Companies seeking to get a slice of trading in the world’s fastest-growing fossil fuel appear to be getting a much needed push from the coronavirus.
Liquefied natural gas is one of the few main commodity markets left where traders still rely heavily on a hodgepodge of meetings, phone calls, emails or even the old fax machine to thrash out deals worth millions of dollars. But a breed of innovators seeking to profit from making the industry more transparent and inclusive could be getting a boost from the new work-from-home world order.
“In the current environment when people can’t meet face to face to negotiate deals, it would make sense to do more online,” said David Thomas, an independent adviser and former head of LNG at Vitol SA. To be sure, all that’s required to execute from home is email and a mobile phone, he said.
Online platforms are gaining because the need for speed has never been greater. Prices have slumped to records and opportunities come and go faster than ever. Spot trading surged to 27 per cent of the market last year, replacing some of the multi year deals that the industry is still centered around.
The LNG spot market really only emerged in the past decade. While this corner of the energy industry is much younger than other markets, there is still a general reluctance among traders to embrace digital tools.
That partly explains why only a fraction of trading is covered by the startups. People are unwilling to transact in a public domain and the preference remains to do bilateral deals, Thomas said.
“For spot trading, most deals are initiated via a call and terms are exchanged over email, I don’t believe that has changed,” said Sarah Behbehani, a senior vice president of LNG at Jera Global Markets. “LNG is a relationship business, and face-to-face meetings are required when discussing long term. However, going forward the frequency for such meetings will definitely be less than before the pandemic.”
Jera Global Markets has adopted technology for virtual meetings, but the lockdowns do mean the speed of execution was slightly impacted to ensure high quality, she said.
Growing liquidity on the sprouting digital platforms – essentially more traders – and making them easy to use are seen in the industry as factors that could make these startups successful.
Orders on the new Emsurge broker platform, founded last year, rose more than fourfold from February to April. Bids, offers and trades on S&P Global Platts’ market-on-close platform surged 24 per cent in January to April from a year earlier. Spark Commodities Pte, which offers shipping assessments for LNG cargoes, now has more than 400 users after starting in April last year.
Emsurge was founded by Melissa Lindsay, former head of LNG at Tullett Prebon. More than 10 former and current LNG traders, executives and consultants from London to Singapore invested in her venture. It’s the first broker screen for physical LNG cargoes and also allows users to connect with their external network of traders as well as colleagues, she said.
Emsurge now has 60 traders from more than 20 companies including Spanish utility Naturgy Energy Group SA and is adding one to two companies per week, Linsday said. Broker orders handled on the platform rose to 25 in April from six in February.
“For a small organization, it may make sense as you can give your order to a broker and then the broker will work on the deal during the day,” Thomas said. “One advantage is the broker can identify new counterparties.”
Platts in July started using its eWindow, an online data-entry platform, in Asia for its LNG market-on-close process, which gives traders the ability to submit bids and offers.
A similar system has been used by Platts in oil and other markets for years. The company’s Japan Korea Marker assessment for LNG is increasingly used in everything from spot deals to long-term supply contracts.
“This data and communications tool brings greater speed, transparency and efficiency to the process of trading, which in today’s largely work-from-home environment can be a boon to the industry,” said Ciaran Roe, director for Global LNG at Platts.
Hartree Partners, a London firm going back to 1997, is embracing the change. Their traders rely on Emsurge for real-time data on bids and offers, feeding it into its proprietary system. They trade pipeline gas, but use Emsurge to understand the LNG market.
“The data being systematized, and real-time, allows us to be far more efficient in processing the information and assisting in informing trading views,” said Paul Garske, a managing partner at Hartree.
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In Singapore, another startup is seeking to make the LNG shipping market more transparent. Spark Commodities, a joint venture between cargo tracking firm Kpler and the European Energy Exchange AG, collects data from ship brokers to provide assessments for LNG freight rates. This is increasingly critical as gas prices from America to Asia converge at low levels, cutting the arbitrage profit from hauling cargoes thousands of miles across oceans.
“Being a new player means we have to be fundamentally better than existing incumbents,” said Tim Mendelssohn, the managing director of Spark Commodities. “We have to be very responsive, robust and customer focused as we can’t rely on a legacy. This agility creates big opportunities too.”
Whether the startups can maintain the growth fueled by the pandemic remains to be seen. What’s clear is that it has got people in the industry thinking about the most efficient ways to interact among themselves and with their counterparties and clients. But many, including Mendelssohn, also miss the physical meetings, be it a beer in the pub or over a cocktail at an industry dinner.
Engie SA, one of the first LNG traders, now largely keeps in contact with clients and stakeholders via a myriad of chat platforms, including WhatsApp, Zoom and BlueJeans, according to Gordon Waters, its global head of LNG.
“COVID-19 was a trigger to further reinforce our setup and ensure minimum disruption to our business and our customers as possible,” he said.
© 2020 Bloomberg L.P.