Avoiding business risks and escorting chemical enterprises to achieve stability and long-term development - written on the occasion of the 5th anniversary of the listing of ethylene glycol futures on the Dalian Commodity Exchange
On December 10, 2018, ethylene glycol futures were listed on the Dalian Commodity Exchange. Over the past five years since its listing, with the substantial expansion of production capacity, customer participation in the ethylene glycol futures industry has increased year by year, and the price discovery function has been fully reflected, which has played an active role in helping industrial chain enterprises avoid operational risks, stabilize market expectations, boost industry confidence, and enhance international discourse.
The supply and demand side has turned loose and the dependence on imports has decreased
In the past five years, ethylene glycol has experienced an obvious cycle of capacity expansion, from the previous balance between supply and demand, and the phased tightness has gradually evolved to an oversupply pattern, the dependence on imports has decreased year by year, and the capacity utilization rate has also declined.
According to the data provided by CITIC Futures Research Institute, China's ethylene glycol production capacity was nearly 10.555 million tons in 2018, and by the end of 2023, the ethylene glycol production capacity will reach 28.775 million tons, with an average growth rate of nearly 18.2% in five years. At the same time, the import volume of ethylene glycol will drop from 9.8 million tons in 2018 to 7 million tons in 2023, the import dependence will decline from 57% to 30% in 2023, and the average operating rate of ethylene glycol plants will drop from 70% in 2018 to 60% in 2023.
In addition, affected by factors such as the new crown epidemic and the conflict between Russia and Ukraine, the overall growth rate of the world economy has slowed down, the domestic economy is also under pressure, and internal and external demand has been significantly suppressed. From the perspective of the downstream polyester industry, from 2019 to 2023, the average growth rate of polyester output will be 7% to 8%, which is slower than the growth rate of more than 10% from 2017 to 2018.
However, the supply and demand side of ethylene glycol has improved this year.
According to He Xiaoqin, a senior researcher at Guotai Junan Futures, the operating rate of ethylene glycol plants has increased this year. From January to October this year, the national ethylene glycol output totaled 13.57 million tons, a year-on-year increase of 23%. In the downstream polyester industry, the operating rate and output of the plant also remained at a high level, with a total of 54.64 million tons of polyester output from January to October, a year-on-year increase of 14%.
"However, due to the commissioning of integrated units such as Sanjiang, Shenghong and Hainan Refining and Chemical Units, as well as the rebound in profits of existing coal chemical plants, the operating rate has risen, resulting in the continuous accumulation of ethylene glycol inventories. He Xiaoqin analyzed.
"In 2023, there will be a certain degree of loss in the process of extracting ethylene glycol from oil, coal, externally mined ethylene monomer or MTO method. This is mainly related to the rapid growth of ethylene glycol production capacity and the oversupply pattern of the industry. Sui Fei, a researcher at the Energy Investment Research Department of Galaxy Futures, said.
For the trend of ethylene glycol in the later period, many industry insiders are cautious.
"Next year, some oil-to-ethylene glycol units are expected to change production slightly, and downstream demand at home and abroad may continue to recover weakly, which will drive a moderate month-on-month increase in ethylene glycol demand. The relevant person in charge of Hengyi Petrochemical analyzed that.
He Xiaoqin believes that the scale of ethylene glycol production next year is limited, but from a global perspective, the high growth of polyester production brought about by the recovery of textile and clothing demand after the epidemic is difficult to sustain.
The person in charge of Yuanda Property basically holds the same view as He Xiaoqin. "Next year, the new production capacity of ethylene glycol is expected to be about 1.8 million tons, and the new supply is less than the new downstream demand, and it may be gradually destocked, but due to the high absolute inventory in the market, it will take time to really destock. The person in charge analyzed that before the destocking, the probability of ethylene glycol bias volatility is higher.
Participants are becoming more and more diversified, and futures liquidity is constantly improving
In the past five years since its listing, ethylene glycol futures and spot have been closely linked, the participants in the futures market have become increasingly diversified, and the proportion of corporate customers has increased year by year. In the first 11 months of this year, the proportion of ethylene glycol futures corporate customers reached 79%.
"The proportion of corporate customers among market participants has increased year by year, reflecting the gradual increase in the ability of industrial customers to use ethylene glycol futures to participate in hedging and risk management. Sui Fei said.
According to He Xiaoqin, the current participants in the ethylene glycol market are relatively diversified. Among them, the proportion of participants with industrial background is relatively large, mainly in the upstream and downstream of ethylene glycol, and their participation mode is mainly based on the strategy of combining futures and spots, with paper goods, spot positions and point price strategies to do corresponding lock-up and hedging.
After 5 years of cultivation, the liquidity of ethylene glycol futures is also improving. According to the estimation of CITIC Futures Research Institute, the average daily position of ethylene glycol futures in 2023 will be nearly 600,000 lots, an increase of nearly 20% over the same period last year.
