A new era of Japanese investment in Australia

" Japan consumes a huge amount of energy but the country’s own fossil fuel resources like coal, oil and gas are scarce."
Yoshi Inoue, Head of Specialised Finance Japan, ANZ

A month before, Watanabe had signed an application with a new electricity supply joint venture, one of the 260 institutions which have entered a now deregulated electricity market. The joint venture offered her 5 per cent saving on her monthly electricity bill, which used to come from traditional market giant Tokyo Electricity and Power Company, TEPCO.

Following the utilities deregulation bill passed by the National Diet (Japan’s parliament) back in June 2015, Japan is deregulating its long-closed electricity and gas markets. The newly opened electricity market will also see the separation of transmission and distribution assets from other assets by 2020 when deregulation is complete.

The gas market is to open up on 1st April 2017 and will separate pipeline assets from other assets by 2022 when deregulation is complete.

Japan, with an advanced, sophisticated economy and 127 million people, consumes a huge amount of energy but the country’s own fossil fuel resources like coal, oil and gas are scarce. The country imports 99 per cent of its required fossil fuels from offshore.

WHERE DOES THE POWER COME FROM?

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Imports of energy resources come from a few major suppliers, especially Australia. Japan currently imports 74 per cent of its required thermal coal and 21 per cent of its required LNG (liquefied natural gas) from Australia.

Moreover, Japan will import nearly 40 per cent of its required LNG from Australia within two years as LNG long-term sales and purchase agreements are already in place.

Australia is and will continue to be absolutely essential to keeping the lights on in Japan.

Looking at the components of electricity production costs here in Japan, fuel costs (including transportation) are clearly the largest, typically accounting for 50 to 60 per cent of the total production costs.

Under the deregulated electricity market in Japan, competition will be driven by how cost effectively electricity generators can procure fuels like thermal coal and LNG. In other words, it is procurement of fuels that determines a utility’s competitiveness in the deregulated market.

With commodity markets oversupplied and prices in the doldrums,prices of coal and oil and gas are actually sitting at 10-year lows. Most producers are struggling to make profits and are looking at restructuring their portfolios.

Meanwhile, the Bank of Japan, the central bank, moved interest rates to negative in February 2016 with the intention of increasing the incentives for Japanese institutions to invest and grow businesses rather than leave cash on deposit.

Given the upcoming deregulation of the Japan’s electricity and gas markets, Japan’s heavy dependence on imported fuels, depressed commodity prices and financial market easing, it is an ideal time for Japanese utilities to go out and acquire fuel assets such as coal mines and LNG assets offshore, locking in supply for the long term at relatively low cost.

Particularly at a time when the more recent alternative to these fuels, nuclear power generation, remains constrained by the post-Fukushima meltdown environment in the wake of the shutting down of all nuclear generation after the 2011 Tohoku earthquake and tsunami.

The question is where should utilities go to acquire assets? From what our market research shows, there is a 74 per cent likelihood Japanese utilities will head for Australia for coal mines and a 40 per cent likelihood they will head downunder for LNG assets.

In the LNG sector, we have already seen Japanese utilities acquire a small stake in Australian LNG projects such as Darwin LNG, Pluto LNG, Gorgon LNG, Curtis LNG, Wheatstone LNG and Ichthys LNG over the last five years. We should see them more in the coal mine sector as well in the coming years.

A NEW ERA OF JAPANESE INVESTMENT IN AUSTRALIA

In the past, we have also seen Japanese trading firms actively acquire stakes in Australian natural resources. Now however the profile of investors has changed - or will change. We will see more Japanese utilities rather than the trading firms of past eras come into Australia.

While utilities are more likely to play a more active role than trading companies, like those earlier investors they are likely to be passive. These utilities would be unlikely to seek majority ownership or operating roles, rather their goal would be to secure supply.

Equally, the targeted investments would be towards the more mature, tier 1 end of the spectrum to ensure reliable long term supply rather than speculative or early stage projects.

This is going to be a new era of Japanese investments to Australia.

Yoshi Inoue is Head of Specialised Finance Japan at ANZ