Indian LNG importers stick to fixed-price tenders despite volatility

Indian LNG importers have continued to rely on fixed-price tenders, leaving procurement exposed to timing risk amid volatile global gas markets.

Floating-price procurement could be more efficient in a volatile market due to its potential to better capture shifting value over time than fixed-price transactions, according to traders, analysts and Indian importer sources.

Indian companies bought eight LNG cargoes in May at fixed prices via tenders at an average of $17.83/million British thermal units, according to a Platts analysis.

Platts, part of S&P Global Energy, assessed the front-month average, or the average of the front two half-months, at $17.72/MMBtu. The front-month average for May 1-15 reflected the price of LNG cargoes delivered to India over May 16-31 and June 1-15. There were 12 days in May when the WIM averaged below $17.83/MMBtu.

In April, Indian companies purchased 14 LNG cargoes at fixed prices through tenders at an average of $16.6/MMBtu, compared with a front-month WIM average of $16.76/MMBtu, and there were only eight trading days during which the front-month WIM fell below $16.6/MMBtu, Platts analysis showed.

While traders said the preference for fixed-price tenders may be linked to limitations in hedging capabilities, some Indian importers said it was more a matter of reluctance to shift toward hedging.

"You would not necessarily hedge 100%, and you would observe that while for some cargoes you may lose out, broadly as a principle, buying on a floating price basis would be beneficial," an Indian importer said.

"If the companies cannot make a change now, it is hard to imagine what would prompt a change," the importer said. "If there is hedging capacity for term contracts, not using the same for spot transactions is a choice that has been made to avoid changing too much and then be left answering questions."

Traders in Singapore, Europe and the Middle East noted that companies operating in competitive markets generally require some form of hedging to effectively manage price risk.

"Even if the competition is with alternative fuel for oil companies, they should hedge because oil companies do hedge the crack spreads," an LNG trader in the Middle East said.

Market participants typically evaluate fixed-price tender results at the time of tender closing, along with the relevant price spreads to JKM futures -- the liquid derivative contract that reflects LNG cargoes delivered to Northeast Asia.

The published JKM-TTF and JKM-WIM futures spreads offer an indication of the tradable value for cargoes delivered to India. According to market participants, these spreads tend to be less volatile than outright fixed prices.

Pricing risk

A single transaction locks in the cargo's price and value -- for example, a commitment of $60 million -- where a typical price fluctuation of 70-80 cents/MMBtu could shift the valuation by up to $2.6 million.

"We have seen tender results even on consecutive days shifting by $1/MMBtu, which is a big swing. We agree that a floating price makes sense, but no one is doing it yet," another Indian importer said.

An Indian company that buys LNG at a fixed $16/MMBtu, equivalent to JKM minus 70 cents/MMBtu, on a day when the JKM-WIM spread was 60 cents/MMBtu would likely have its offer awarded, since Indian buyers typically target prices below the day's WIM, according to importers.

However, if prices were to fall and the company bought two additional cargoes at $15/MMBtu and $14/MMBtu, and JKM later settled at $14.75/MMBtu, the cargo purchased at $14/MMBtu would be profitable, while the transactions at $16/MMBtu and $15/MMBtu would result in a loss, importers said.

Alternatively, if prices were to rise and the company purchased two additional cargoes at $17/MMBtu and $18/MMBtu, and the full-month average JKM settled at $17.50/MMBtu, only one of the three fixed-price transactions would be beneficial, according to importers.

A discount of 70 cents/MMBtu to JKM ensures the same 70-cent/MMBtu discount is maintained at final settlement -- resulting in $14.05/MMBtu in the falling market scenario and $16.80/MMBtu in the rising market scenario.