By Yuji Okada and Chou Hui Hong
March 29 (Bloomberg) — Japan, the biggest buyer of liquefied natural gas, plans to list the world’s first futures contract for the supercooled fuel on the Tokyo Commodity Exchange within two years.
The futures will be for cash settlement in dollars and based on an index price for spot LNG cargoes delivered to Japan, Takashi Ishizaki, the director for the commerce policy division at the Ministry of Economy, Trade and Industry, said by phone today. While the contracts won’t be for physical delivery, they will allow Exchange Futures for Physical, or so-called EFP, transactions that enable traders to swap their futures positions for a physical holding.
LNG futures will allow consumers and producers to hedge against price swings, while challenging the current method of linking the fuel’s cost to oil. That’s more important after Japan’s bill for LNGclimbed to a record last year, helping push the nation’s trade deficit to an all-time high, as it switched to thermal electricity generation after the shutdown of its nuclear plants. The Tokyo Commodity Exchange, or Tocom, will consider how to implement the contract after a council set up by the ministry agreed with the proposal today, Ishizaki said after the meeting in Tokyo.
“We always seek opportunities to list new futures contracts, although it takes time to develop,” Tadashi Ezaki, the president of Tocom, the nation’s largest commodity exchange, said in an interview in Tokyo yesterday. “We are keen to create a market that meets the needs of domestic and oversees investors.”
Japan paid 6 trillion yen ($64 billion) for a record 87.3 million metric tons of LNG last year, customs data show. The gas, which is chilled to a liquid for transport by tanker, cost an average $16.70 per million British thermal units, or almost six times as much as the $2.83 average price of U.S. gas traded on the New York Mercantile Exchange last year.
All but two of the nation’s 50 atomic reactors are still shut pending safety checks after the March 2011 earthquake that caused a meltdown at Tokyo Electric Power Co.’s Fukushima plant. The country’s trade deficit was 6.9 trillion yen in 2012.
The trade ministry wants a future for cash settlement rather than physical delivery to attract traders who don’t have access to infrastructure such as regasification terminals, according to Ishizaki. It also plans to encourage LNG buyers in South Korea and Taiwan to participate to increase liquidity, he said. The government will ask Singapore, which is vying to become Asia’s LNG trading hub, and the U.S., which is becoming an exporter of shale-gas-derived LNG to Japan, to list a similar contract.
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.
Chubu Electric Power Co. has signed a binding agreement to buy 1 million tons of LNG a year from the Wheatstone project in Western Australia for as much as 20 years, Chevron Corp. said in a statement e-mailed today. Wheatstone is owned by Chevron, Apache Energy Ltd., Kuwait Petroleum Corp., Royal Dutch Shell Plc, Kyushu Electric Power Co. and a unit of Tokyo Electric.