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APPEC: China's SHFE to accelerate natural gas futures contract development

Highlights

Developing cobalt, hydrogen and ammonia contracts

Volatility amid pandemic encourages hedging

Shanghai Futures Exchange will accelerate research and development of natural gas futures contract as an effort to meet China's carbon neutrality targets, the exchange's CEO Wang Fenghai said during an APPEC interview on Sept. 28.

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"Natural gas is a key alternative product during energy transition process, with less carbon emission comparing with oil and coal," Wang said adding that it will be the next energy contract to launch.

Demand for hedging tool for gas/LNG amid the recent surge in LNG prices has been rising, while SHFE has been developing the contract for more than three years, Chinese market participants said.

However, there remain a few issues to figure out, such as the unit measurement and designed warehouse for delivery, market sources said.

China has decided to adopt thermal unit, or MMBtu, instead of volumetric units (Bcf or Bcm) as the standard units for measuring and pricing domestic gas, in line with international practices.

The country's top planner, National Development & Reform Commission, in 2019 announced to implement the thermal unit as the national measurement by end-May 2021, but no progress on it was reported as of September.

Moreover, China's gas storage capacity is still limited, especially during the peak winter season, making it difficult to set delivery spot.

China's commodity futures are against physical delivery.

In addition, SHFE also invested in developing futures contracts for green energy products, such as battery cobalt, hydrogen and ammonia, Wang said.

The exchange works with other organizations to adopt low carbon and ESG in futures market to develop green derivatives system to meet the demand from China's economic transformation.

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Trades increase amid pandemic

Meanwhile, price volatility during pandemic period encouraged market participants to trade Chinese futures to hedge risks, including international investors, Wang said.

Currently, 73 domestic and international brokers are registered in Shanghai International Energy Exchange, or INE, with the international ones located in 25 countries and regions cross the world, according to Wang.

INE is SHFE's subsidiary which hosts crude oil futures contract and low sulfur bunker fuel oil futures contract that allow international investors to participate.

During January-August, traded volume of INE's crude futures increased 8.5% year on year to 28.78 million lots, and traded value rose 51% to almost Yuan 1.2 trillion ($185.74 million). Its daily open interest was at 83,000 lots, Wang said. One lot equals to 1,000 barrels.

The contract's accumulated delivered volume reached 126 million barrels since the futures were launched in 2018.

Moreover, some of this barrels were sent to India, South Korea, Malaysia and Myanmar, which attracted more interest from physical players from overseas indicating a trading-hub price begins to take a shape, Wang said.

Traded volume of its low sulfur bunker fuel oil futures contract, which meets IMO 2020 specification, has reached 18.23 million lots (182.3 million mt) since the launch in June 2020, with traded value at about Yuan 502.7 billion, Wang added.

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