The link between liquefied natural gas prices and its policy implications-the case of high importing dependency Asian countries

ABSTRACT

It is crucial to evaluate integration issues for Asian liquefied natural gas (LNG) markets because importers now have some chance to adjust the pricing mechanisms. The purpose of this study is to examine the price integration between high-importing-dependency Asian LNG importers (Japan, Korea, and Taiwan). Considering the global economic crisis and LNG trading features, this study applied the smooth transition regression (STR) model and the nonlinear cointegration test to explore the long-run price relationship. This study indicates the limitation of the linear model in testing the LNG market integration. Furthermore, empirical results of this study suggest nonlinear cointegrations exist and show evidence of a smooth transition in the long-run price relationships, but do not support the law of one price (LOP). In terms of policy implications, this study’s findings indicate that a mechanism for facilitating information transmission and market adjustment in Asian LNG markets is needed.

KEYWORDS:

• Energy price
• liquefied natural gas
• nonlinear cointegration
• smooth transition regression
• structural change
• JEL Q41
• C22
• F18

Notes

¹ The LNG long-term import contract is linked to a common target – the Japanese Crude Cocktail (JCC) price – for Japan (JPN), Korea (KOR), and Taiwan (TWN). The JCC is also referred to as the Japanese Custom Cleared, which is the average price of customs-cleared crude oil imports into Japan. The JCC is published by the Japanese government every month. More detailed information for LNG pricing mechanism can be found in Akbar (2011).

² Japan refers to the JCC price for oil that is mainly from the Middle East, but European gas prices are indexed to the North Sea Brent crude oil price.

³ There are two reasons that we avoid using data after the Fukushima nuclear accident. First, the purpose of our study is to investigate price integration in the Asian LNG market, especially after the global crisis where the LNG market favors buyers more. However, LNG importing prices have increased abnormally post Fukushima due to the importing of LNG from the spot market. Second, the Fukushima is a special event with a clear time cut. It has a predictable significant positive influence on Japanese importing prices.

⁴ Here we focused on the price relationship for Japan and did not test the price relationship between Korea and Taiwan, because of the following reasons. First, import prices of Japan are commonly used as the price signal in the Asian market. Second, we assume that the LOP exists between Korea and Taiwan if the LOPs exist in both Japan-Korea and Japan-Taiwan.

⁵ We also examine the stability by using the rolling window approach with window size 30. However, linear long-run relationships are also not stable over the sample period.

⁶ We choose the optimal block size b in the range: the smallest b = T°^.7 and the largest b = T°^.9, where T is the sample size.