Corrected: Liquidity issues loom large for Japanese TOCOM LNG market

(The fifth paragraph of the ICIS story “Liquidity issues loom large for Japanese TOCOM LNG market“, originally published on 17 September 2014, has been corrected to reflect the fact that counterparty names on the JOE platform are not visible.)

LNG buyer and trader reaction to Japan’s newly launched LNG derivatives market has been less than optimistic.

The Japan OTC Exchange (JOE) – a venture between the Tokyo Commodity Exchange (TOCOM) and broker Ginga Energy – opened the trading platform for non-deliverable forward contracts this week. The Japanese Ministry of Economy, Trade and Industry (METI) has been pushing the project in the hope it will add transparency to the global LNG market and thereby help stabilise energy prices in the country, the world’s largest LNG importer.

Companies can offer contracts of up to 5,000 tonnes of LNG to be delivered within a calendar year, according to JOE. No physical LNG will be delivered upon settlement. Instead, the counterparties will exchange cash based on the difference between a fixed price and the three-day settlement average of a Japanese firm’s price assessment up to and including the final day of assessment before the contract month. The final day of assessment will be the 15th of the previous month.

JOE’s LNG derivatives market will not be the world’s first. The CME opened an LNG swaps market in April 2012, followed a few months later by ICE. Trade volumes on both platforms disappointed, however.

Counterparty names on the JOE platform are invisible, but each member has a list of members potentially active on the platform.

If the market succeeds, Japan’s government hopes it will eventually lead to the world’s first LNG futures market being established in Tokyo. But the trading platform has raised eyebrows even among some of the dozen or so companies that have said they will participate.

Although Tokyo Electric (TEPCO), Tokyo Gas and other large utilities are well represented in the JOE platform, and trading houses such as Mitsubishi and Vitol are said to be joining soon, BP and other large suppliers are so far noticeable in their absence. That bodes poorly for a derivatives platform that has struggled with liquidity.

“As everyone knows, this is METI’s agenda, and it could stimulate (or force) some Japanese participants. However, the major suppliers’ response will be key,” a Japanese trader told ICIS in an email.

But Japanese LNG buyers’ determination to create a Japan delivered ex-ship (DES) physical benchmark may help JOE’s market succeed, he added.

“The only advantage of JOE, assuming that we have one, would be the fact that major Japanese utility companies have been supporting the idea of developing a DES Japan benchmark, which naturally entails their active participation in the market,” Araki said.

Even with large buyers joining the platform, the LNG spot market’s lack of liquidity could still present a high hurdle, buyers and traders said. Fewer than 20 spot cargoes were delivered globally in September, according to ICIS data. The bulk of Japanese LNG is purchased on an oil-based link against which a derivative gas price hedge may not be effective.

Adding to the liquidity issue would be the sheer size of the contract cargoes eligible for trade on the exchange, increasing exposure to price fluctuations. Each contract would represent 250,000MMBtu of LNG, or about 5,000 tonnes. That compares to the 10,000MMBtu stipulated in CME’s LNG swaps contracts.

Not all traders were completely pessimistic about the market’s chances, however. The LNG hub could actually spur some deals by making Japanese utilities more willing to enter the spot market, one trader said. Ben Lefebvre