New warehouses have been approved in northern China to hold methanol cargoes intended for futures trade
China’s methanol futures market remains beset with chronic illiquidity more than three years after its inception, with not much incentive available to encourage participation of more players, industry sources said on 28 January.
While more producers are being drawn to list cargoes in the Zhengzhou Commodities Exchange (ZCE), buying interest remained low given the high cost of methanol futures contracts compared with readily available cargoes in the spot physical market.
In 2013, monthly trading volumes in the methanol futures market ranged in tens of thousands to hundreds of thousand tonnes, but failed to hit 1m tonnes until December.
December saw methanol futures volumes spiking to more than 5m tonnes because of tight supply and high prices of physical cargoes.
“The recent high activity on the ZCE was because of physical market tightness, brought about by supply outages in the Middle East and southeast Asia,” a source from ZCE said.
Anticipation of snug local Chinese methanol supply because of restricted supply of feedstock natural gas during winter also serves to fuel trades in the methanol futures market, the source said.
China restricts the use of natural gas by industries to prioritise the heating requirement of households during extremely cold weather.
There was initial optimism that volumes in the methanol futures market would stay high in the near term, but this may not be sustained if prices of physical cargoes are on a decline and bourse regulations are not improved, industry sources said.
The ZCE methanol futures market pales in comparison with purified terephthalic acid (PTA) futures traded in the Dalian Commodity Exchange that have monthly volumes in millions of tonnes.
Since June 2013, new warehouses in northern China have been approved to hold methanol cargoes intended for futures trade, to encourage producers inland to participate in the market.
More storage tanks for physical delivery were also approved in east and south China to foment a more vibrant futures trade in the domestic market.
Methanol producers in the eastern and southern parts of China have a clear advantage over their competitors inland since most end-users are concentrated in the coastal regions, industry sources said.
ZCE has a pricing scheme that applies fixed price deductions on methanol cargoes from inland, since these materials are normally priced much lower.
Using the prevailing methanol futures price as a base, ZCE deducts yuan (CNY) 155/tonne ($26/tonne) on cargoes hailing from Hebei province; and CNY500/tonne for those from Inner Mongolia.
These fixed deductions, however, are deterring buyers as actual prices of spot methanol cargoes inland are much lower compared with the prices at which they are being made available in the futures market, industry sources said.
Some industry sources suggested that floating deductions are preferable, to take into account the actual price differential between methanol cargoes traded in Hebei and Inner Mongolia in north China, and those from the eastern parts on which the methanol futures prices are pegged.
On 27 January, methanol futures for May delivery closed at CNY2,947/tonne ex-tank, while physical cargoes were transacted in Hebei for immediate lifting at CNY2,710-2,800/tonne ex-tank.
“Either limit the list of approved storage tanks to east and south China only, or apply a prevailing market rate discount to cargoes, [which] are physically lying in Hebei or Inner Mongolia,” an analyst said.
Other industry players, however, acknowledge the difficulty of applying a floating discount given the volatility inherent in the physical methanol market and the susceptibility of paper futures trading to speculation.