Prices tumble on uncertainty over impact of changes, profit-taking
DCE plans to increase warehouse receipt write-off period, hike storage fees
Import margins narrow 70% from mid-May to early September
Petrotahlil - LPG trade volumes on the Dalian Commodity Exchange could dampen further and futures prices come under more pressure from expectations the fledgling exchange may more than triple daily storage fees, trade sources said in the week ended Sept. 4.
DCE's plan to increase warehouse receipt write-off periods to once every three months from once every March, to encourage delivery warehouses to issue warehouse receipts, also stoked investor uncertainty.
These controversial changes in DCE rules, coupled with profit-taking, have pummeled China's LPG futures prices on the exchange this week.
Asked to comment on market concerns that the exchange, which was launched in March, would hike daily storage fees to Yuan 3 Yuan-5/mt from Yuan 1/mt, a DCE official confirmed they had held a conference with major investors to seek comments on raising the fees, but no decision had yet been made.
The settlement price for the November 2020 contract, the most actively traded on the DCE, dived Yuan 202/mt or 5% day on day to Yuan 3,637/mt on Aug. 20, with volumes surging 191% to 523,321 lots over the same period, DCE data showed.
The November contract price has fallen further in September, with the latest settlement at Yuan 3,571/mt on Sept. 3, DCE data showed.
Chinese LPG delivery warehouses were said to be reluctant to issue warehouse receipts, as storage fees were deemed too low. The long validity period for futures warehouse receipts could also prompt significant price volatility for domestic LPG, S&P Global Platts has reported.
"Once the rules are changed, delivery warehouses are expected to be willing to issue warehouse receipts, which will largely increase the possibility of LPG futures delivery. This was believed to have encouraged many buyers who held long positions at high prices to close their positions in a bid to avoid delivery," a source in eastern China said.
DCE LPG futures prices jumped to above Yuan 4,000/mt in July. Prices had held at around Yuan 3,800-3,900/mt prior to the slide, while domestic LPG wholesale prices were around Yuan 2,800/mt over the same period. This makes the price gap as wide as more than Yuan 1,000/mt, market sources said.
In contrast, the spread between DCE futures and Saudi Contract Price swaps has been narrowing, and was also believed to have triggered profit-taking after the drop in DCE LPG futures, sources aid.
"A trader sold November contract on DCE at around Yuan 3,800-3,900/mt in July, then bought November CP swaps at around $385/mt at the same time," a second source in eastern China said. "Now the November contract on DCE has dropped to around Yuan 3,600/mt while the November CP rose to $390/mt, if the trader closed the positions, he can earn around Yuan 300/mt." the source added.
With better risk management and global prices under pressure, import margins have narrowed to Yuan 200-300/mt in early September from Yuan 500-600/mt in late July and Yuan 800-900/mt in mid-May, trade sources said.
"It's normal to have the margin around Yuan 200-400/mt. The previous level was too far from the market level," a third Chinese trade source said.
DCE LPG futures prices are expected to ease closer to domestic wholesale prices, which are expected to rise as the peak demand winter season nears. This narrows the price gap between the two as the first delivery month in November approaches, market sources said.
TRADING VOLUME SHRINKS
Average LPG futures trades on DCE hit 628,245 lots in April before falling to 392,384 lots or 7.85 million mt in May, exchange data showed.
If the volume is calculated unilaterally, average daily LPG futures trades were 3.9 million mt in May, 2.3 million mt in June, 2.7 million mt in July and 2.2 million mt in August.
Volumes are expected to fluctuate further, while prices could come under further pressure in the near term due to the proposed changes, trade sources said.
While market participants said the impact on trades would be limited, some companies were adopting a conservative stance managing risks via the exchange given the uncertainties.
"Rising storage costs reduce speculation, that's why DCE prices are dropping," another source said.
INTERNATIONAL PRICES SOFT
Saudi Aramco this week kept the September propane term Contract Price steady from August at $365/mt, while its butane CP was set at $355/mt, up $10/mt from August.
Traders said the September CPs were set at the lower end of forecasts, or even below, and this also had some impact on declining DCE prices. "I think that did some damage," one source said.
Front-cycle CFR North Asia H1 October delivery propane was assessed down $14/mt on day at $353/mt Sept. 3 after the previous front-cycle CFR H2 September propane was assessed Aug. 31 at a two-week low of $351/mt.
The region is facing ample Middle East supply and while US deliveries in September hover at 2 million mt, concerns emerged over a closing arbitrage and cargo cancellations.
Demand has surfaced from India for October and while China's retail market is recovering, incremental demand from propane dehydrogenation plants has been delayed by the deferred startups of new facilities.
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Source : Platts