China’s Dalian Commodity Exchange Styrene Futures

On September 26, 2019, styrene futures were officially listed on the DCE. In the past year since its listing, styrene futures have been operating steadily as a whole, with a steady increase in the scale of transactions, and active industry participation. In the past year, the functions of futures price discovery and hedging have been effectively brought into play, deriving a rich variety of trading, pricing and hedging models for entity companies. Futures prices have become an important pricing reference for spot and paper goods in the market. Under the dual pressure of capacity expansion and the epidemic, styrene futures provide industrial companies with effective risk management tools, and point price trading based on futures prices has gradually become the mainstream of the market.

Industrial customer participation has increased significantly

Significant changes have taken place in the spot market since the listing of styrene futures. The rapid expansion of domestic production capacity, abundant supply, high terminal inventory and the collapse of refined oil consumption have dragged down the price of pure benzene. The traditional market is facing the dilemma of weakening liquidity and continued market downturn. However, styrene futures have brought “good news” to the industry chain. The function of futures price discovery is effective and maintains a high degree of market activity. In the capacity expansion cycle, upstream and downstream companies still retain leeway.

Since its listing, styrene futures have maintained stable and safe operations and the market size has steadily increased. As of the end of August this year, the trading volume and average daily open interest of styrene futures were 23,776,900 lots and 101,400 lots, respectively, and the trading holding ratio remained at a reasonable level of 1.04. Among them, the average daily trading volume and open interest in the first 8 months of this year increased by 95% and 78% respectively compared with last year; styrene futures legal person customers accounted for 58%, an increase of 20% compared with last year, and the participation of industrial customers has increased significantly.

The listing of styrene futures coincides with the starting point of the new capacity launch cycle. With the commissioning of the Zhejiang Petrochemical and Hengli units at the beginning of this year, the national styrene capacity has increased by 10%, and the supply and demand pattern has gradually changed from last year’s relative tightness. Affected by this, the price of styrene futures has fallen all the way after the listing.

According to reports, the Spring Festival in China has negatively impacted the industry. The downstream synthetic resins, terminal home appliances, and the real estate industry have generally postponed the resumption of work. Port inventory has continued to rise, and the price of styrene has also continued to fall. 40%.

After April, with the improvement of the China’s epidemic and the expectation of loose liquidity, commodities have bottomed out, and the price of styrene has rebounded following the rise in the cost side. However, the pattern of oversupply of styrene has not yet occurred. Significantly improved, the price increase of styrene is relatively limited.

The listing of styrene futures as a risk management tool provides an effective solution for upstream and downstream participants in the spot industry chain to avoid falling market prices. It is very beneficial for upstream production companies and midstream trading companies to sell and hedge.

It is precisely because of this that many industrial enterprises have begun to actively participate in the newly-born styrene futures market. 

Over the past year, the trading volume of styrene futures has gradually increased from an initial average of less than 50,000 lots to the current average of 120,000 lots, and the futures holdings are currently stable at more than 100,000 lots.

In order to effectively play the futures function, DCE has continued to introduce innovative measures on styrene and other products. Among them, in February, DCE allowed 10 new market makers on styrene and other products. In June, it continued to add 2 market makers. The number of styrene futures market makers increased to 12 to promote the continuous activity of futures contracts. Enterprises participate in futures hedging and basis price. In July, the delivery fee for all futures products was waived, reducing the cost of enterprises participating in hedging.

Participants of styrene futures are characterized by numerous participants from all walks of life, and industrial chain production enterprises have a certain role and energy in the futures market. As a traditional trader based on physical trade, the starting point for trading companies to participate in the futures market is the hedging and arbitrage demand for physical trade.

“Physical trade is our foundation and strengths. We use futures as an efficient and safe risk management tool to realize transactions that are difficult to carry out in physical trade through futures trading.” – said a trader at Broad Energy.

Also as a trader, Nantong Chemical took an active part in it after the listing of styrene, and currently focuses on hedging. It is understood that shortly after the listing of styrene futures, under the situation of oversupply, the forward curve shows a clear structure of near-low and far-high. Futures with substantial forward premiums provide a good opportunity for futures trading. “Under the structure of this year’s forward premium, hedging has not only solved part of the physical sales problem, but also has a stable spread.

In the opinion of the interviewees, before the listing of styrene futures, companies mainly used Huaxi Village swaps to hedge. Since the listing of styrene futures, overall open interest and trading volume have gradually increased. Among the existing models, styrene futures are undoubtedly the most liquid and risk management tool. Futures prices have become an important pricing reference for spot and paper goods in the market. Together with swaps and paper goods, they provide industrial enterprises with multi-level risk aversion tools.

RR