of economic discomfort, Japan seems to be welcoming inflation. This, coupled with corporate governance reforms, has led to structural changes that focus on efficiency and profitability, meaning companies are returning more value than ever.

According to Asset Management One, a leading Japanese investment firm, with $453bn under management globally, 59 per cent of Tokyo-listed companies are now working to improve capital efficiency, up 10 per cent since the end of 2023.

Japan, a wealthy country with a high savings rate and an ageing and shrinking population, is turning a corner according to leading analysts. "Japan presents important opportunities for both wealth management and investment – both Japanese investors investing in the rest of the world, and non-residents are increasingly interested in putting money to work in Japan itself," says Arnab Das, global market strategist at Invesco.

"The Nikkei should continue to do well as long as Japan continues to emerge from deflation – a process that has begun and seems to have more legs than previous false starts."

But the exit from deflation is not a given, by any means, given the structural downward pressures on nominal growth from demographics, he believes. "These doubts are reasons for the Bank of Japan (BoJ) to go very slowly, which itself is reflationary and hence bullish for Japanese assets, especially stocks and real estate," says Mr Das.

In March, the BoJ ended an eight-year cycle of negative interest rates, citing that its 2 per cent inflation target is on the horizon. Japan's era of deflation began in the 1990s, known as ‘The Lost Decade', mainly due to the bursting of the bubble economy.

"The key is to make Japan an attractive place for residents and foreigners – people and firms – to spend and invest. And that is indeed what seems to be happening, at least to some degree, a higher degree than for many years if not decades," Mr Das explains.

At Pictet Asset Management, Sam Perry, senior investment manager of Japanese equities, also believes structural change will provide renewed opportunities in Japan. "The 12 years of governance reforms are seeing record high dividends and share buybacks together with companies having a new explicit focus on return on capital," he says.

"The exit from deflation and presence of persistent moderate inflation will stimulate investment and spending by the corporate sector and encourage investment by retail investors," he adds.

Robotic leaders

Japan is generally considered a world-leader in many areas of technology, including robotics, automotive and use of technology in services, including social and health care. According to the International Federation of Robotics, Japan is the world's number one industrial robot manufacturer.

"Robotics in personal care are being developed and tested in Japan," says Invesco's Mr Das. "As the world starts to catch up to Japan in the demographic transition, such firms could become major players in an ever-expanding global market, where many other technologies and traditional services could become harder to get," he believes.

Japanese car manufacturers were also the first to lead the way in hybrids and electric vehicles (EVs). Almost 15 years ago, Nissan was the first automaker to offer a mass-produced car that ran on batteries alone. But Japan failed to cement its place in the EV world. According to Drive Electric, an electric vehicle leasing specialist, China is still leading the EV race.

Yet hope remains for this sector, according to Mr Das. "Some Japanese car firms are leading the way in development of radical alternative battery technologies, which, if they bear fruit, could transform the EV landscape with far longer range and faster recharging," he says.

Tokyo under scrutiny

Japan has only limited ability to confront the challenges it faces. The country is highly exposed to geopolitical risks, both within the north Asia region and to US political risk, according to Invesco's Mr Das. He believes the weak yen could come under scrutiny, should Donald Trump be re-elected. "He and his advisers, such as Robert Lighthizer, would like a weaker dollar to support re-industrialisation."

Mr Trump may consider trying to push other countries, especially allies, to "re-evaluate their own currencies" and could do so via the "bully pulpit".

According to Mr Das, such an effort or even talk of it could help drive the yen stronger, Japanese government bond yields lower, and put some pressure on the Nikkei, given the potential earnings impact and risk of importing disinflationary pressure.

Source: PWMNET

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Samantha Luan

Energy

A rise in European wholesale gas prices over the past several months could encourage more utilities to switch to coal for electricity generation this coming winter, even as countries try to push the carbon-intense fuel out of the power mix.

While many European countries, such as France, Britain and Italy, have already either phased out coal completely or have limited scope for large-scale gas-to-coal switching, it remains a key part of the power mix in Europe's number one energy consumer Germany, and much of eastern Europe.

A gas-to-coal shift would reverse a trend which began earlier this year when European gas prices fell to near a three-year low in February, incentivizing a switch in other direction. Gas prices have risen nearly 40% since their Feb. 23 low.

Plants fired by coal, which emits more than double the carbon dioxide equivalent per megawatt hour (MWh) of power produced than gas, also have to take into account the greater cost of EU carbon permits to offset their emissions.

But the price of permits also remains well below last year's record high of more than 100 euros ($108), currently at around 68 euros per metric ton.

According to LSEG, a carbon price below 80 euros per metric ton would be needed for high efficiency coal plants to replace gas plants with 50% efficiency as of the first quarter of next year.

"We can expect many low- and medium-efficiency gas plants to be replaced by high and medium efficiency coal plants this winter, starting from November," said Petter Norby, power analyst at LSEG.

Carbon-Heavy but Cheaper Coal to Replace Gas in European Power Mix This Winter_1

Coal and carbon prices have experienced relatively strong losses this year due to weak Asian demand, cautious market sentiment and high stockpiles, said Andy Sommer, Swiss utility Axpo's head of fundamental analysis, modelling and meteorology.

By contrast, "gas markets experienced a continued uptrend due to tight LNG supply and maintenance in Norway and the UK, leading to lower-than-average stock builds," he said.

Looking ahead into July, his outlook suggested continued volatility with a focus on weather patterns.

Tight global LNG supply and multiple offline facilities in the U.S. have contributed to the increase in European gas prices over the last month, and could continue to be bullish factors, Rystad analyst Fabian Ronningen said.

There is also some volatility caused by the potential for an early Russian pipeline cut and ongoing Norwegian gas maintenance outages during summer, he added. Carbon-Heavy but Cheaper Coal to Replace Gas in European Power Mix This Winter_2

Carbon-Heavy but Cheaper Coal to Replace Gas in European Power Mix This Winter_2

Germany's electricity industry is still very dependent on coal imports, with importers lobby VDKI pegging current annual import levels at 33 million metric tons, of which 18 million are for power generation.

The import levels are down some 26.3% from 2022 when gas supplies were cut from Russia following the invasion of Ukraine, while coal for power levels are seen down near 40%, VDKI data showed. Carbon-Heavy but Cheaper Coal to Replace Gas in European Power Mix This Winter_3