Rising China LLDPE futures prices create arbitrage opportunities

02 August 2010 12:37  [Source: ICIS news]

SINGAPORE (ICIS)--Rising prices of linear low density polyethylene (LLDPE) futures contracts on China's Dalian Commodity Exchange (DCE) have created arbitrage opportunities for physical cargoes, which are likely to lead to higher import prices, industry sources said on Monday.

With the most actively traded January LLDPE futures contracts priced on Monday afternoon at yuan (CNY) 10,505/tonne ($1,552/tonne), importers could book a physical cargo for September arrival and lock in their profits by taking a “sell” position on the futures market, the sources said.

Significantly lower import prices made the arbitrage window an attractive option for physical market players, as the huge differential between futures and physical trades would more than cover the costs of holding a physical cargo from September until the time when the January futures contracts expire and delivery would be due, they added.

The cost of holding the physical cargo was less than $100/tonne (€77/tonne), while the price gap between the futures and physical trades was more than $400/tonne, based on current discussions in the physical market, they said.

ICIS assessed LLDPE at $1,060-1,110/tonne CFR (cost and freight) China for September arrival.

LLDPE futures have been rising since mid-July because of speculation that the Chinese government would maintain a loose fiscal policy to ensure domestic economic growth, Ye Hong Bin, a market analyst with China International Futures Co (CIFCO), said.

The January contracts' closing price had risen by 7.7% since 20 July, according to DCE data.

The arbitrage opportunities were expected to boost buying interest for imported material and drive up import prices, industry sources said.

However, buying activity has not yet picked up markedly, they added.

An LLDPE producer based in northeast Asia was planning to bring forward its September offers to take advantage of the current positive sentiment, according to market sources.

The producer usually announces its offers in the second half of the month for shipments taking place the following month, the sources added.

($1 = €0.77/$1 = CNY6.77)

For more on linear low density polyethylene visit ICIS chemical intelligence 
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By: Chow Bee Lin
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