Channel NewsAsia

Japan to start LNG futures contract

TOKYO: Japan is preparing to create the world's first futures trading contract for liquefied natural gas in a bid to stabilise the commodity's price as demand soars, an industry ministry official said on Tuesday.

Resource-poor Japan and neighbouring South Korea are the world's two top buyers of LNG with East Asia accounting for about 60 percent of global demand, but the region also tends to pay higher prices with shipping costs expensive and rates varying from place to place.

In Asia, the price for LNG is index-linked to oil, which means buyers tend to pay far more than those in North America, where price is determined on the basis of supply and demand.

Big price differences for LNG -- natural gas that is temporarily liquefied for easier storage and transportation -- underscored the need for its own trading contract, the industry ministry official said.

Tokyo wants to make the contract a reality within two years, he added.

"We want to create a system that serves as a new indicator, reflecting the true supply-and-demand conditions of LNG and to stabilise its price," the official said.

The contract would be traded at the Tokyo Commodity Exchange, with Japan saying it hopes to encourage gas users in South Korea and Taiwan to take part in the market, and later US gas suppliers.

Tokyo has racked up growing current account deficits due to ballooning energy costs after it was forced to turn to pricey fossil-fuel alternatives in the wake of the 2011 Fukushima atomic crisis. The accident led to the shutdown of nuclear reactors which once supplied about one-third of Japan's power.

A weaker yen has also jacked up the cost of imported fuel which is usually priced in US dollars.