Japanese LNG buyers boost optimization, shorter contract tenures on declining domestic demand

Japanese LNG buyers are boosting their optimization of LNG cargo trading amid declining domestic demand in order to maximize their profits, according to Japanese LNG importers and Asian LNG traders.

Optimization includes time swaps, location swaps, quality swaps and quantity swaps, enabling them to make the most money from trading, as well as manage stocks, Asian LNG traders said.

Time swaps have been performed when the market is in contango, especially by Japanese gas utilities, Asian LNG traders said.

When the market is in contango, a company typically buys a cargo for delivery in an earlier month, puts it into storage, and sells a cargo for a later month. For example, the spread between the balance-of-month November/December was assessed at 20 cents/MMBtu on Oct. 8, indicating it could make 20 cents/MMBtu of profit just from trading those cargoes, in theory.

Japanese gas companies often engage in these kinds of trades, rather than power utilities, because gas utilities have more spare capacity, according to Japanese utilities. Power utilities' tank operations are typically more complicated as power demand fluctuates, Asian LNG traders said.

In September, Japan's Kansai Power Electric Company performed location and time swaps, by selling a cargo, FOB Cove Point, loading over Oct. 28-Nov. 1, and buying a cargo, DES Japan, delivery over Sep. 30-Oct.1, to receive a cargo earlier as well as to sell the US cargo to the most lucrative market, Asian LNG traders said.

However, a Japanese importer said: "At the moment, our stocks in the tank are too high. In early November, a new cargo cannot be stored. We need to perform a time swap to delay the delivery."

Japanese importers face a full-tank situation when consumption is slower than expected, Japanese LNG importers said. Time swap is one of the options to solve the problem, they said.

The importer said: "We sometimes need to buy rich cargoes to adjust the heating value. When we don't have enough heating value, we have to swap cargoes to get a cargo with a higher heating value."

Japan imported a total of 66.9 million mt of LNG in 2024. This was a slight increase of 1.2% year over year, but the general trend since 2012 has been a decline, due to higher nuclear availability, continued renewable additions, and weak total power demand resulting from sluggish industrial activity and energy conservation policies, according to S&P Global Commodity Insights analysts, who projected Japan's LNG demand to be about 56 million mt by 2035.

Japanese LNG importers seek shorter and/or FOB contracts

Japan will see 20.37 million mt/year of contracts expiring over 2025-2030, according to data from the Japan Organization for Metals and Energy Security, or Jogmec.

To replenish the expiring contracts, Japanese companies are looking for long-term supply, Asian LNG traders said. Recently, Hokkaido Gas and Shizuoka Gas each sought supply for seven years, which compares with an average of 14 years for the contracts expiring over 2025-2030.

Hokkaido Gas earlier this year sought LNG supply via a tender for up to seven years starting from April 2027, seeking around three cargoes per year, while Shizuoka Gas closed the first round of a tender at the end of September to buy LNG in a seven-year term contract starting in April 2027, Platts reported previously. Both companies sought DES cargoes.

Some Japanese utility sources said it is difficult to sign longer-term contracts over 15 years because of the uncertainty of decarbonization.

Japan is committed to achieving net-zero greenhouse gas emissions by 2050. Therefore, Japan could implement new regulations to encourage utilities to reduce greenhouse gases, which may prevent them from consuming LNG.

On the other hand, Japan's JERA decided to purchase up to 5.5 million mt/year from four US Gulf Coast export developers for around 20 years starting in around 2030 on an FOB basis, the company said in June.

The contracts were announced just after Japan and the US discussed expanding trade, non-tariff measures and cooperation on economic security during the talks on US tariff measures in Washington June 5.

The tenures were longer than those recently seen, while the contracts have flexibility as they are FOB contracts.

"All volume will be delivered under FOB terms with no destination restrictions, allowing JERA to optimize shipping routes and respond flexibly to evolving market conditions and LNG demand across the Asia-Pacific region," JERA said on its website.

This comes at a time when the US-North Asia arbitrage, via the Cape of Good Hope, has been shut for most of this year, being assessed at minus 65 cents/MMBtu on average in the year to date. Exports of US LNG to Japan in the first nine months of the year totaled 2.65 million mt, almost half of the 5.28 million mt exported during the same period last year.

Major LNG term contracts expiring from 2025 to 2030

Source: JOGMEC