China LLDPE futures down 0.7% on arbitrage opportunity

16 February 2011 09:44  [Source: ICIS news]

SINGAPORE (ICIS)--China’s linear low density polyethylene (LLDPE) futures fell by 0.7% on the Dalian Commodity Exchange (DCE) on Wednesday, as the arbitrage opportunity for physical cargoes led investors to take “sell” positions in the futures trade, local brokers said.

With the most actively traded May LLDPE futures contracts priced at yuan (CNY) 12,350/tonne ($1,874/tonne), importers could book a physical cargo in the local retail market for prompt delivery and lock in their profits by taking a “sell” position on the futures market, the brokers said.

The cost of holding the physical cargo was around CNY500/tonne, while the price gap between the futures and physical trades was around CNY1,000/tonne, based on current discussions in the physical market, they said. That means investors could lock in a profit of CNY500/tonne by taking a ‘sell’ position on the futures market.

But the build-up of “sell” positions on the futures market weighed down on the futures price, they said.

Liquidity focused on the May contract, which closed at CNY12,350/tonne, down 0.7% or CNY85/tonne from Tuesday’s settlement price of CNY12,435/tonne, according to DCE data.

LLDPE was selling at around CNY11,300/tonne DEL (delivered) in the domestic physical market, local distributors said.

The LLDPE futures price is likely to fall further if its premium over the physical market widens, said Li Chen Ming, a petrochemical analyst at Guang Fu Futures in Guangzhou.

($1 = CNY6.59)

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By: Chow Bee Lin
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