With good market liquidity, ethylene glycol futures are increasingly recognized by market participants, and more and more varieties are introduced into the portfolio of price risk management and asset allocation.
Why are ethylene glycol futures recognized by many market participants?
"Compared with the use of spot electronic disks and swaps for risk management, ethylene glycol futures are more secure in terms of openness and transparency, delivery security, etc. The flexible application of futures can help companies become more resilient to risk. Sui Fei said.
Hengyi Petrochemical has a deep understanding of the changes before and after the application of futures. "In the past, there were no ethylene glycol futures, and the forward paper market or spot electronic disk was mostly used for price risk hedging, but the poor qualification of the counterparty led to the increased difficulty of performance or default events in extreme markets, and the market capacity was relatively small, which could not provide sufficient liquidity for large enterprises to hedge and hedge. The relevant person in charge of Hengyi Petrochemical said that since the listing of ethylene glycol futures on the DCE, the industrial trade environment has been significantly cleared up a lot. Market participants use futures for hedging or basis trading, and the risk of sharp price fluctuations and the risk of default by counterparty counterparties is significantly reduced. In addition, the futures market fully reflects the information of all parties in the market and the expectations of participants, and the characteristics of continuity, openness and anticipation of futures prices are conducive to increasing market transparency, improving the efficiency of resource allocation, and enhancing the confidence of industry participants.
"Ethylene glycol futures have greatly stabilized market expectations. He Zongyu, manager of the polyester raw material department of Jiangyin Jinqiao Chemical Co., Ltd., believes that the price of ethylene glycol will continue to remain low in 2023, and both integrated units and coal-to-ethylene glycol units will face greater loss pressure. In addition, low prices have also led to a decline in trading activity in the spot market. In the context of this industry, the overall output of ethylene glycol in China still maintains a growth rate of 20%, which undoubtedly benefits from the wider application of ethylene glycol futures tools.
The evolution of trade patterns promotes industrial transformation and upgrading
In the past five years, the trade model in the ethylene glycol futures market has also evolved, and has changed from traditional spot trading and long-term hedging to new futures and spot combination models such as basis point price and weighted trade.
"Traditional hedging is relatively straightforward and simple, simply considering the establishment of positions with the same quantity, the same maturity and opposite direction, and is relatively passive when the market trend is unfavorable, and the choice is limited. The new basis price and weighted trade can improve the efficiency of hedging and increase the safety of corporate hedging. Sui Fei analyzed that in the past five years, the penetration rate of basis price in the ethylene glycol market has exceeded 90%.
It is understood that at present, the post-point price trading of ethylene glycol has become the mainstream trading mode in the spot market. This is also the procurement pricing model often adopted by current demand-oriented enterprises. On the one hand, the seller can obtain a higher basis yield by charging time value, and on the other hand, the buyer can avoid the problem of being forced to accept a high price due to a shortage of goods, and has the right to freely choose the point in time to determine the price.
Many industrial chain enterprises and traders participated in it, and they really tasted the "sweetness" of ethylene glycol futures.
"Through the basis point price operation, ethylene glycol factories can sell spot inventory at a higher absolute price, ethylene glycol traders give full play to the advantages of the supply chain to earn income through basis trading operations, and downstream polyester companies have obtained storage fees and lower prices for raw material stocking. The relevant person in charge of Hengyi Petrochemical said.
Wusan Zhongda Chemical Group shared its case of adopting the post-point price transaction model to help textile enterprises save costs. "Our company has a long-term cooperation with a textile enterprise in Shaoxing City. The textile enterprise pursues low prices in procurement, so our company and them first deliver at a tentative price, and agree on a one-month price period, during which the disk price reaches the low price expected by the factory, and then carry out the pending order price, and finally settle with the point price as the benchmark price. Zhu Bixing, head of the polyester business department of Wusan Zhongda Chemical Group, said that the model provides factories with flexible price rights, and can outperform the average spot price of ethylene glycol throughout the year, saving it a lot of procurement costs.
Over the past five years, ethylene glycol futures have brought positive changes to the industry while avoiding risks and locking in profits for enterprises.
"Ethylene glycol futures are of great significance to promote the upgrading and optimization of the industry structure, as well as to enhance the pricing influence of China's ethylene glycol international market. The relevant person in charge of Yuanda Properties said that after the listing of ethylene glycol futures, it has provided a more complete and comprehensive raw material hedging tool system for the polyester industry and promoted the healthy development of the industry.
The relevant person in charge of Hengyi Petrochemical also believes that after the listing of ethylene glycol futures, the industry's external pricing power has been significantly enhanced, and the situation of strong pricing by overseas leading suppliers in the past has been greatly improved.
"After the listing of ethylene glycol futures, it has brought about changes in the industry and business models, from resource advantages, to channel advantages, and then to the current futures and spot model. The corresponding profit model has also changed from chasing unilateral trends to paying attention to basis changes, which has also reduced the volatility of ethylene glycol futures prices to a certain extent. He Zongyu said.
