US LNG exports, on destination-free terms, have been regarded as the game changer for the market in recent years. But this view neglects the role played by China’s rising demand, and the changes taking place among traditional LNG buyers in Northeast Asia, which are driving the rapid establishment of an LNG trading hub. The global LNG market is becoming more liquid and spot-oriented. The US tackles the supply leg of this increasingly flexible market, but the greater flexibility on the demand leg can be ascribed to surging demand in China, whose LNG buyers in recent years have been under-contracted and consequently more willing to enter into prompter, more short-term trade than longer-established import markets. The combination of these supply and demand legs have enabled portfolio players
Ciaran Roe considers the following as important: Asia, China, Japan, JKM, LNG, MOC, natural gas
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US LNG exports, on destination-free terms, have been regarded as the game changer for the market in recent years. But this view neglects the role played by China’s rising demand, and the changes taking place among traditional LNG buyers in Northeast Asia, which are driving the rapid establishment of an LNG trading hub.
The global LNG market is becoming more liquid and spot-oriented. The US tackles the supply leg of this increasingly flexible market, but the greater flexibility on the demand leg can be ascribed to surging demand in China, whose LNG buyers in recent years have been under-contracted and consequently more willing to enter into prompter, more short-term trade than longer-established import markets. The combination of these supply and demand legs have enabled portfolio players and traders to play a more active role in the LNG spot market.
The appearance of destination-free cargoes has also created an environment where buyers are pushing sellers to allow for more destination flexibility for LNG cargoes under long-term contracts. Meanwhile the over-contracted nature of some Northeast Asian end-users is encouraging new variety in business models, with some Japanese utilities entering the portfolio player segment.
Spot LNG trading
Spot trade volumes have surged as a result. Spot deals collected by S&P Global Platts in Northeast Asia have jumped 57% in 2019 year-on-year from January-September to 392. This follows an 82% jump in the whole of 2018 versus 2017 (332 Northeast Asia spot trades were collected by Platts in 2018).
Indeed, while supply – and the number of liquefaction suppliers – in 2019 is only ramping up from the US, market evolution has been storming ahead in the expanding spot trading hub of Japan, Korea, Taiwan and China, or JKTC. Together, these locations imported 192 million mt of LNG in 2018, or 62% of global demand. This “hub” is not an intersection of physical pipelines or a pipeline network like certain regional natural gas hubs. It is more akin to oil trading hubs where delivery can be made or taken at multiple ports or terminals.
JKTC optionality – the ability for the buyer to divert the cargo to terminals within these locations – is so commonplace that it appears in 66% of fully transparent spot market bids, offers and trades. Meanwhile, Japan, Korea or China (JKC) appears in a further 32% of spot market bids, offers and trades for delivery into Northeast Asia. Single location delivery optionality – the ability to deliver a cargo into only one of Japan, Korea, Taiwan and China – appears in less than 1% of bids, offers and trades.
These percentages come from data reported via the Platts Market On Close (MOC) assessment process – a daily real-time price formation process where companies report named, firm bids, offers and trades. Since June 2018 over 1600 bids, offers and trades have been reported via the JKM MOC.
There are two other clear ways to understand the impact certain importing nations are having on spot market dynamics in Northeast Asia – the world’s largest LNG importing region.
One is by analyzing the base discharge port listed in bids. Companies state in their bids the base port where the cargo will discharge, unless the seller is notified of a diversion before an agreed date.
This data shows that Japan’s terminals are used in 43% of bids, while China and Korea are used around 29% and 25% respectively. This is broadly in line with the overall volume of LNG that each of these nations import, at least in volume order – Japan is the largest LNG importer globally, China is second and Korea is third.
A second perspective comes from looking at the locations where cargoes performing against trades reported in the JKM MOC have been delivered. By this measure, China comes out on top: 48% of the trades reported in the MOC have been delivered to Chinese regasification terminals versus just under 40% to Japan and nearly 15% to Korea.
This data could imply a fixed, final structure to today’s LNG market. Certainly the under-contracted nature of China’s end-users and the higher logistical flexibility in China is a draw for companies looking to deliver LNG cargoes into Northeast Asia.
But Japan is making swift moves to liberalize its downstream power market, which could encourage more competitiveness among its utilities, thereby bringing more into the trading space and encouraging further logistical flexibility at Japan’s LNG receiving terminals. This process could redefine the priorities of Japan’s LNG importers from one where predictability of cargo deliveries is turned down to allow for a higher degree of operational flexibility.
The structure of the market is still evolving, and any price benchmark in this space needs to remain flexible. Northeast Asia is, and will likely remain, the focal point for global LNG price formation, having organically formed its own trading hub, JKTC. It allows flexibility to buyers and sellers within the constraints of end-user markets that are gradually undergoing the process of liberalization, and reflects the bulk of total global LNG demand.
Furthermore, an expanding shipping fleet, more flexible commercial contracts and greater trading standardization are key factors that will boost trading flexibility within this JKTC trading hub.
Platts JKM, which reflects deliveries into JKTC, is being used by industry participants to express the significance of this hub. Companies have begun to use JKM for contractual settlement as far upstream as the Permian Basin, and as far downstream as domestic gas markets, reflecting the growing impact LNG cargo trade is having on the LNG and natural gas markets globally.