FocusPositive response for PVC futures trading in China

25 May 2009 09:58  [Source: ICIS news]

By Ng Hun Wei

SINGAPORE (ICIS news)--Polyvinyl chloride (PVC) market players in China have hailed launch of PVC futures contracts in Dalian on Monday as a positive development, but say it will take time to tell if such financial instruments could take off.

Trading of the PVC futures contracts started on Monday at 09:00 hours Singapore time (02:00 GMT) at the Dalian Commodity Exchange (DCE).

September contracts – the earliest delivery-month available – gained almost yuan (CNY) 300/tonne ($44/tonne) from an opening price of CNY6,300/tonne in the first hour of trading. More than 80,000 contracts – or 400,000 tonnes – had changed hands by 12:00 hours.

"At this stage, the PVC futures contract is still a novelty and we are all learning along the way. I certainly don’t expect any producer to dive headlong into the market immediately," one of the leading Chinese PVC producers said in Mandarin.

It was unclear at this stage which producers had participated in the futures market so far, as trading was executed mainly through brokerages.

However, Shanghai Chlor-Alkali, the biggest PVC producer in China, confirmed its active participation last week and would look to hedge around 70% of its spot sales volume.

The advantages for trading PVC futures are similar to the reasons for participating in any other futures market, namely, improving risk management and market efficiency, industry sources said.

Traders and producers noted that PVC prices in China underwent bouts of severe volatility last year, rising more than 20% in the first eight months to CNY9,000/tonne ex-warehoouse (EXWH) before tumbling by more than 30% in the remaining four months.

The country, which consumed around 9m tonnes of PVC last year, has a massive PVC market with over 140 producers and more than 1,000 downstream factories.

Traders and producers had also talked of possible arbitrage opportunities relating, for example, to the spread between PVC and other plastics such as LLDPE, which was also traded on the DCE.

A well-regulated futures market would allow its participants to exploit opportunities for hedging or profit. However, it remained to be seen when the PVC futures market in Dalian would reach that level of sophistication, traders and producers said.

"This is after all the first time we have a PVC futures market here. We still need to assess the market’s liquidity and how delivery is actually implemented," a PVC trader said.

With over 100 PVC producers and 1,000 downstream factories, there exists a potential for mismatch in terms of the numbers of buyers and sellers in the PVC futures market, industry players said.

Much could eventually depend on the ability of brokerages to reach out to buyers from the downstream sectors, they added.

Although the exchange had stipulated several product grades that could be delivered without inspection, PVC producers said they also wanted to see how potential disputes over product specifications and delivery locations would be handled.

These questions were likely to be answered in September at the earliest, when the period for the first futures contract will expire.

Sources said market players would remain cautious because the Chinese government was expected to announce revisions on anti-dumping duties on PVC imports in September, which would affect the PVC demand and supply balance in the country.

($1 = CNY6.82)

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By: Ng Hun Wei
+65 6780 4359

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