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Insight | Time: Oct 13 2020 8:57AM
Polyester staple fiber futures trading commences
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The trading of polyester staple fiber futures was launched on Oct 12 on Zhengzhou Commodity Exchange (ZCE).

Upstream PTA and MEG futures have been traded on commodity exchange, and a large number of players have been participating in the trading. Then, the trading of PSF futures will help provide producers, consumers and relevant traders with tool to hedge. Also, it provides upstream feedstock enterprises and other investors with more effective trading modes and risk-management strategies. That is why much attention have been laid on PSF futures long before the start of trading.

On Oct 9, ZCE announced the benchmark price for PSF futures (contracts including PF105, PF106, PF107, PF108 and PF109) at 5,400yuan/mt (up/down limit for PSF futures on the first trading day shall be ±8% of the benchmark price, and the daily up/down limit for PSF futures contract shall be ±4% of the settlement price of the previous trading day). The price level has drawn much market attention, then, what’s the importance of it?

1. Cost of PSF futures
In spot market, China domestic PSF price rose after the week-long holiday in the beginning of Oct, due to good sales. Prevailing trading prices are currently at around 5,400-5,500yuan/mt in Zhejiang and Jiangsu, and 5,400-5,600yuan/mt in Fujian, short-distance delivered. CCFGroup assesses 1.4D price index at 5,465yuan/mt for Oct 10. With the freight of 80yuan/mt for short distance excluded, prevailing PSF ex-work trading prices are at around 5,385yuan/mt, only +15yuan/mt to the benchmark price of PSF futures.

However, as there are miscellaneous costs including warehouse storage charges, transaction fees, delivery fees, fund interests, tax, etc, which would be no less than 150yuan/mt and could amount to as high as 380yuan/mt (dependent on the stint of storage, payment mode, inspection fees, etc), the cost of May contract of PSF futures is much higher than the benchmark price of 5,400yuan/mt.

2. PSF profits
On Oct 9, the settlement prices of May contracts of PTA and MEG futures were at 3,574yuan/mt and 3,907yuan/mt respectively, based on which, the feedstock cost for PSF can be calculated at 4,365yuan/mt. Given the benchmark price of 5,400yuan/mt, PSF to feedstock price spread is 1,035yuan/mt, hence, PSF cash flow is around 135yuan/mt.

*Cash flow of PSF = PSF - (0.855 * PTA + 0.335 * MEG + 900yuan/mt) (The fixed 900yuan/mt is not inclusive of freight of 80yuan/mt.)

From the chart above, since the boom of the industry in 2016, PSF cash flow averages at 400yuan/mt in the last 5 years, and was no less than 170yuan/mt even in 2016. Therefore, the cash flow based on the benchmark price is far below the 5-year average.

3. PSF and PTA capacity expansion
In terms of PTA capacity expansion, there will be fresh capacity of 10.5 million mt/yr to come on stream in China before May 2021, and there will be additional 3.3 million mt/yr new PTA capacity in Jun next year. The intensive capacity growth would bring about severe oversupply. As for PSF, however, only Hubei Lvyu is expected to start its new 1.4D plant with capacity of 60kt/yr before May 2020.

Therefore, in the polyester chain, PTA will be under greater pressure than PSF, and the profits in the chain could transfer to downstream sector.

In addition, PSF market is currently quite healthy with inventory at lows and some companies even in short of products. Moreover, crude oil prices are currently low, supportive to virgin PSF keeping its advantage and substitution of recycled staple fiber.

In a conclusion, the benchmark price for PSF futures at 5,400yuan/mt is slightly lower than expected, and that is why participants are going to long PSF, especially long PSF and short PTA.

However, there are indeed some negative factors and risks. Some traders and buyers have bought PSF earlier, with buying prices at around 5,200yuan/mt or slightly above. Hence, some enterprises may sell PSF in order to lock in gains after it has risen appreciably. In addition, though orders to end-use textiles market are good, the plant operating rate is high, and polyester yarn sales are smooth, the market could enter the slack demand season gradually and there’s uncertainty about the outlook of demand. Also, it is suggested to focus on any unexpected PTA plant maintenance if PTA profit reduces drastically.
[RISK DISCLAIMER] All opinions, news, analysis, prices or other information contained on this report is provided by analyst of Zhejiang Huarui Information Consulting Co., Ltd (CCFGroup) as general market commentary and does not constitute investment advice. CCFGroup will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.
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