SINGAPORE (Reuters) - Singapore Exchange SGXL.SI is planning to create an Asian benchmark for liquefied natural gas (LNG) and break a decade-long reliance on oil-linked pricing, hoping to take a greater role in an expanding spot market, a senior official said.
Spot LNG trading in Asia is set to rise as a wave of new supply comes online, but participants have few options to hedge risks amid a lack of a liquid derivatives market.
“We think that Singapore has a role to play,” Michael Syn, head of derivatives at SGX, said in an interview at the Reuters Commodities Summit.
SGX will compete with CME Group CME.O, which will begin development and clearing of a Japanese LNG contract later this year. Japan is the world's largest importer of LNG.
Singapore produces more than 90 percent of its electricity from imported natural gas, including LNG bought mainly on long-term contracts.
“We are starting to realize that when the price of gas in the free market falls below what we can procure, it makes us less competitive and our manufacturing sector starts to suffer,” said Syn at the Summit, held at the Reuters office in Singapore.
Already Asia’s main oil trading hub, Singapore is building LNG storage facilities. The city-state sits at the intersection of the seaborne LNG passing through the Malacca Strait and a growing network of pipelines in Southeast Asia.
“So if we are able to establish price formation mechanisms for both pipeline and seaborne gas, Singapore could become a natural virtual pricing point for pan-Asian gas,” said Syn.
SGX may make an announcement on its gas pricing initiatives next week during the Singapore International Energy Week, he said.
The exchange is already working with about 20 major physical LNG players in publishing a weekly price index known as the Singapore Sling, or FOB Singapore SGX LNG Index Group.
The aim is to offer derivative products linked to that index, Syn said.
SGX on Wednesday reported its highest quarterly net profit in about seven years, boosted by a strong performance in its fast-growing derivatives business.
The derivatives sector is mainly powered by financial contracts such as the China A50 index futures and a commodities suite that includes iron ore, rubber, coal and freight.
“We have enough of an interesting supermarket that we are no longer obsessed with what’s the next new product. If all we did was sit still with our portfolio right now, we do address 80-90 percent of offshore hard currency institutional needs,” Syn said.
While there are some market concerns on the pace of growth in the derivatives business, OCBC analysts expect the segment to remain the key driver for SGX, predicting a 25.5 percent rise in derivatives revenue this year.
As part of his first 100-days strategic review, new CEO Loh Boon Chye’s priorities include diversifying the bourse’s business mix and improving liquidity in the weak securities market.
“We want to double down on our bet on the Chinese and Indian verticals, from equities to currencies to relevant commodities,” said Syn.
“We see no other way than that for the sheer size of those economies, the sheer amount of production, consumption and hedging needs.”
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Additional reporting by Manolo Serapio Jr; Editing by Tom Hogue
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