Dalian: A Whole New Ball Game?

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Source of picture: waittilnextcentury.blogspot

Back to an old theme, the Dalian Commodity Exchange, this story from ICIS news talks of how physical cargoes are being bought and then sold at a price fixed now for November delivery. At the time of writing this was realising a $169/tonne profit.

This could be old news, but I had only been really thinking about paper trade – i.e. the practice of dipping in and out on a daily basis to make a quick buck with only cash settlements taking place.

If this is widespread this is altogether different. It raises the possibility that if a lot of these types of trades take place and there is a sudden fall in the price, those left holding the contracts close to or at maturity might panic. You then could have the classic self-perpetuating downward price spiral in the market as a whole.

And if physical deals like this on the exchange increase, it would be harder to say that the market has no relevance to determining real-world pricing.

Arbitrage like this also might have the obvious effect of forcing increases in off-exchange PE prices (and posssibly all polyolefins as the exchange is apparently being watched by producers every of grade).

As any such increases in the regular market would not be the result of fundamentals, wouldn’t this add to volatility?

Or alternatively I suppose, if enough physical cargoes were delivered through the exchange, supply might tighten sufficiently to maintain strong prices in the regular market!

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