Behind the “turbulent” changes in the PTA industry in recent years, one company is indispensable, and that is Zhejiang Yisheng Petrochemical Co., Ltd. (Yisheng for short) petrochemical). Faced with the decline in overall industry profits and compression of processing fees, Yisheng Petrochemical has achieved the goal of locking in costs and stabilizing the supply of raw materials by using futures tools to lock in processing fees and price points. In 2021, Yisheng Petrochemical will actively play the role of leading demonstration and bridge link in the industrial base, innovate the sales business model, and introduce PTA basis into contract sales.
Use the futures market to price and avoid the risk of price fluctuations
With the changes in the supply and demand pattern in recent years, the PTA spot market pricing model has also gradually changed. At present, basis trade in the PTA industry has become the mainstream of the market. Market submissions only ask about the basis and rarely use fixed price.
According to Xu Jien, deputy general manager of Yisheng Petrochemical Marketing Center, as the market matures in the use of futures tools, PTA transactions have mostly used the futures contract + basis pricing model in recent years, and the spot price almost no longer exists. That is, the buyer and seller have negotiated a premium and discount in advance and agreed to price point on the market within a certain price point period. When the other party makes a price point, the final transaction price is the point price + basis.
A reporter from Futures Daily learned that the PTA futures + basis pricing model has now been skillfully used by customers and has become the mainstream pricing model in the market, accounting for as much as 98%.
“In the past two years, post-price pricing has been widely used in PTA transactions, which means that price and cargo rights are separated. When the market is bearish, the downstream demand side can first use the temporary price to take delivery, and wait until the price reaches the psychological price later. Then the actual settlement will be carried out,” Xu Ji’en said.
For PTA manufacturing enterprises, they face inventory risks during the production and operation process, including the risk of inventory changes of finished PTA, raw material PX and their processing fees. “When processing fees are extremely compressed and facing falling prices, downstream companies will postpone purchases due to the psychological influence of ‘buy up but not buy down’, further amplifying the company’s inventory risk of raw materials. The accumulation of finished product inventory will bring cash flow Pressure has forced companies to continue price reduction promotions, triggering resonance. Faced with inventory risks, PTA manufacturing companies can manage inventory through PTA futures.” Xu Ji’en said.
“For buyers, changes in production costs caused by fluctuations in raw material prices determine the profit margins of enterprises. Enterprises that use the spot average price pricing model to purchase raw materials will face an increase in overall procurement costs caused by rising raw material prices. As well as the risk of inventory depreciation caused by falling raw material and product prices.” In Xu Jien’s view, the futures pricing model can help buyers lock in costs and reduce operating risks when raw material prices fluctuate.
“A customer of the company spotted the PTA price trend and priced it at a low price, and priced 500 tons at the market price of 4,950 yuan/ton on July 7, 2021.” Xu Jien said that on July 18, after the OPEC+ production increase agreement was implemented, , the bad news was gradually digested, and crude oil prices began to rebound. The customer priced 1,100 tons at the market price of 4,918 yuan/ton on July 20. Taking into account the basis difference on the day of the spot price, the prices were 4,935 yuan/ton and 4,938 yuan/ton respectively. price as the final settlement price. The final average spot price in July was 5,207 yuan/ton. The customer’s two orders lowered the average unit price by 270 yuan/ton, saving about 430,000 yuan in procurement costs. When purchasing companies face rising market prices, they can carry out effective risk management by pricing on the futures market.
Introduce long-term contract based on basis difference to control procurement costs
“For sales companies, pricing can be used to lock in prices and thus operating profits; for purchasers, pricing can be used to control procurement costs and avoid increased production costs caused by falling raw material prices, creating a win-win situation.” Xu Ji’en said.
The reporter learned that in order to further promote the use of futures tools to downstream companies, starting from 2021, Yisheng Petrochemical will add price point clauses to the contract sales policy to guide more downstream production companies to participate in futures price points and PTA basis points. It has officially entered the contract mode, allowing all long-term contract customers to price futures within the time and quantity allowed by the contract and control procurement costs.
During the epidemic, pulse sales occurred in the downstream polyester market, and polyester manufacturers hoped to lock in raw material costs when selling.
