Asia may be the world’s biggest consumer of liquefied natural gas, 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 TOCOM – this week announced they would join forces to create Asian LNG and electricity futures.
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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 Andrew Koscharsky, Director at energy firm RCMA Group in Singapore, which trades in Asian and Australian oil, gas and power products, and is also a retail supplier in Singapore.
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.
GETTING IT RIGHT
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.
“These terms are necessary to… allow producers to secure investments,” said Mohammed Saleh Abdulla Al Sada, energy minister of top LNG exporter Qatar, during an a visit to Tokyo this week.
Exchanges in Singapore, Japan, South Korea, and China have ambitions to become the hub, but each individually lack the required clout.
Japan and South Korea are seen as too focused on their own markets, China’s gas market remains underdeveloped, and tiny Singapore lacks the consumer base and storage capacity to warrant an Asian LNG hub.
By joining forces, some concerns would be addressed.
“Having the largest demand centre in the world cooperating with a major trading hub means that traders like RCMA would be able to deploy more capital in a broader and more liquid environment, with additional players,” RCMA’s Koscharsky said.
The rise of Asian LNG and power exchanges would challenge the dominant pricing model, in which price reporting agencies like S&P Global Platts’ publish daily assessments based on bilateral bids, offers, and completed deals.
An exchange’s benefit is its transparent pricing information and ability to enable companies to hedge fuel costs by taking futures positions.
While some remain sceptical about the viability of establishing an Asian power and gas exchange, and others question its benefits over long-term bilateral supply deals, there is precedence: 15 years ago, Europe’s energy markets were similarly fragmented and illiquid.
Like Asia today, most supplies came under long-term contracts linked to oil markets and prices assessed by agencies like Platts, Argus or Heren (now ICIS).
That changed after European Union efforts to liberalise energy markets, encouraging the development of exchanges like Germany’s European Energy Exchange (EEX) and France’s Powernext, which today cooperate closely.
EEX, which was much snubbed in its early years, now says that almost 500 firms from 33 countries are registered with it.
“As exchange platforms gain maturity… prices reported by exchanges are becoming more and more relevant as a price benchmark for commodities,” said Madjid Kuebler, Managing Director of German energy advisory Team Consult.
In a sign that the SGX/TOCOM tie-up is seen as serious competition, incumbent Platts says it is keen to cooperate.
“Exchanges and price reporting agencies can work successfully together,” said Marc Howson, Senior Managing Editor for LNG at S&P Global Platts in Singapore, adding that Platts had signed its own memorandum of understanding with TOCOM with the intention of listing JKM from April next year.