China's SHFE aims to revive interest in oil futures trading with asphalt contract

Singapore (Platts)--26 Jun 2013 450 am EDT/850 GMT

China's Shanghai Futures Exchange is hoping its new asphalt futures contract -- to be launched next month -- will revive interest in oil trading on the bourse, after activity on its fuel oil contract fizzled out, Zhang Zheng, SHFE's director of energy and chemicals markets, said Tuesday.

The asphalt futures contract is awaiting final approval for listing on the exchange from China's Securities Regulatory Commission, Zhang said in a training session for the new contract held in Beijing.

China's No.70 A-grade petroleum asphalt for road use will be used as the standard specification for the physically settled contract, which will trade in lots of 10 mt. It will be priced in Yuan/mt and will require a minimum deposit of 4% of the transaction value.

Zhang said that the asphalt futures contract should prove attractive to a wider range of participants, given its relatively lower cost. He noted that with the current domestic price of No.70 A-grade petroleum asphalt at about Yuan 4,500 ($728.40)/mt, participants will only need to deposit a minimum of about Yuan 2,000 to start trading the contract, "which means everyone can be a player".

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The exchange is also hoping this new contract will kickstart interest in oil trading on the bourse ahead of a planned crude oil contract launch at the end of this year, Zhang said, adding that as asphalt is a byproduct of oil refining, its production cost is highly correlated to crude oil.

"Participants can get familiar with the trading and hedging of asphalt contracts, accumulate knowledge of energy trading, and then divert to the crude futures contract when it is launched," Zhang said.

He added that the new asphalt contract would also be attractive to brokerage companies -- which earn commissions on trades -- as the price of asphalt fluctuates frequently.

A broker from First Futures, who attended the training session, said: "As it is a small contract with 10 mt for each lot, we believe there is a great opportunity for small players to participate."

Market sources told Platts that as the price of asphalt was highly seasonal and tended to fluctuate from quarter to quarter, the new contract will likely be a useful hedging tool.

"As long as there is fluctuation, there will be a need for hedging," the broker added.

In 2012, the price of No. 70 A-grade petroleum asphalt hit a high of Yuan 5,000/mt and a low of Yuan 4,200/mt, according to data from BAIINFO, a Beijing-based energy information company.

But a source at Zhuhai Huafeng, a small asphalt producer based in Guangdong, South China, said the company rarely stocks up on asphalt, and has less incentive to hedge.

"We cannot afford to stock it at tankers due to cash liquidity concerns. So the hedging requirement is not much," he said, adding that the company had a steady stream of customers in South China and did not not see the need to trade the new contract. But he did not rule out the possibility of trading the contract in future.

Asphalt producers who want their product to be used for physical settlement of the contract must first register their product with the SHFE. Producers need to have a minimum production capacity of 500,000 mt/year of asphalt and be producing for two consecutive years, according to the SHFE. Their asphalt has to meet the specifications of China's No. 70 A-grade petroleum asphalt for road use and they need to detail where their asphalt has been used in the last three years as proof of stable quality.

The SHFE's only existing oil futures contract -- a fuel oil contract that was launched in 2004 -- has seen virtually no liquidity in recent years. Trading on the contract took a hit after the China fuel oil market started shrinking in January 2009, when a newly imposed tax wiped out margins. Changes to the contract -- the lot size was increased and the product specifications changed -- at the end of 2011, also affected trading activity.


--Edited by Deepa Vijiyasingam,

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