03 July 2009 16:06 [Source: ICIS news]
By Becky Zhang
SHANGHAI (ICIS news)--Chemicals futures are taking off in China with traded volumes skyrocketing in the first half of the year at two major commodity futures trading centres, CBI analysts said this week.
With 50.21m tonnes worth, valued at yuan (CNY) 483.0bn ($70.61bn), transacted in May, linear low density polyethylene (LLDPE) on the China Dalian Commodity Exchange (DCE) was the most eye catching among the three chemical futures traded in China.
This volume was nearly 100 times the turnover for the first month of trading in July 2007.
Purified terephthalic acid (PTA) futures also showed strongly on the China Zhengzhou Commodity Exchange (CZCE) in May with 39.50m tonnes worth CNY 279.4bn ($40.85bn) exchanging hands. This was more than 10 times the monthly volume when the product debuted in December 2006.
The newly launched polyvinyl chloride (PVC) contract on the DCE also performed well, with the daily trade volume rising from the preliminary 200-300 tonnes to a recent ?xml:namespace>
Industrial players and financial funds, lured by steep price fluctuations, have swarmed into the markets.
“Drastic price volatility is the core factor that draws the attention of investors,” said Shi Mingzhu, a chemicals futures analyst at China Nanhua Futures.
The larger the price differences the more the gain/loss opportunities. More participants pour into the market in response, creating even bigger turbulent price waves.
“This is how futures grow,” Shi explained.
“Intra-day volatility of LLDPE has averaged 2.17%, higher than that of PTA at 1.73% and spot PVC at 0.08%. LLDPE has thus attracted more interest from those fund managers, “said Wang Yongfeng, a researcher at Guotai Jun’an Futures.
The majority of players are participating in the markets only to speculate, and there is limited physical delivery, said Wang.
The consumption of LLDPE in
The largest monthly futures-related physical trade of LLDPE was only 7,185 tonnes, in May 2009, according to the DCE database.
Futures investors are divided into two groups; those who follow industry fundamentals and those who mainly make decisions based on technical data.
Most industry players belong to the first group, while most futures companies and financial institutions are in the second.
But despite much speculation, futures prices only deviate from the physical spot markets in the short term.
Long-term futures pricing pulls into line with physical trade because of the influence of industry participants who are involved for hedging purposes, Shi added.
Speculators, despite their primary focus on technical data, also refer to physical market fundamentals by studying market reports, he said.
“Basic (chemicals industry-specific) market fundamentals set general long-term futures market trends, while government policy, the macro-economy and oil prices set the short-term direction,” said an LLDPE trader.
One of the questions being asked is whether futures pricing might start to exert on influence on how Chinese chemical producers set their physical prices.
“We will not take futures price as pricing references. The impact of futures prices on spot markets will remain only a reflection of market sentiment,” a senior official in Sinopec’s synthetic resin department, told CBI.
This was the result of the limited amount of physical deliveries taking place through the futures markets, he added.
Sinopec, the largest LLDPE supplier in
Unlike LLDPE - where there is much more limited participation - 70% of Chinese PTA producers are involved with futures trading.
Major players in PTA futures are most from the industry because of the weaker correlation between PTA physical prices and the cost of crude oil when compared with LLDPE and PVC.
This makes tracking PTA price direction harder for those outside the industry.
Several polyethylene terephthalate (PET) producers are also understood to be involved in PTA futures trades, including Zhejiang Guxiandao Industrial Fibre and Jiangsu Huaxicun.
“The main objective of the industry players is speculation. Very few are hedging,” said a senior official from Oriental Petrochemical (
Some producers have discussed using PTA futures as the benchmark for their pricing, but nobody has made the move because the current China PTA futures market is too small.
Because the PVC market has been launched only recently, it is too early to assess its impact on the physical market.
However, the remarkable performance in its first month of trading has grabbed the attention.
“PVC futures trading is expected to be more vigorous than [either] LLDPE or PTA, “said CBI industrial analyst Du Yingting.
“Unlike LLDPE and PTA in
By comparison, the top three LLDPE producers – Sinopec, PetroChina, and Shanghai Secco Petrochemical – account for 98% of
Thirty nine percent of PTA capacity is in the hands of the three biggest producers - Hualian Sanxin, Xiamen Xianglu, and Liaoning Yisheng Dahua.
“Shanghai Chlor-Alkali Chemical is mulling hedging on the PVC futures market,” a senior official from the company said. He believes that the futures exchange will add to physical market volatility.
Further futures markets could be launched in
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