TOCOM rubber seeks to reverse losses through new power, rubber contracts

TOKYO (Oct 4): The Tokyo Commodity Exchange (TOCOM) may start trading of its electric power futures contract as early as January, part of an effort to return to profitability by expanding its product listings, its chief executive officer said on Wednesday.

In March 2016, Japan opened its electric power sector to competition causing the country’s utilities to embrace more spot power trading, with volumes on the Japan Electric Power Exchange more than quadrupling.

The demand for power futures on TOCOM to help utilities to manage the price volatility that has followed the spot trading surge may help the exchange reverse three years of losses incurred amid stiff competition with futures markets in China and Singapore.

“The (spot) market is too volatile, especially in the summer and winter,” said TOCOM Chief Executive Officer Takamichi Hamada said in an interview, pointing to a need for new power suppliers to be able to hedge in the futures market.

A sweltering summer drove prices on the Japan Electric Power Exchange to just above 100 yen (US$0.90) per kilowatt hour in July, the highest on record, as new entrants scrambled to meet the demand for cooling.

TOCOM delayed the launch of the electricity futures in July as utilities and other market participants needed more time to get their systems in place.

Hamada wants the new futures contract to be running by January to have two months of settlement before the end of the financial year in March.

TOCOM reported a third straight year of losses for the 2017/18 financial year, but Hamada is hopeful that the new products will help it turn to profitable this year.

“Cost cut, marketing to broaden participants and new contracts are the three key pillars to turn us around,” he said.

Last financial year, TOCOM’s total trading volumes were 24 million contracts, only about a quarter of the record 87 million contracts traded in 2003.

TOCOM also plans to boost trading volumes by adding a new rubber product, Hamada said, a market where the exchange has been active since the 1950s.

On Oct 9, TOCOM will launch new technically specified rubber (TSR) futures to meet growing demand for the product.

The exchange’s existing ribbed smoked sheet (RSS) futures have been a benchmark for the Asian rubber market since they were first offered in 1952.

However, rubber consumers, particularly tyre-makers, have started to prefer TSR, which is largely machine produced and is considered a more consistent product, to the smoked sheets, which are put together by hand and can have some variance in quality.

TOCOM’s new TSR contract will be for physical delivery on a Free on Board (FOB) basis at two ports in Thailand and one in Malaysia.

Trading in TSR futures on the Singapore Exchange tripled between 2014 and 2017 while TOCOM’s RSS contract volumes have fallen by more than a tenth.

“Singapore’s TSR is mainly linked with the Indonesian product, but our TSR meets the product standard in Thailand, the world’s biggest natural rubber producer,” Hamada said, adding that it will likely attract Thai producers and shippers as well as buyers in China, the world’s biggest rubber consumer, for hedging and arbitrage.

The Shanghai Futures Exchange (ShFE) has bypassed TOCOM on rubber futures volumes, with ShFE’s turnover in 2017 of 89 million contracts 42 times higher than the Japanese exchange’s volumes.

(US$1 = 113.8000 yen)