Japan, the world’s biggest importer of LNG, pays about $18 per British thermal units, versus$10 in Europe and $3~4 in the U.S. It is tired of paying such a price for a resource that has become so important. So Japan is preparing to launch the first LNG futures market.
The low price in the U.S. is due to the shale gas boom in the country and to the fact that the gas does not need to be liquefied. In Europe, there are spot markets for LNG which constantly take into account the state of supply and demand.
In Asia, however, the LNG prices are indexed to the oil prices. For Japan, this system is no longer sustainable. The country accounts for one third of LNG sold on the planet and its gas bill has significantly increased since the Fukushima disaster(a record $64 billion in 2012) as gas and oil have become the main source of electricity, with most of nuclear reactors down. This is the main reason the Japanese Ministry of Economy has decided to create the first LNG futures market.
“Japan definitely has an interest in something more in line with a global price of LNG to offset their price with regions that have weaker demand,” said Eric Bickel, commodity analyst with Schneider Electric, an energy-consulting firm. “They’re sort of spreading that load.”
The parties behind the push for the new contract – which include electricity and gas utilities, trading houses, traders and government officials – will aim to list the dollar-denominated futures on the Tokyo Commodity Exchange by March 2015.
The futures will be for cash settlement in dollars and based on an index price for spot LNG cargoes delivered to Japan, reports Bloomberg quoting Takashi Ishizaki, the director for the commerce policy division at the Ministry of Economy, Trade and Industry.
The contracts won’t be for physical delivery, but will allow Exchange Futures for Physical, or so-called EFP, transactions that enable traders to swap their futures positions for a physical holding.
“We always seek opportunities to list new futures contracts, although it takes time to develop,” Bloomberg quotes Tadashi Ezaki, the president of Tokyo Commodity Exchange, as saying. “We are keen to create a market that meets the needs of domestic and oversees investors.”
Japan is hoping to launch an accessible market for major Asian buyers including South Korea and Taiwan, and will consider asking exchanges in Singapore and the United States to establish similar LNG futures markets.
The trade ministry, which oversees energy policy and commodity futures trading, set up the council in November to consider the possible listing of the contracts. The council includes officials from Mitsubishi Corp., Mitsui & Co., Sumitomo Corp., Goldman Sachs Group Inc., JX Nippon Oil & Energy Corp, Tokyo Electric, Tokyo Gas Co. and Inpex Corp.
The ministry may begin publishing its own spot price assessments that can be used for the LNG futures, Ishizaki said, without giving a time frame.