China's SHFE aims to revive interest in oil futures trading with asphalt contract
Singapore (Platts)--26Jun2013/450 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
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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
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, email@example.com