(The opinions expressed here are those of the author, acolumnist for Reuters.)
* GRAPHIC: Spot LNG vs. South Korea customs price: https://tmsnrt.rs/2Ne8jbL
By Clyde Russell
LAUNCESTON, Australia, Aug 19 (Reuters) - The price of spotcargoes of liquefied natural gas (LNG) has ticked up recently inAsia amid tentative signs of some peak summer demand, but theproblem remains that for many buyers the cost is still too high.
While the market focuses on the spot price as a way ofassessing the extent of oversupply, or the strength of demand,it's worth noting that the market for short-term cargoes isdwarfed by the far greater volumes procured under long-term,mainly crude oil-linked contracts.
This means that for many consumers of LNG, especially in thetop- and third-ranked buyers Japan and South Korea, the declinein spot prices is largely irrelevant.
For weak spot prices to become relevant, demand in thosecountries has to be so strong that additional cargoes over andabove contracted volumes are needed.
The spot price for cargoes delivered to North Asia <LNG-AS>rose to $5 per million British thermal units (mmBtu) in the weekending Aug. 16, the highest since late June and 25% above the $4trough reached in early August.
It's also worth noting that the spot price reached anorthern summer peak last year of $12 in June, and was at $11 inthe week to Aug. 17, 2018, more than double the current price.
But while spot prices have slumped as producers in Australiaand the United States commissioned new plants, the long-termcontract price, which accounts for about two-thirds of theglobal market, has fallen by a considerably smaller margin.
South Korea paid $9.40 per mmBtu for its LNG imports inJuly, which is only 6% less than the $10.01 it paid for them inJuly 2018, according to customs data. This price would mainlyreflect volumes under long-term contract, but would also includecargoes under spot contracts.
For the first seven months of the year, South Korea paid anaverage $10.22 per mmBtu for LNG, which was 6.9% higher than forthe same period last year.
Japan's LNG cost an average $9.14 per mmBtu in June thisyear, down only marginally from $9.79 for the same month a yearago, according to official data.
The fact that both Japan and South Korea haven't seen muchbenefit from lower spot prices for LNG is largely a reflectionof the higher cost of Brent crude oil for much of thefirst half of 2019, with the price rising from a closing low of$50.47 a barrel in November last year to a peak of $74.57 inlate April.
While Brent and other crudes have been dropping since theApril high, the price is still above the November low, which isreflected in the still relatively high price of contract LNGcompared to spot supplies.
ASIAN LNG DEMAND STRUGGLES
It's therefore not surprising that LNG imports in both Japanand South Korea have been falling.
For the first seven months of the year South Korea's importswere 22.9 million tonnes, down from 25.4 million in the sameperiod last year.
In Japan, imports for the first half were 38.6 milliontonnes, a drop of 8.2% compared to the same period last year.
China, the world's second-biggest LNG importer, is stillgrowing imports, but at a far slower pace than before.
China's January to July imports of the super-chilled fuelwere 32.8 million tonnes, up 18.8% on 27.6 million in the sameperiod a year ago, according to vessel-tracking and port datacompiled by Refinitiv.
However, for the whole of 2018, China's imports were 38.6%higher than for 2017.
China also buys a greater percentage of its LNG on the spotmarket, meaning it has managed to secure some of the benefits ofa lower spot price.
It also has a fixed, low-priced long-term contract withAustralia's Northwest Shelf venture, which also lowers the costof LNG supplied to China.
The reliance on long-term contracts for much of Asia'ssupplies is probably largely responsible for the mediocre growthin demand so far this year, with Refinitiv data showing thecontinent imported 139.3 million tonnes in the first sevenmonths of the year, up a mere 2.9% from the same period in 2018.
In contrast, Europe's imports of 51.5 million tonnes in theJanuary to July period are up 87% from the 27.5 million in thesame period last year, showing the continent's ability to takegreater spot volumes is paying dividends for its natural gasutilities.
The problem for LNG producers is that they need to boostdemand for their product in order to sell their existing output,not to mention all the future production now in the pipeline.
But in order to do so they will have to accept lower pricesand more flexible pricing systems, and by doing so they willundermine the economics of existing and new ventures.
(Editing by Richard Pullin)