In August 2021, affected by the Delta mutant strain, domestic and foreign crude oil demand is expected to be limited, and crude oil prices have fallen under pressure. At the same time, domestic polyester factories have begun to reduce production due to profit compression and inventory accumulation, which has affected both the upstream and downstream markets. down, PTA prices dropped from high levels. In this round of falling market, Yisheng Petrochemical carried out price point pricing for long-term customers. The price point was much lower than the price settled with the average price of the whole month. This diluted the price when PTA was at a high level and helped customers when the market weakened. Control procurement costs and reduce the risk of discounts on raw materials upon receipt.
“Yisheng Petrochemical adopts a traditional method of combining spot average price and partial futures price point for PTA contract customers to settle the contract, giving contract customers the right to point price on the futures disk. In the case of obvious market fluctuations , customers can relatively flexibly and autonomously control their procurement costs through price points to meet customer risk management needs.” Xu Ji’enHe said that the innovation of this sales model has improved the coverage of industrial enterprises in the futures market, opened up the upstream and downstream of the industrial chain, attracted more industrial enterprises to participate in price formation, and promoted the stability of the industrial chain.
Xu Jien introduced that because Yisheng Petrochemical stipulates that the number of price points made by customers after the 20th of each month will decrease day by day, so after the price plummeted on August 19 last year, a customer saw the opportunity to focus on price points on the 20th. The customer priced 1,500 tons at the market price of 4,918 yuan/ton. The basis difference on that day was 5 yuan/ton. The final settlement price was 4,923 yuan/ton, which was 229 yuan/ton lower than the average spot price in August of 5,152 yuan/ton. This operation Saving the customer approximately 340,000 yuan.
In his view, unlike the traditional cost pricing and spot average price models, the point price settlement model gives customers more room for flexible operations. This model not only facilitates downstream stabilization of purchases, optimizes procurement costs, and gives it a certain degree of pricing power; it also helps sellers rotate inventory and prevent inventory backlogs. It also tests the ability of enterprises to use the futures market for risk management.
“Introducing point prices into PTA long-term contracts will make the futures and spot markets more closely integrated, further play the role of PTA futures in stabilizing corporate production and operations, enrich corporate business models, and help downstream customers manage risks. “Xu Ji’en said.
Give full play to the advantages of industrial base to achieve win-win situation between upstream and downstream
In fact, as an upstream factory in the polyester industry, Yisheng Petrochemical has always been actively learning and constantly recharging its mentality. In order to better utilize the futures market to manage risks, the company has established a team of professionals who are familiar with the futures markettalent team also separates the business sales department and the futures pricing operation department to ensure efficient and independent operation between departments while preventing moral risks.
Over the years, Yisheng Petrochemical has actively used the functions of price discovery, risk management, and resource allocation in the futures market to manage spot operating risks, arrange production and sales, and enhance the competitiveness of the company.
Nowadays, the high volatility of commodities has undoubtedly increased the difficulty of corporate risk management, and has also put forward higher requirements for the risk management capabilities of Yisheng Petrochemical. In this context, Yisheng Petrochemical stated that it will draw on the lessons learned from the risk management practice in the past two years, further improve the risk management system, and give full play to its research advantages in multiple risk management models such as futures, price points, arbitrage, and options. Actively explore new models to cope with possible extreme price fluctuations. At the same time, companies actively share the production and sales model that combines futures and cash to help industry chain companies deepen their knowledge and understanding of futures derivatives.
After Yisheng Petrochemical officially introduced point pricing into long-term contracts at the beginning of 2021, downstream companies were highly motivated to participate and had a wide range of participation. The companies also had a new way to control costs and avoid risks, prompting more companies to go deeper. Get in touch with and understand futures tools in depth and maximize the effectiveness of futures tools. The reporter learned that with the successful cases in 2021, many downstream customers will entrust third-party traders to participate in contract execution in 2022, and the third-party traders will provide price-setting services in the middle.
“It can be seen that many polyester industry chain companies have developed the habit of futures price pricing, and have achieved tangible benefits in the price pricing process, achieving a win-win situation.” Xu Ji’en said that in the future, Yisheng Petrochemical will cooperate with customers to price more and earlier, serve every customer well through innovation in sales policies, and help customers understand, understand and make good use of futures tools.
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