S’pore-Tokyo move to develop LNG mart offers new trading landscape

SINGAPORE: Asia may be the world’s biggest consumer of liquefied natural gas (LNG), yet its LNG trading activity is minuscule as no exchange has managed to establish itself as a benchmark. That might be about to change.

Following years of unfulfilled promises, two of Asia’s leading exchanges — Singapore’s SGX and Japan’s Tokyo Commodity Exchange (Tocom) — this week announced they would join forces to create Asian LNG and electricity futures.

Shifting the market away from long-term contracts to a freely floating spot market with the use of financial exchanges revolutionised the European energy market and could be about to do the same in Asia, market participants said.

“Seeing Singapore and Japan working together in creating a more transparent and tradable LNG market is a major step forward,” said energy firm RCMA Group, here.

For Japanese and South Korean utilities, the world’s biggest buyers of LNG, the creation of a liquid spot and exchange LNG trading hub will allow them to purchase cargoes at short notice and tailor-made volumes.

The development comes at an opportune time for buyers.

With many long-term supply contracts about to expire and new production from Australia and the United States trying to find buyers, companies such as Jera, a joint venture between Tokyo Electric and Chubu Electric, or Korea’s KOGAS are shifting significant proportions of their requirements towards spot markets.

The availability of futures contracts on exchanges also allows buyers to financially hedge fuel purchases, which collectively see billions of dollars worth of LNG being shipped around Asia at any given time.

Despite the overall enthusiasm, many hurdles remain, and Asia’s LNG market has experienced false dawns before.

Trading LNG in spot markets and on futures exchanges does expose buyers to risk as prices can spike due to unforeseen supply disruptions or sudden demand rises, something they were protected against under long-term agreements.

For producers, loosing steady revenue streams from long-term contracts, makes future investments more difficult. Reuters