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Business-Finance

Published on April 14, 2008

Author: Lassie

Source: authorstream.com

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Price Transparency and the Evolution of Asian Aromatics Markets:  Price Transparency and the Evolution of Asian Aromatics Markets Thomas Giaever-Enger Managing Editor Asian Petrochemicals Indian Petrochem Mumbai November 6th, 2006 Agenda:  Price volatility & hedging needs Transparency & commoditization Spot liquidity & market participation Extension of physical forward trade Rise of paper swaps trade What’s coming next Agenda Agenda:  Price volatility & hedging needs Transparency & commoditization Spot liquidity & market participation Extension of physical forward trade Rise of paper swaps trade What’s coming next Agenda Crude price rally and correction:  Crude price rally and correction But spare capacity to stay historically low:  But spare capacity to stay historically low Continued growth in oil demand expected:  Continued growth in oil demand expected Source = OPEC, IEA forecasts May 2006 Growing reliance on OPEC concentrates supply risk:  Growing reliance on OPEC concentrates supply risk Where will all future new oil come from?:  Where will all future new oil come from? Mostly unstable parts of the world Middle East, constant threat of war, political instability and terrorism Africa, plagued by political instability, war and civil unrest Central Asia, potentially unstable. A power struggle developing between Russia, China, Iran and the US Russia unlikely to increase exports Likely to be increasing pressure to drill in stable but environmentally sensitive regions/countries Other production constraints: US weather:  Other production constraints: US weather When will global refinery expansions arrive?:  When will global refinery expansions arrive? Sources = Platts data, analysis, various stories in 2005-2006 Where will new refinery expansions be?:  Where will new refinery expansions be? Where it will be: Mostly Asia Pacific Mostly for regional growth Turns Asia into swing supplier Where it won’t: US, which is “outsourcing” refining Fears of cyclical downturn on glut of new capacity:  Fears of cyclical downturn on glut of new capacity Petchems suffer extreme intra-day volatility from oil:  Petchems suffer extreme intra-day volatility from oil Petchem prices are even more volatile than oil:  Petchem prices are even more volatile than oil Petchem prices are even more volatile than oil:  Petchem prices are even more volatile than oil Benzene v = 42% Brent v = 34% Jan 2000 Sep 2006 Slide16:  Volatility Uncertainty Need for hedging Risk Volatility creates Risk Hedging mitigates price, credit risks Hedging mitigates price risk Hedging in physical market price cycles:  Hedging in physical market price cycles Supply > Demand Stocks building Demand > Supply Stocks drawing Disinvestment Reinvestment Break-even price Source: Societe Generale CONSUMERS HEDGE PRODUCERS HEDGE Agenda:  Price volatility & hedging needs Transparency & commoditization Spot liquidity & market participation Extension of physical forward trade Rise of paper swaps trade What’s coming next Agenda Slide19:  Opaque info Uncertainty Need for Transparency Risk Opacity creates Risk Transparency mitigates price & counterparty risk Transparency mitigates price risk Platts’ mission: market transparency:  Platts’ mission: market transparency Heards in the markets Instant Feedback Price Discovery PCA 5 Data Origination Price Testing Platts serves commodities markets by providing critical market intelligence in real-time Platts petchem market heards on page PCA 5:  Platts petchem market heards on page PCA 5 05/11/28 11:00 Heard 147: PX: Tricon bids Jan at $790/mt FOB Rdam, 1kt 05/11/28 10:57 Heard 146: MTBE: Neste bid $515/mt FOB AR, any Dec 05/11/28 10:30 Heard 141: MTBE: Vitol bid $495/mt FOB AR, Dec 1-13 05/11/28 10:21 Heard 139: LDPE: Converter seeks Nov contracts at -Eur70/mt 05/11/28 10:14 Heard 138: PP: Converter said Nov done at rollover to Oct 05/11/28 03:18 Heard 102: Tol: B3) Noble bid firm H2 Dec or any Jan $730/mt 05/11/28 03:21 Heard 106: PX: B4) BP bid firm Jan $1020/mt CFR Taiwan/Ch 05/11/28 03:04 Heard 92: Tol: S5) Shell offer firm any Jan $635/mt FOBK 2kt 05/11/28 03:00 Heard 81: Bz: B6) FHR bid firm H2 Jan $615/mt FOB Korea 3kt 05/11/28 03:00 Heard 80: Bz: S3) J&J offer firm H2 Jan $650/mt FOB Korea 05/11/23 13:47 Heard 54: Jan benzene trade heard at 230 cts/gal FOB USG 05/11/23 11:46 Heard 141: Nov LDPE offered 68 cts/lb FAS Houston 05/11/17 12:22 Heard 201: Nov ethylene offered [screen] 74.75 ct/lb FD USG 05/11/16 11:57 Heard 167: Dec PP homo done 61 cts/lb dlvd railcar Houston 05/11/23 13:10 Heard 48: Dec methanol bid at 89 cts/gal FOB USG 05/11/22 16:23 Heard 182: Jan n-toluene trade heard at 200 cts/gal FOB USG 05/11/21 16:36 Heard 186: Dec benzene trade heard 222.75 cts/gal FOB USG US Asia Europe Platts aromatics assessment window:  Platts aromatics assessment window Launched June 2005 for benzene, toluene, styrene, paraxylene firm bids/offers. Isomer-MX added since. Objective to promote transparency and spot market liquidity which improve price determination. Half-hour daily assessment windows: 4.00-4.30pm SG time for Asia, 4.00-4.30pm UK time for Europe. All participants & metrics named and published E.g. – Toluene: S1) Shell offers firm H1 April at $730/mt