FocusChina’s LLDPE futures trade gains momentum, drives sentiment

09 April 2009 07:02  [Source: ICIS news]

By Chow Bee Lin

SINGAPORE (ICIS news)--Linear low density polyethylene (LLDPE) futures trading on the Dalian Commodity Exchange (DCE) is gaining momentum and exerting greater influence on the sentiment in the physical PE market, industry sources said on Thursday.

The average weekly transaction volume on the futures exchange rose markedly in the fourth quarter last year, after the product specifications on the contracts were modified to match the standards applied in the physical market, an executive of Zhejiang Province Yongan Futures Broker, Liu Wen Wang said.

The average weekly transaction volume shot up to over 2m contracts per week in the first quarter this year, compared with a weekly average of about 68,000 contracts about a year ago.

“We have been looking at the futures for indications of price trends in the physical market,” a large LLDPE trading company in Shanghai said.

However, the futures market is also influenced by trading in the physical markets.

“Since the LLDPE futures contract was launched in July 2007, the futures and physical PE markets have influenced each other on different occasions, but it is still unclear which has a greater impact on the other,” an executive with broker International Futures, Ye Hong Bin said.

“From early July to much of August, falling futures prices weakened local sentiment and added to the downward pressure on domestic prices in the physical markets,” said Ye, illustrating the dynamics between the futures and physical markets.

“Sharp price falls in China’s physical import market in end September last year triggered panic selling on the futures market,” he added.

Last September, import prices of different PE grades registered the sharpest week-on-week decline in a decade, as Asian and Middle East producers slashed prices under mounting inventory pressure, according to global chemical market intelligence service ICIS pricing.

LLDPE prices fell by $100-150/tonne to $1,380-1,450/tonne CFR (cost and freight) in the week ended 26 September 2008, according to ICIS pricing.

The most actively traded futures contracts fell by yuan (CNY) 1,000-2,000/tonne in the second week of October last year, when Chinese businesses resumed after the week-long National Day holiday, according to DCE data.

Soaring domestic PE prices in the phyiscal market late last year also had an impact on the futures market, said Ye. Domestic PE prices rose sharply in November and December last year after local producers cut output in response to weak demand, and that in turn spurred trading on the futures exchange, he said.

But the futures are at risk of drifting away from levels traded in the physical market due to a lack of contract deliveries, said Liu. Many players have avoided delivery due to fears that the locally produced material being traded will not meet product specifications defined in the contracts, he said.

But such fears are merely a psychological barrier and should dissipate as players deepen their understanding of the futures contracts, said Hao Jingyi, an executive of DCE. Deliveries made sense to a player only if futures prices are higher than the physical market, Hao added. 

Seven contracts for a total of 10,190 tonnes have been delivered since the futures launched, and the largest single contract delivered was for 2,605 tonnes to Tianjin last September, according to DCE.

Several warehouses have been designated as delivery points including Shanghai, Tianjin, Guangzhou, Yuyao, Shandong and Foshan.   

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By: Chow Bee Lin
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