Japanese utilities boost spot LNG trading as domestic demand declines

Japanese utilities are increasingly engaging in spot LNG trading to sustain their business scale amid a contracting domestic market.

The country imported about 65 million mt of LNG in 2024, according to the Ministry of Finance, down 0.4% from 2023. This compares to 74 million mt in 2020.

Japan's LNG demand is expected to decline after 2025 due to a declining population, the gradual restart of nuclear reactors and the expansion of renewable energy sources. S&P Global Commodity Insights analysts project Japan's LNG demand to be about 54.41 million mt by 2035.

Term contracts typically fulfill nearly all the needs of Japanese power and gas utilities. However, when demand declines, they may encounter surplus cargoes that must be sold in the spot market, unless their term contracts are approaching expiration.

Shrinking demand could compel power and gas companies to seek business opportunities beyond the country's borders.

According to industry sources, Japanese gas utilities have been actively trading spot cargoes primarily to optimize their operations and profits.

Major Japanese gas companies, including Tokyo Gas and Osaka Gas, have been actively trading spot cargoes, particularly when the market structure is in contango. They possess greater spare storage capacity compared with Japanese power utilities, enabling them to engage more effectively in contango strategies.

Tokyo Gas set up an LNG trading company, TG Energy Trading, in 2024 in Singapore to enhance its LNG trading functions, aiming to boost its LNG trading volume to 5 million mt by fiscal year 2030-31 (April-March), Platts, part of S&P Global Commodity Insights, reported earlier. In March, Tokyo Gas also announced plans to expand its business in US, including trading US LNG.

Osaka Gas Energy Supply & Trading, or OGEST, established in December 2019 in Singapore, has also been active in the Asian LNG spot market, optimizing its operations and profits.

Both companies have participated in the Platts Market on Close assessment process, with OGEST reporting three bids and three offers and TG Global Trading, Tokyo Gas' former trading unit, reporting one bid and five offers from 2024 to 2025 so far.

"These gas companies buy physical cargoes for earlier month delivery, physically store them in their tanks and sell them in later months to take advantage of the time spread when it is in contango," said an LNG trader.

Platts assessed the June/July contango structure at 17.5 cents/MMBtu on April 16.

In recent years, Kyushu Electric Power Company has emerged as one of the most active spot LNG sellers, having sold at least three cargoes so far in 2025. Industry sources said that the power utility holds a long position in LNG due to its expanding solar power capacity.

Growing hedging role

The importance of hedging has been growing among Japanese utilities as their LNG physical exposure increases alongside enhanced trading capabilities. Traditionally, Japanese utilities did not hedge their LNG purchases.

Japanese utilities' power and gas prices are tied to Japan's imported crude oil or LNG prices, which has historically diminished the need for hedging.

However, this is changing as Japanese utilities are ramping up their spot trading activities and gaining exposure to various pricing benchmarks through term contracts and spot sales.

"We hedge to [align] both the buying and selling prices to flat prices and lock the profit," said the LNG trader based in Japan.

"In case we have a purchase of LNG linked to Brent crude and the cargo [sale is] at JKM-linked prices, we fix the price by selling Brent futures to make the floating price [into a] fixed [one]," the trader said. "And we buy JKM futures or swaps at a fixed price, which is supposed to be higher than our purchase price, to make the profit fixed."

The LNG trader also said that they would refrain from hedging their positions if they were confident about making a profit. Additionally, hedging becomes unnecessary when transactions are conducted back-to-back against the same price benchmark, as the margins would already be secured.