LNG derivatives could set off market for all

"The Asian infrastructure story is a great one for shipping because of its huge energy demands." said Affinity Research managing partner Mark Williams, adding that up to $8trn in infrastructure spending has been forecast for the 10 years till 2020.

He noted however that the recent slide in oil prices has cast doubts about the continuing use of old benchmarks such as Brent and the Japan Crude Cocktail (JCC) to underpin LNG infrastructure finance. "You couple this with the increase of spot LNG cargoes and you see an increased demand for a standalone LNG derivative with its own forward curve mirroring the time scale and series of JCC," Williams said.

Pointing to the way the SGX iron ore contract changed the iron ore market, Williams suggested that the same might happen for LNG. Recounting how iron ore used to be sold on annual or multi-year contracts and is now sold mostly on a spot basis, he said: "The iron ore futures market has helped to liquefy the iron ore market and allow easier access to it." This in turn has led to vessels also being traded on a spot basis as opposed to the old long term contract model and has greatly broadened the market for iron ore shipping.

"It's possible therefore that this kind of market structure and financial product could help the LNG markets and help to get the gas to Asia where it is required," he said. SGX launched futures and swaps contracts linked to its index of spot prices for LNG traded in Asia earlier this year. With 275m tonnes per annum (mtpa) traded last year and a forecast of 425mtpa by 2030 the market is not insubstantial, Williams noted.

Meanwhile as buyers push more for shorter term contracts and spot trading of LNG, the key to making this all happen is pricing, added Affinity (Shipping) managing partner Richard Fulford-Smith. "We will have exponential growth, and it's simply a matter of creating the forward curve on pricing which will make the case for LNG to be shipped in more vast quantities," he said.

BMT Asia Pacific md Richard Colwill noted that with average LNG contracts having gone down from 25 years to six years and more activity in the short term market there is potential for ship owners to take advantage of this.

Echoing this Maersk Tankers senior market analyst Michael Jones pointed out how big LNG buyers are now demanding re-negotiations on long term contracts and are even attempting to create enough volume for a spot market on their own in Asia. He warned however that while "it is an opportunity for trade on the shipping side, I do think it raises key risks about developing new projects".

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