B L O G

Don’t Leave Money on the Table – How LNG Buyers Can Get the Most from the Online Market

Key Points
  • Buying using an online marketplace reduces overhead costs and adds efficiency
  • Online buying helps you find new suppliers and build new relationships
  •  Competitive, transparent pricing drives better results
  •  Online marketplace procurement streamlines how you finalize purchases and reduce time and effort on lengthy negotiations

There is a common misconception when people discuss trading platforms and online trading for commodities; that online markets are for speculative trading. This misconception tends to drive naturally long sellers and naturally short buyers away from screen-based commodity markets since they don’t “trade”, per se. There is plenty of opportunity for buyers and sellers of physical cargoes of LNG to utilize online marketplaces and trading platforms for their purchases and sales, and in doing so increase their competitiveness and returns for their stakeholders.

I’m writing this article as a quick overview of some of the ways that LNG buyers can leverage online LNG procurement through a central marketplace and get the best deal to fit their requirements. LNG buyers are a group that should be using online platforms. Buyers often become price-takers to their suppliers or to marketing firms that sell to them. Online procurement puts the power back into the hands of LNG buyers.

Some of the key benefits of online trading platforms for LNG buyers are:

Price Determination – Central online marketplaces are designed to improve price transparency, and that benefits no group of LNG market participants more than buyers. Whether procurement is conducted directly online, or using traditional mechanisms, buyers need to be assured that transactions are within a reasonable range of the market price. My company’s online platform, the Redwood Marketplace, is a “Bid-Ask” platform at its core, focusing on price discovery and transparency of the spread between the bids-to-buy and offers-to-sell LNG. Bids and offers can be used to set a range of market pricing, and coupled with a full history of completed transactions on the active Bid-Ask market, buyers can be assured they are buying within the market boundaries and justify their purchases to management, corporate stakeholders, regulatory authorities or any other governance bodies that oversee their purchases.

Access to Competitive Offers – Using an online trading platform enables buyers to either augment their traditional practices or to re-design their entire procurement program with online purchasing. You don’t need to do all your deals online, but just the ones that make the most sense as part of your overall balanced procurement strategy. Whether the platform is used for some or all of an LNG buyer’s transactions, the core benefit is access to competitive supply offers. Competition means that suppliers must openly compete with each other for the right to fill the buyer’s requirements. This may be purely in terms of price, but it may also be in the more complicated transaction details such as credit terms, delivery and logistics, legal terms and conditions, or in various deal optionality and shaping. The Redwood Marketplace platform enables LNG buyers to seek out supply offers using any variety of trading formats, from highly bespoke custom bid-ask or auction markets with full price transparency to request-for-quote markets that allow them to target only qualified suppliers in complete privacy. No matter the format chosen, the buyer has the option to structure their procurement process to ensure they get the best deal from the market to suit their needs each time.

Pre-Trade Anonymity – Buyers should seek out a platform that offers the option of pre-trade anonymity. Often the price that is shown to a buyer depends on who the buyer is. The less that the buyer is in the market, the more likely it is that a supplier will show them a higher price. The Redwood Marketplace Bid-Ask markets enable the buyer to structure a market and post bids to buy without showing their name to the market. Once matched, counterparties to a trade are introduced but at that stage the price is already agreed to.

Customized Deal Terms – LNG is a highly customized and non-standard commodity, so the platform a buyer uses should allow for a high degree of customized requirements. The trading formats within the Redwood Marketplace are all based on the foundation of the Redwood Online LNG Confirmation. The Confirmation is a template that allows the LNG buyer to structure a simple, standard transaction or a highly detailed, bespoke and complex transaction with optionality. Transaction structures not only lay out the basic terms of the transaction (price, size, term, tax, allowed laytime, demurrage, estimated boil-off) but also the quality specifications for the commodity, delivery terms, port requirements, credit and payment terms, and special terms and conditions. The deal structure also allows for attached documents to further refine a transaction, such as the SPA governing the trade, letter of credit templates, banking documents, tender documentation, etc.

Reduce Letter of Credit Requirements – Trading platforms can also provide new products and services to buyers that may ease some of the challenges of closing a trade. At Redwood we specifically wanted to address trade credit and the costs and inflexibility of letters of credit as security. Providing letters of credit to support payment for cargoes received can be costly, both in terms of fees but also in terms of a buyer’s balance sheet and credit capacity. The Redwood Marketplace allows suppliers to purchase Trade Credit Insurance at the point of sale, and the buyer can structure this in their requirements for suppliers instead of using a bank-issued letter of credit as payment security.

There are other benefits for LNG buyers in using an online platform for their purchases. The best way to discover all the benefits is to try it. At Redwood Markets, we can make it very easy for a buyer to try out an online platform and see for themselves. We won’t charge you anything to structure your custom trade requirements and make your first purchase. The Redwood Marketplace costs nothing for an LNG buyer to use and enter into their first transaction with a supplier. After their first transaction, the only fees that the LNG buyer will pay is for future transactions if they find value in the online procurement process with their first trade. The pricing of the platform makes it risk-free for an LNG buyer to try it for the first time and see for themselves whether they find value in using it for their procurement needs.

We can show an LNG buyer how to use the platform either in person or via a webinar online. The long-term benefits to buyers of direct access to the market are that no matter whether the market is over or under-supplied, buyers can rest assured that they will maintain a competitive channel to suppliers that will get them better results.

Ajay Batra,
President and CEO, Redwood Markets Inc.