Liquidity in the LNG derivatives markets is expected to increase as the Japanese power and gas markets undergo deregulation, a panel of experts said at the LNG and Natural Gas Markets Conference 2016, held in Singapore May 26-27.
Power and gas utility buyers of LNG in Japan are looking to diversify their LNG price indexation and hedge their price exposure, amid limited sales growth and uncertainty over the effect deregulation will have on downstream competition and pricing.
Chaired by Shelley Kerr, Editorial Director at S&P Global Platts, the panel comprised Lily Chia, Head of Oil, Power and Gas Derivatives with the Singapore Exchange, and Ryan Waters, Director, Asia Pacific, with the Intercontinental Exchange.
"[Japanese utilities] are already in the international markets hedging some of their feedstock exposure, or they are hedging through the Japanese banks which will go into the markets on their behalf," Waters said. "But direct participation will increase. It will be led by certain companies and then the rest will follow."
Chia added: "It will take some time. First of all, [consumers] need to be convinced about gas-on-gas pricing ... That is a big decision because it unravels whatever pricing models they might be using, the approvals they have had from their boards, from their ministries."
"For the consumers and utilities, this makes perfect sense because the [price] outlook for gas is much lower than the outlook for oil ... It is going to take time, but I am quite certain that it will move in that direction," she said.
JAPAN LOOKS TO LIBERALIZE GAS MARKETS BY 2017
The Japanese government fully liberalized the retail electricity market in April 2016, and is aiming to do the same for retail gas markets in 2017 with the purpose of improving supply security, increasing competition and reducing costs following the Fukushima disaster in 2011.
Similar efforts to improve energy efficiency and supply security through deregulation have been made by other governments in Asia, not only in the traditional consumer markets of China, Taiwan and South Korea, but also among the emerging LNG demand centers of South and Southeast Asia.
So far, activity in the derivatives market has seen a steep increase, with the Platts JKM swaps hitting a record high of 1,295 lots -- around 250,000 mt or four LNG cargoes based on a delivered cargo size assumption of 62,000-64,000 mt -- traded and cleared through ICE in April, the largest quantity traded in a given month to date, data provided by ICE showed.
April transactions brought the total number of lots -- one lot equals 10,000 MMBtu -- traded in the first four months of 2016 to 2,850, or more than eight-and-a-half standard-size LNG cargoes, already exceeding the 2,791 lots traded in the 2015 calendar year.
"In the last six months we have seen exponential growth in the [JKM swaps] contract," Waters said. "We are continually looking for LNG opportunities to get into this market more effectively. We do believe [LNG derivatives] are the future and it is quite a profitable place for us to be."
While the upward trend in exchange-cleared trading seems apparent, the total number of transactions done is unclear, as the majority of JKM swaps are typically concluded without the supervision of an exchange, either bilaterally or through a brokering service.
DERIVATIVES TRADING GAINING INTEREST
Developed by SGX in 2014, the Sling, or SGX LNG Index Group, has also seen recent trading.
The weekly Singapore-based spot price index saw a single lot traded in January 2016 between LNG traders Trafigura and Pavilion and a second deal done more recently by unknown counterparties.
"We have had modest volumes at this stage, but are continuing to see customers and counterparties being onboarded onto the platform," Chia said. "We are patient and we are hopeful that it will continue to grow".
Trade in the LNG derivatives markets tend to be driven by price discovery, trade speculation or hedging requirements, Waters said, although liquidity on the exchange is yet to rise before full-size cargo hedging becomes a reality.
"The majority of the [trading] volumes are coming from banks," Waters said. "We also get portfolio players, producers, traders, European utilities ... a very broad spectrum of people that are trading the [JKM swaps]contract".
The JKM swap is a monthly cash-settled futures contract, based on the Platts daily JKM assessment, a daily physical spot market price assessment for LNG delivered to Japan, South Korea, China and Taiwan.
A total of 75 companies engage in the assessment of the physical Platts JKM marker, with 25 participants actively trading the JKM swaps through ICE.
The Sling calculates a virtual trading point in Singapore, taking the average of pricing inputs submitted by its participants.
The Sling can be converted to different DES/FOB points across Asia through cargo repositioning and freight costs on a net forward/back basis. A total of 22 contributors participate in the Sling discovery process, with two transactions having taking place to date.
Both contracts reflect a standard contract-size of 10,000 MMBtu.
