Why does PX futures price fall back

PX futures opened high before falling back continuously since the launch last Friday. The May contract of PX futures (PX2405) closed at 9,346yuan/mt on Sep 18, down by 204yuan/mt from the list benchmark price of 9,550yuan/mt. Then, how come does it fall short of expectations?

1. Compared to May PTA futures contract, PX futures contract price is relatively high

Before the launch of PX futures, the benchmark pricing had been the focus of the market. It is generally believed that PX futures pricing pegging to crude oil futures or PTA futures would be appropriate. However, it is difficult to forecast crude oil price for May 2024, and discussions for most distant PX paper goods are mostly centered on Jan goods. Therefore, it would be more reasonable to estimate list benchmark price of PX2405 at a neutral level around 9,300yuan/mt, based on May PTA futures.

However, Zhengzhou Commodity Exchange announced on Sep 14 the list benchmark price for PX2405 at 9,550yuan/mt, indicating PTA-PX processing spread at only 30yuan/mt. Then, there came talks about shorting PX and longing PTA. On Sep 15, the first trading day for PX futures, PX2405 contract price surged to 10,050yuan/mt after the opening, further supporting the short selling. Afterwards, PX2405 contract price pulled back rapidly to below the list benchmark price.

2. Players adopt wait-and-see approach

Before the launch of PX futures and during the first two trading days, most players mainly adopt wait-and-see approach. It is far too early for the delivery of May futures contracts, and there could be uncertainties. For those players looking for opportunities for arbitrage, it is more like speculation if they enter the market now. Meanwhile, in the beginning of the trading, the quantity of positions is quite small, and thus the price fluctuation would be much bigger than PTA futures. