Platts JKM LNG FAQ

Platts JKM™ LNG FAQ

What is Platts JKM™?

Platts JKM™ is the Liquefied Natural Gas (LNG) benchmark price assessment for spot physical cargoes. It is referenced in spot deals, tenders and short, medium and long-term contracts both in Northeast Asia and globally.

JKM reflects the spot market value of cargoes delivered ex-ship (DES) into Japan, South Korea, China and Taiwan. Deliveries into these locations equate to the majority of global LNG demand.

How does Platts assess JKM?

JKM reflects the daily tradeable value of a spot LNG cargo at the given delivery period and location, based on trades, bids, offers and indications of tradeable value reported to S&P Global Platts pricing specialists.

Platts uses a Market-on-Close (MOC) assessment methodology*. Since Q2 2018, companies began reporting firm and transparent bids, offers and trades in the Platts MOC process.

The MOC is a day-long process that ends at 4:30 p.m. Singapore time — the timestamp for Platts LNG assessments in Asia.

During the process, Platts editors survey the market for information on bids, offers, trades as well as market fundamentals. In addition, Platts also publishes information from companies that report firm, named bids, offers and trades in the MOC assessment process. All the published information is considered in the day’s assessment. Firm bids, offers that are open to the larger market, and any trades resulting from those bids and offers, take precedence in the assessment process.

Besides information published in the LNG MOC process, Platts editors also engage directly with producers, consumers, traders, brokers and shippers to gather price information. Platts publishes this information and uses it to assess intraday values, which serve as the reference point for any firm bids, offers and trades in the MOC process.

The information gathered through market surveys is considered in the final assessment alongside bids, offers and trades reported in the MOC. The firm bids, offers that are open to the whole market, and trades resulting from that take precedence in the final assessment.

These inputs are published throughout the day, in real-time, in the form

of “market heards”, to allow Platts to test the information which forms the basis of the assessment and for market participants to give feedback on those inputs. Platts assessments normalize for a range of dimensions including timing/delivery dates, quantity, location, terms of trade and quality.

For more details, please refer here.

How many companies do you communicate with for the JMK price assessment?

Platts communicates directly with a source list that covers a broad cross section of the market: producers/portfolio sellers/traders/consumers/brokers.

Platts does not take into account information from a single segment of the market, i.e. only from buyers or producers.

On a daily-basis, Platts focusses communication on active LNG spot market participants, those actively trading LNG in the Asia Pacific region.

The number of companies that actively contribute to the assessment process totaled over 110 as of February 2019.

How many firm bids, offers and trades go into assessing JKM?

In determining the final assessment, Platts gives the greatest priority to fully verifiable and transparent bids, offers, expression of interest and trades published in the LNG MOC process.

Besides information published in the LNG MOC process, Platts editors also engage directly with producers, consumers, traders, brokers and shippers to gather price information.

Platts publishes this information and uses it to assess intraday values, which serve as the reference point for any firm bids, offers and trades in the MOC process.

The information gathered through market surveys is considered in the final assessment alongside bids, offers and trades reported in the MOC.

The Platts MOC is a structured assessment process designed to yield a price assessment reflective of market values at the close of a typical trading day, and where reported bids and offers can only by improved incrementally, but Platts prioritizes data reported via the MOC process, where Platts has certainty and full knowledge of relevant information about the bid, offer or trade.

How do you ensure the accuracy of your price information?

Platts gathers information from a broad cross section of market participants to ensure a large number of data inputs and a reasonable balance between buyers, suppliers and traders.

Platts also publishes all trades/bids/offers data in real time in the form of “market heards” to allow subscribers the opportunity to assess and give their feedback on the data that forms the core of the assessment process.

Platts may track all aspects of performance on trades reported during its MOC assessment process.

We make every attempt to verify deals with all counterparties involved to ensure accountability and confirm the veracity of information provided.

We may not consider information for an indefinite period for assessment purposes from certain sources or companies if we believe that the information they provide is either false or misleading.

Also, Platts fully aligns with IOSCO principles for oil price reporting agencies in LNG markets. As such, Platts is subject to an annual independent and external assurance review.

What are the requirements for a successful price benchmark?

Independence, impartiality and transparency are crucial to building credibility in a benchmark. The support and adoption of the market is also needed: the market accepts the price index and utilizes it in legally binding contracts.

A market-representative methodology which reflects the nuances of the particular commodity is also imperative.

For example, Platts employs different types of methodology depending on the structure and trading behavior in the market being assessed: MOC/Survey/Index/etc.