FOB Korea 2,000mt, L/C at sight Windows generate 3-4 times more price information:  Windows generate 3-4 times more price information Liquidity is a measure of participation + activity:  Liquidity is a measure of participation + activity USCP phased out from Asian benzene contracts:  USCP phased out from Asian benzene contracts Asia contract price formula traditionally based on US CP as Asia exports heavily to the US. From 2006, contract benchmark has shifted towards FOB Korea because: Supply from Korea has increased FOB Korea spot trading has become more liquid Price discovery is more precise than in the US due to transparent Asian assessment windows Asia beginning to dictate netback price to the US as swing supplier Toluene benchmark FOB Korea now proxy for Asia:  Toluene benchmark FOB Korea now proxy for Asia Forward curve trade of Asian Bz, PX, MX in 2006:  Forward curve trade of Asian Bz, PX, MX in 2006 Agenda:  Price volatility & hedging needs Transparency & commoditization Spot liquidity & market participation Extension of physical forward trade Rise of paper swaps trade What’s coming next Agenda Asia benzene supply concentrates benchmark:  Asia benzene supply concentrates benchmark Source = METI Asian liquidity: expressed by length of trading chains:  Asian liquidity: expressed by length of trading chains Source: ChemCross September 2005: selective participation from top 15:  September 2005: selective participation from top 15 November 2006: 20+ players in 3 to 5 markets:  November 2006: 20+ players in 3 to 5 markets Agenda:  Price volatility & hedging needs Transparency & commoditization Spot liquidity & market participation Extension of physical forward trade Rise of paper swaps trade What’s coming next Agenda Development of further forward Asian PX trading:  Development of further forward Asian PX trading Development of further forward Asian PX trading:  Development of further forward Asian PX trading Development of further forward Asian PX trading:  Development of further forward Asian PX trading Evolution of forward curve trade of Asian PX in 2006:  Evolution of forward curve trade of Asian PX in 2006 Agenda:  Price volatility & hedging needs Transparency & commoditization Spot liquidity & market participation Extension of physical forward trade Rise of paper swaps trade What’s coming next Agenda The timing of new derivative instruments –why now?:  The timing of new derivative instruments –why now? Derivatives naturally emerge when: The market is liquid There is a high degree of standardization and commoditization There is a high degree of correlation of market price (assessment) with the derivative being valued Direct market inputs make for transparent pricing Trade is possible at arm’s length, on a level playing field Paper swaps trade emerges in Asia:  Paper swaps trade emerges in Asia 14 active PX swaps players since March 2006: Noble, BP, Shell, Glencore, Integra, FHR, J&J, LGI, Trammochem, Integra, Garson, Projector, Landmark, Trustbridge. Platts began daily swaps assessments Oct 2, 2006: 1,000mt lots CFR Taiwan, balance month & next two calendar months. 7 active Isomer-MX swaps players: BP, Shell, Tychem, Unichem, Garson, Tricon, KP Chemical. 4 active benzene swaps players: BP, Noble, Integra, FlintHills, Growth of paper swaps markets participants in Asia:  Growth of paper swaps markets participants in Asia Agenda:  Price volatility & hedging needs Transparency & commoditization Spot liquidity & market participation Extension of physical forward trade Rise of paper swaps trade What’s coming next Agenda New e-trading ventures in China in 2006:  New e-trading ventures in China in 2006 Shanghai Petroleum Exchange (SPEX): end-2006? Methanol, MEG to be traded in East China. Shanghai Ginga: Nov 1 - forward SM, toluene, MEG traded in Chinese Yuan, 10mt lots ex-tank. Zhong Da Chemical: May 8 - MEG, SM, toluene traded domestic in Yuan and CFR China in US $. Ningbo Dupute Liquid Petchem E-commerce: Mar 31 - domestic toluene, methanol, MEG trade. Petrochemicals matured rapidly in 2005-2006:  Petrochemicals matured rapidly in 2005-2006 Energy & petchems correlation tightened Aromatics now liquid, highly commoditized More East-West, arbitrage transparency Markets connecting globally Trading houses going global Price, news frequency accelerating Volatility & risk increased Greed - attracting new physical & financial players Fear - conservative elements scared of rate of change, cyclical industry downturn, global recession – implying risk of extreme trading profit/loss, margin cuts, mergers An outlook for Asian aromatics trading in 2007 :  An outlook for Asian aromatics trading in 2007 Derivatives appear where confidence in physical benchmarks is strong: benzene, toluene, styrene. Greater transparency will make price discovery more accurate, deepening the gravity of Asian price benchmarks. E-trading will emerge where commoditized, high volume trade has reached a critical mass. Exchange-based clearing services will be offered where counterparty risk is an obstacle to growth of liquidity. Partialization of cargo volumes is possible if spot liquidity becomes bottlenecked by logistical constraints. Thankyou.:  ● Singapore ● Guangzhou ● Tokyo ● Sydney ● Thankyou. Thomas Giaever-Enger Managing Editor, Asia Petrochemicals tom_enger@platts.com www.platts.com +65 6530 6584

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