14 August 2009 08:40 [Source: ICIS news]
By Ng Hun Wei
SINGAPORE (ICIS news)--Polyvinyl chloride (PVC) futures contracts for November delivery traded in China saw a near seven-fold increase in volumes over the past two weeks, with prices hitting record highs as some players may be taking advantage of wide inter-month spreads, industry sources said on Friday.
November contract volumes traded on the Dalian Commodity Exchange (DCE) hit 601,154 tonnes as of 12 August from 87,918 tonnes in end July, based on data from the exchange.
Its price jumped 14% to a record CNY7,900/tonne ($1,157/tonne) on Wednesday before slipping down slightly to CNY7,690/tonne on Thursday, the same data showed.
The November contract, the most actively traded among 11 contracts currently being traded, was priced CNY190/tonne higher than the settlement price for September contracts at CNY7,690/tonne and CNY145/tonne higher than the October contract, which was trading at CNY7,725/tonne on Thursday.
The wide spread between November contract and other expiration months could be one of the main reasons market players have flocked to the PVC futures exchange in recent weeks, traders and producers said.
“I think some people are tempted by this high November price relative to prices for the other months. To them, the futures market is a means by which they can profit from this price difference,” said a source involved in the polymers futures market in ?xml:namespace>
The November futures contract price was about 10% higher than PVC spot prices, currently at around CNY7,000/tonne.
There were two main ways to exploit this price spread, traders and producers said.
The first was to buy (or set aside, in the case of PVC producers) physical cargoes, go short on the November contracts then deliver the cargoes when the contracts expire. This strategy was viable because spot prices were only at around CNY7,000/tonne ex-warehouse (EXW) while the November prices were high enough to cover the storage costs incurred till the delivery date, industry sources said.
Traders in the Chinese domestic market had in fact appeared to have latched on to this strategy last week, pushing up spot prices by CNY150-300/tonne in the process, the sources added.
The second method was to go long on the September contracts and short the November ones, traders and producers said. The main advantage of such a strategy was that the arbitrageur did not have to worry if he was able to secure material that met the DCE’s product specifications, they pointed out.
Alternatively, the arbitrageur could close out his positions before the contracts expired, thereby ridding himself the hassle of receiving and delivery physical cargoes, market players added.
For PVC traders who are long on spot material and short on November futures, they make profits as long as the inter-month spread narrows, regardless of which direction the contract prices take. They stand to make the most gains if September prices increase and November prices fall, industry sources said.
Storage and funding costs for PVC were relatively low, estimated at less than CNY60 a month, they added.
The notion there could be players betting - at least partially - on a PVC price fall flies in the face of what some market players say is generally bullish market sentiment. They believe bullish buyers are chasing up the prices while PVC producers are willing to take short positions since they have to sell their monthly cargoes anyway.
“People who enter the futures market are not stupid. Prices can’t be rising because these people think the market is softening,” said a major Chinese PVC producer. The price surge was rooted in firming PVC demand, as indicated by rising property values in major cities across China, he added.
On the other hand, some industry players have flagged concerns that PVC futures trade was much too driven by speculation that it would be difficult to benchmark spot offers on this market.
But there was ground for PVC futures prices to rise, said a major producer, citing firming demand in line with the uptrend in property values in key cities across
PVC is used in pipe and residential building and construction applications.
“I think (spot) prices are generally rising for sure. But whether they will rise by as much as the futures market is indicating, remains to be seen as there is a lot of speculation at the moment,” said a northeast Asian PVC producer.($1 = CNY6.84)
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