Following the futures of PTA, LLDPE and PVC, the approval of China Securities Regulatory Commission (CSRC) for the listing of the polypropylene (PP) futures, another chemical futures product, has drawn the attention of the international market. With unsuccessful listing of the PP futures on a number of international futures exchanges, will the PP futures achieve successful operation after the listing as other domestic chemical futures products? In this regard, an official of the chemical products department of Dalian Commodity Exchange (DCE) said in an interview recently that as the world's largest producer and consumer of the synthetic resins and related chemical products, China has a huge and highly sophisticated spot market and an adequately developed chemical futures market, which will provide a solid foundation and guarantee for the successful operation of the PP futures.
Since 2005, the London Metal Exchange (LME), the Multi Commodity Exchange of India (MCX) based in Mumbai and other international futures exchanges have launched the LLDPE, PVC, PP and other futures products of general-purpose synthetic resins in succession, but the few participants and the lack of market liquidity have caused the futures exchanges to gradually terminate the trading of related products. Currently, only New York Mercantile Exchange (NYMEX) has retained the futures products but with a small size.
The reasons for the failure of the international chemical futures of synthetic resins are that the growth of the consumption size on the spot market slows down, the market has a relatively high concentration, the direct connection of most of the production and consumption enterprises results in the lack of the intermediate traders, and related industrial clients have a strong capacity for costs transfer with no demand for hedging on the futures market. In terms of the PP products, from the perspective of the pattern of supply and demand in the world, the production capacity and consumption are mainly concentrated in the Northeast Asia, North America, Western Europe and other regions. In recent years, the number of global PP producers has been in gradual decrease with the production equipment increasingly concentrated in a few large multinational companies. In 2011, the world’s top ten PP producers reached a production capacity of 33.23 million tons / year, accounting for about 51.74% of the world total PP production capacity. In addition, the economic downturn and the shrinking manufacturing sector in North America and Western Europe caused successively by the financial crisis and the European debt crisis since 2008 has cut down the consumption demand in the regions and adversely affected the industrial size of the synthetic resin.
In contrast, China's PP spot market features a huge size, rapid growth, and highly commercialized products. In 2012, China's PP production capacity reached 12.18 million tons / year with a total consumption of 14.86 million tons, accounting for 17% and 27% of the global market respectively. With a quite long chain of the petrochemical industry, except taking the products with poor stability of the chemical nature and difficulty in storage and transportation as intermediate goods, the domestic enterprises usually choose the sectors of the production or the consumption separately, and in terms of PP, the commercialization rate reaches almost 100%.
In addition, there is no monopoly in supply and demand of the spot goods in China with the commodity pricing fully based on the market. In the production area, the main producers of PP include state-owned enterprises, private enterprises and joint ventures as well as some enterprises dependent on imports. In specific, China Natural Petroleum Corporation (CNPC) and SINOPEC, China’s two largest producers, account for about 47% of the supply (similar to LLDPE, etc.) and the supply from imports, joint ventures and other sources account for 53% of the total; in the area of consumption, more than 99% of the plastics processing enterprises are SMEs; in the sector of trade, as China’s PP trade chain features multiple levels with the 4-plus-level traders at most in the sections from the producers to the final consumers, the product prices are fully set on the basis of the market supply and demand. Taking the two largest PP producers of CNPC and SINOPEC for example, in accordance with the supply pattern of the PP products in 2012 in China, even in the first level of the trade of the product, only about 30% of the products can be priced according to the prices announced by the two corporations, which are also adjusted on the basis of the market conditions at any time, and in many cases the prices on the domestic electronic market are taken into account. Thus, the supply and demand pattern of domestic spot market and the business models of the enterprises have laid a solid foundation for the successful operation of the PP futures after the listing. In fact, the fierce volatility of domestic PP price has just stemmed from the full competition in the spot market pattern, and the demand of the enterprises for management of market risks appears accordingly.
The official also pointed out that the sound overall development of the domestic futures market of resins and other chemicals has paved the way for the operation of the PP futures. In 2007, DCE listed the first domestic synthetic resin futures product of linear low density polyethylene (LLDPE) while paying attention to the research of PVC, PP and other products. And in 2009, the PVC futures were listed. PP and LLDPE as well as PVC are all synthetic resins, with the same upstream raw materials, similar structure of the intermediate trade market, the overlapped regions of downstream consumption and the sharing of some of the hedging and investment groups. Since the listing, the two products of LLDPE and PVC have seen stable operation with the structure of investors gradually improved and the futures market functions brought into play accordingly, which has provided successful experience and solid guarantee for the development of the PP product.
He also disclosed that the sound development of China's synthetic resin futures market has drawn the attention in the world. Dubai Gold and Commodities Exchange has also recently planned to launch the trading of the PP futures. To this end, the exchange has sent its staff members to do research at DCE several times, fully comparing notes on the preliminary designing of the PP futures contract. Currently, its design of the PP contract is very similar to that soon to be listed on DCE and the exchange plans to launch the futures within this year. It is believed that the smooth operation after the listing will form an interactive pattern in the prices with the PP futures on DCE.