China’s Chemical Futures Rebounded in December 2015

By Guantong Futures Co., Ltd.

The domestic chemical futures market showed upward momentum in December 2015, because: 1) although international crude oil prices tumbled in early December 2015 upon OPEC’s decision to maintain high production, crude oil futures prices did not decline, instead only fluctuating a little; and 2) as China still needs to import some chemicals, depreciation of the RMB did offset, to some degree, the adverse effects of the crash in crude oil prices.
Benefiting from the supply-demand balance and a certain monopolistic character in China’s upstream sectors, PE and PP rebounded drastically in the futures market, with PE performing better due to less influence from coal chemicals. The rebound of methanol and PTA was relatively weak, as they are more affected by production costs.

1. PE futures

In December 2015, 21.91 million round lots of PE futures were traded, falling 8.9% YoY (950 000 round lots/d), and turnover declined 17.6% YoY to RMB835.1 billion (RMB36.3 billion/d), with open interest at the end of the month rising 18.4% YoY to 663 000 round lots.
The basis has been staying at around RMB1 000, shrinking first and then expanding due to many factors like stabilizing crude oil prices, the RMB’s depreciation and rising spot prices.
The LLDPE price spread remained relatively stable. Spot prices fell at first in December and then rebounded.
International factors - international crude oil prices. After OPEC decided not to cut output, international crude oil prices plummeted at the beginning of December 2015, and then remained low. The number of America’s oil wells in operation fell continually, but output failed to decrease significantly, and inventories even increased. Furthermore, daily production of OPEC in December 2015 rose MoM. Therefore, the near term supply of international crude oil is forecast to be excess, which is a major factor affecting oil prices. Low international crude oil prices will adversely impact PE prices to a certain extent.
Domestic factors: 1) PE output reached 1.48 million tons in November 2015, when operating rates remained high. Because of shrinking import profits, the volume of PE imports fell greatly MoM to 785 000 tons in November. In addition, demand for mulching film will increase in March and April 2016; 2) The earlier sharp price spread between futures and spot goods contracted recently; 3) The RMB’s depreciation neutralized unfavorable impacts from the crash in crude oil prices to some degree, boosted import prices, and may stimulate PE futures prices to a certain extent.
In sum, the PE futures trade was propelled by the shrinking price spread and the RMB’s depreciation in the short term, but it may decline again for the lack of favorable factors in the long run.

2. PP futures

In December 2015, 39.68 million round lots of PP futures were traded, surging 261% YoY (1.73 million round lots/d), and turnover soared 158% YoY to RMB1.13 trillion (RMB49.2 billion/d), with open interest at the end of the month jumping 113% YoY to 762 000 round lots.
International factors - international crude oil prices. As both PE and PP are olefins, international crude oil prices have the same impact on both PE and PP futures.
Domestic factors: 1) More supply and lower import prices. In November 2015, domestic PP output was 1.49 million tons, rising 21.2% YoY but declining 1.13% MoM. In the same month, the volume of PP imports reached 388 000 tons, up 2.58% YoY and up 2.24% MoM. After a short rebound in June and July 2015, the import prices of homopolymerized PP fell to US$1 202/t; 2) PP consumption grew more slowly than the supply. In November 2015, apparent PP consumption reached 1.86 million tons, gaining modestly from a year earlier but decreasing slightly from October; 3) Contracting price spread between futures and spot goods, and the RMB’s depreciation.
In sum, PP futures are likely to show a downward trend in the medium term.

3. PTA futures

In December 2015, 30.65 million round lots of PTA futures were traded, falling 18.46% YoY (1.33 million round lots/d), and turnover dropped 27.87% YoY to RMB674.2 billion (RMB29.3 billion/d), with open interest at the end of the month decreasing 12.69% YoY to 941 000 round lots.
PTA spot prices plummeted in early December 2015, then stabilized and rebounded slightly at the end of the month, staying at around RMB4 300/t. At present, domestic prices are basically the same as import prices.
International factors - international crude oil prices and PX prices. PTA futures prices may decrease because international crude oil prices are expected to fall, PX prices in Asia are declining (Latest PX price FOB Korea was US$743/t), and naphtha and MX prices are declining.
Domestic factors: 1) The PTA supply is to be curbed by lowering operating rates. The overhaul of the Ningbo plant of Yisheng Petrochemical was postponed, possibly to be arranged in January 2016, when the load of the company was forecast to remain stable first and then to fall. With domestic operating rates staying at around 65.6%, the PTA supply may decline stably in the short term; 2) Unsatisfactory downstream demand. For January 2016 alone, nearly 8 million t/a polymer units were shut down, and many weaving factories started to stop production in late January, greatly cutting demand for PTA in February and adversely impacting PTA futures prices.

4. Methanol futures

In December 2015, 42.62 million round lots of methanol were traded, soaring 58.8% YoY (1.85 million round lots/d), and turnover rose 27.38% YoY to RMB715.2 billion (RMB31.1 billion/d), with open interest at the end of the month shooting up 56.32% YoY to 605 000 round lots. In addition to increasingly rising market capital surplus, methanol contracts becoming smaller is another reason for the increasing volume of transactions.
Spot prices behaved basically the same. As inconvenient winter transportation tightened the methanol supply in northern China, the price spread among northern China, eastern China and southern China tended to contract.
International factors: Decreases in international crude oil prices have a certain adverse impact on methanol prices, although the latter is less influenced by the former, as methanol in China is mainly produced by coal, natural gas and coke-oven gas.
Domestic factors: 1) Changes in coal and natural gas prices. Coal prices are forecast to remain relatively high in the short term, keeping costs of coal-to-methanol high. The National Development and Reform Commission cut gate prices of non-residential natural gas, effective November 20, 2015, lowering the costs of most enterprises that produce methanol with natural gas; 2) Relatively sufficient methanol supply. In November 2015, domestic output of fine methanol reached 3.54 million tons, rising 4.6% (or 155 800 tons) MoM, growing 17.26% (or 520 000 tons) YoY; 3) Shrinking demand. At the end of 2015, some formaldehyde plants stopped or cut production, and DMF/acetic acid enterprises overhauled or limited their yield. Therefore, domestic demand for methanol contracted.