China to launch ICIS-linked PX swap contracts in Q1 2021

Author: Anna Xiang

2020/12/01

SINGAPORE (ICIS)--China will launch in the first quarter of 2021 a central counterparty clearing in Shanghai for paraxylene (PX) swaps contracts, which will adopt ICIS’ quotes as benchmark for monthly settlement.

The Shanghai Clearing House (SHCH) will use ICIS’ daily PX CFR (cost & freight) CMP (China Main Ports) assessment as basis to generate the monthly average price, after multiplying the central parity rate of Chinese yuan against the US dollar published by the People's Bank of China (PBoC) on the same day.

SHCH is the authorised central counterparty clearing institution for China’s over-the-counter (OTC) market and is a subsidiary of the PBoC.

ICIS is a leading petrochemical market intelligence provider, and its PX CFR CMP prices are widely used in settling contracts, as well as spot cargoes at floating prices.

Participants in the China PX market are in urgent need of spot trading denominated in Chinese yuan in response to increasing domestic supply, due to intensive plant start-ups operated by domestic private enterprises.

China is a major PX importer, with trades for forward cargoes mostly settled in US dollars since the 1990s.

However, dependence on import volumes has fallen from 60% in 2016 to 40% in 2020, with the operation of new production capacities from private firms. The dependency rate is likely to drop further in the next two years.

China is less dependent on cargoes from overseas suppliers in northeast Asia, as production enthusiasm in Japan and South Korea has been disrupted by sharply squeezed margins.

With PX prices in Asia nearly halved in the first quarter of 2020, pulled down by declines in feedstock values and substantially weakened demand amid the pandemic, Chinese producers are actively pushing forward integration of the domestic PX industry chain.

PX prices are closely linked to upstream naphtha and downstream purified terephthalic acid (PTA) performance, but there is an absence of a hedging tool in the market.

The launch of PX swaps contracts - which will be China’s first – will not only provide a tool to meet the demand for hedging, arbitrage trading and investment, but also help manage price volatility and avoid counterparty credit risks, both increasing liquidity and ensuring safety in the market.

As an important raw material for the chemical industry, PX is primarily used in the production of purified terephthalic acid (PTA), as well as in some medicine and printing ink applications.

ICIS has successfully completed the International Organization of Securities Commissions (IOSCO) Commodity Price Reporting Agency (PRA) assurance review of its price reporting business for the eighth successive year.

Focus article by Anna Xiang

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