The development of a forward market is also important. When a forward market forms around the benchmark, it’s a strong indicator that it’s gained market acceptance.

Lastly, for a price to be relevant, the international norms of trading and conventions of a free and open market place must be adhered to. Any distortion could see prices vary from the true market value.

On the Platts JKM™ Derivatives market.

Can you explain what JKM™ derivatives are and how the paper market is developing?

JKM Futures contracts are listed on the Intercontinental Exchange (ICE), Chicago Mercantile Exchange (CME) and European Energy Exchange (EEX). These are cash-settled derivatives settling against the monthly average of JKM. Options contracts are also listed on CME and ICE.

JKM futures trade in 2020 reached over 160 million mt, up around 50% on year. Exchange data show that 180,149 lots, or 34.6 million mt of JKM derivatives were cleared through ICE and CME in 2018.

Market players in the derivatives market now span Asian end-users, portfolio players, trading companies, LNG producers, banks, funds and European utilities. Trading houses, including those from Japan are also active along with the financial banks and more recently hedge funds have entered the market.

JKM derivatives assessments are published on a daily basis with priority put on data published via the Platts MOC assessment process for APAC LNG derivatives, which is supported by Platts Editorial Window technology.

Platts publishes two forward curves for JKM derivatives: one reflects the market close at 16:30 Singapore time; the other reflects a close of 16:30

London time. Platts assesses in both regions as JKM derivatives are actively traded in the two time zones.

Is Platts using JKM derivatives deals/bids/offers in its assessment process for the physical JKM?

Platts does consider JKM derivatives price levels when converting floating price (or index-linked) trades, bids and offers to a fixed price basis.

Platts does so by considering the value of the relevant derivative instrument. For example, if a company offers a cargo of LNG at the arithmetic average of JKM February, the tool by which the market participant could convert the floating price to a fixed price would be the JKM February derivative.

Do you think risk management tools based specifically on LNG prices will continue to increase in relevance in the coming years?

The multi-year trend shows a significant shift towards more short-term contracting either through single-cargo tenders or spot transactions.

This process is accelerating as more volumes slough off long-term contracts into shorter term accords.

As the market becomes more exposed to spot pricing and LNG-specific market fundamentals having risk management tools that reflect this will be crucial.

On LNG market outlook/development.

How big is the spot market for LNG now?

While the LNG market continues to be dominated by legacy
long-term contracts, there is a marked movement towards shorter-term and spot deals.

LNG spot transactions — trades where cargoes are delivered within three months of the transaction date — totalled more than 35% of the global trade volumes in 2020, according to the GIIGNL report for the same year.

Traditional long-term, oil-linked contracts expose both buyers and sellers to market risks, as short-term price fluctuations are not captured. Most LNG term contract pricing remains linked to oil prices, but this is also being eroded as market participants seek spot indices which more closely reflect the supply/demand fundamentals of the LNG market.

Daily LNG spot prices mitigate this risk by reflecting the actual tradeable market value for LNG bought and sold each day, making the inherent

market volatility both visible and understandable.

Which country will be successful in creating an Asian LNG hub?

This depends on how “hub” is defined: there are several large importing nations for LNG in North Asia: Japan and China are now closely tied as the largest LNG importer, while South Korea is third.

These nations vie for import volumes of LNG, albeit with varying levels of spot market activity.

In terms of where a trading hub, defined by a concentration of
companies involved in physical and derivatives transactions, then Singapore is now the LNG trading hub in APAC.

Singapore has emerged as the Asian LNG hub in terms of human talent, with several consumers, producers and traders situated in the country, while the political and fiscal regime is also supportive of trading activities. Its storage capabilities and status as an LNG bunkering hub add to the country’s appeal.

Connectivity will continue to be an issue in Asia due to lack of pipeline infrastructure and LNG is poised to be the key to connecting these disparate markets.

JKM is already an industry benchmark adopted in short, medium and long-term contracts in Asia and globally and is well placed to provide a benchmark price for LNG/gas across Asian markets.

Do you see a move away from LNG cargoes being priced off oil prices in Asia - on a similar scale to what is happening in Europe?

We certainly see diversification of Asian LNG pricing. This has been seen through contracts with prices linked to JKM and we see that trend becoming more prominent.

Market participants seek Asian market pricing methods which more closely reflect the supply/demand fundamentals of the LNG market.

Oil-linked pricing has declined in the last few years in long-term contracts as well. Recently, large projects have reached FID solely using either hybrid or JKM-related pricing. Globally, more contracts are being linked to JKM and other LNG benchmarks, whether that is upstream in the US gas market or downstream in the India regasified LNG market.