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At the “Dalian Commodity Exchange (DCE) Special Session” of the 12th China (Shenzhen) International Derivatives Forum 2016, the draft contract and rules for the ethylene glycol (EG) futures was shown to the market for the first time. Chen Wei, director of the industrial products business division of DCE, said that the contract design of the EG futures has adapted to the pattern of the spot market, with the delivery warehouses set in the main regions of consumption and trade distribution such as East China and South China, and the “home delivery service” warehouse receipt system for factory warehouses has been designed based on the product characteristic of ethylene-to-EG and coal-to-EG products.
Chen pointed out that the development of the EG spot market shows the following three features: first, the market size is large with many enterprises and an important position in the industry. In 2015, China’s EG consumption was about 12.667 million tonnes, more than half of the world’s total, and calculated based on the average price of RMB 6,000 / tonne, the market size was about RMB 76 billion; in 2015 there were a total of 29 upstream production enterprises for EG in China. With regard to import and trade, there were over 400 enterprises participating in importing EG, and at the EG logistics and distribution center in Zhangjiagang, more than 1,000 small and medium-sized trade companies were involved in EG trade. Among the downstream consumption enterprises, the number of polyester enterprises alone exceeded 100, including about 50 enterprises with a production capacity of more 300,000 tonne. Second, the imports concentrated in Jiangsu and Zhejiang Provinces. In 2015 EG imports stood at 8.77 million tonne. Particularly, Jiangsu and Zhejiang were the largest EG importing provinces. Third, the price fluctuations are high with the average profits at low levels, and the industry shows a strong demand for hedging.
In terms of the quality standards for delivery, Chen said that based on the national standards, the EG futures will see some other indicators added. As a chemical product with relatively mature production technology, EG features a high degree of standardization in quality. The currently effective national standards of EG is the “Industrial Ethylene Glycol (GB/T4649-2008)”, which is also the mainstream standards in the spot trade, and most of the domestic production enterprises also adopt the national standards. In addition, considering the spot trade practices, DCE has added the chlorine ion indicator in designing the delivery quality standards for the EG futures.
Chen stressed that the chlorine ion content is not a mandatory inspection indicator in the current national standards, but in spot trade, the chloride ion content is basically a mandatory inspection indicator and it has been planned to add the indicator in the revision for the next version of the national standards. Moreover, the trace of inorganic chlorine in EG is mainly from the pollution in the transportation of the product. The chloride ion significantly affects the corrosion resistance of the stainless steel reactors and storage tanks, and the long-term storage can cause serious damage to the reactors or pipes, having an adverse impact on the downstream polymerization process. Therefore, the chlorine ion indicator is added.
Chen pointed out that as the downstream polyester enterprises have not completely accepted the coal-to-EG product, which features a small amount of output and a small market share and has not met the standards for delivery at present, the coal-to-EG product cannot be used for delivery for the time being. In order to distinguish the ethylene-to-EG and coal-to-EG products, a threshold indicator has been added for the EG futures, and in the delivery quality standards the impurity indicators such as 1, 2-butanediol and ethylene carbonate are added.
According to Chen, in order to adapt to the pattern of the EG physicals, DCE has chosen to set the delivery areas in the main consumption and trade distribution centers in East and South China. In terms of the upstream supply of EG, both production and import are concentrated in East China represented by Jiangsu, Zhejiang and Shanghai, and East China recorded 38% of China’s total output; the imports are also concentrated in Jiangsu and Zhejiang provinces in East China, which registered 84% of China’s total imports. In addition, Jiangsu and Zhejiang provinces also boasts most of the EG storage tanks in China, with a large number of local trading companies, and the EG spot trade is very active.
Regarding the downstream consumption, the EG consumption is mainly concentrated in China’s eastern coastal regions such as Jiangsu, Zhejiang and Shanghai as well as Guangdong and Fujian. Jiangsu and Zhejiang provinces in East China are the most concentrated region for the polyester enterprises in China, as well as the region with the largest EG consumption, accounting for 73% of China’s total. In addition, the coastal region in South China including Fujian and Guangdong also clusters a large number of polyester enterprises and is the second largest EG consumption region in China, accounting for 12% of the total EG consumption.
The delivery warehouses for the EG futures will be set in East China and South China. East China will be set as the benchmark delivery area, and other regions will be designated as non-benchmark delivery areas, with the premium and discount at RMB 0 / tonne.
Finally, in terms of the delivery system, Chen stressed that as the EG is a liquid product in bulk and the delivery depends on fixed storage tanks, in extreme cases, the situation of insufficient tank capacity might occur for a short period of time. To address the problem, DCE has designed the “home delivery service” warehouse receipt system for factory warehouses, stipulating that during warehouse receipt registration, the fixed pick-up sites will not be assigned to the warehouse receipts, and when writing off the warehouse receipts, the buyer can name the preferred place of delivery, and the factory warehouse should be responsible for making the goods available at that location. Besides, as the EG has the stable physicochemical property without metamorphism for one year in storage, the validity of the warehouse receipts is one year with the writing off at the end of September each year.
