Is Dalian setting the markets?

Make your own mind up about the role of the Dalian Commodity Exchange linear-low density polyethylene (LLDPE) and polyvinyl chloride (PVC) futures contracts from the interviews below.

The first quote is from Sinopec – from an ICIS news story.

There then follows my interviews with a major Asian producer and a consultant based in Asia.

The chart below shows the correlation between Dalian LLDPE and domestic physical market prices in China, courtesy of CBI – our joint venture partner in China.

 

DalianPEvphysicalJan-May.GIF

My next step, after what the major producer has said, is to do some research into any links between Dalian and pricing in the overall chemicals market.



Sinopec’s view

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.”

“This is the result of the limited amount of physical deliveries taking place through the futures markets.”



The Asian producer:



The Dalian futures market LLDPE price plays a big role in the Chinese polymer market. Although it trades only LLPE and PVC, it has become a trend setter for the entire market.

Many traders and end users also take part in the trading. Sinopec and PetroChina follow the Dalian market .”

The consultant

“The Dalian exchange has become a reference point for producers. Even though they are not trading on it (no hedging is taking place as it’s also financial and chemicals traders) there is a psychological effect as it’s a daily price that’s very easily accessible: just log on to the screen each morning and there you go.

“In the absence of a complete picture of what’s happening in China, Dalian is as good a guide as any.

“For example, there are no truly reliable inventory assessments at all the polymer and finished-goods levels, and there can be a lack of clarity on local production levels.

“What is fundamental growth versus the short-term boost from rising bank lending? The exchange has, as a result, become a very useful tool and a great way of making money.

“The world is a bit lopsided now because there are also so many other factors confusing the market – including the real effect of the decline of the availability of recycled material versus the oil price.

“When the new supply hits the market then new supply will become THE factor and it’s likely that people will take less notice of Dalian.

“This doesn’t mean that the volumes will go down necessarily – this depends on whether bank lending remains free and easy.

“I see an upside potential for pricing in Q3 because the new capacities won’t have hit the market then but I see things turning bad from the fourth quarter.”

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