【SCI View】China LPG Market to Usher in Futures

SCI99

2020-01-03

China LPG Market to Usher in Futures

According to sources, the Dalian Commodity Exchange (DCE) plans to develop LPG futures in 2020, given China is the largest LPG importer and consumer in the world.

LPG is short for liquefied petroleum gas. With the development of the petrochemical industry, LPG, as a kind of basic feedstock and new fuel, has attracted more and more attention. In chemical production, LPG is a by-product in the process of catalytic cracking and thermal cracking of crude oil, which is used to produce synthetic plastic, synthetic rubber, synthetic fiber, medicine, explosive, dye, etc. LPG has been widely used as fuel because of its high calorific value, and there is no smoke and breeze when burning. LPG is also used to cut metals, bake agricultural products and the roast industrial kilns. In 2019, China’s LPG output was 23,724.01kt, and it was estimated that the LPG import volume would be 22,098kt.

In terms of the downstream demand, most LPG resources are consumed in the chemical industry and the fuel industry. Therein, China’s LPG resources are mainly used as civil-use gas. Given the market pricing, China’s civil-use gas prices fluctuate greatly due to the import market, supply-demand fundamentals, production technology, etc. For example, the highest price spread of civil-use gas surpassed RMB 1,000/mt in 2017. Accordingly, participants of China’s LPG market need to evade the market risks.

Relevant person in charge of DCE said that after years of in-depth research on LPG quality standards, spot patterns, trade habits, transportation, warehouse, etc., DCE has initially completed the design of LPG futures contracts and positioned the contract target LPG fuel gas.

The benchmark delivery place for LPG futures is Guangdong, and the delivery areas include South China, East China and North China. The annual consumption volume of LPG fuel gas in Guangdong reaches 5.17 million mt, ranking first in China, with the highest marketization and openness degree. The prices formed by refineries and traders are the most representative. In South China, East China and North China, the LPG output, sales volume and warehouse are relatively high, and the inter-regional price correlation coefficients are all above 0.9. Accordingly, South China, East China and North China are suitable as the delivery areas for LPG futures. DCE has set a discount of RMB -100/mt for the non-benchmark areas of East China and South China, and RMB -200/mt for those of North China.

Sources also say that because there are no third-party warehouse companies in the spot market, the warehouse tanks of import traders and producers are for captive use. Therefore, LPG futures will implement full-warehouse delivery. In the initial stage, DCE plans to set up more than 20 factories and warehouses in South China, East China and North China, covering refineries, importers, traders and of urban LPG companies with long-term inventories. According to the assessment, the planned supply of factory and warehouse accounts for 70% of the total LPG supply in the region.

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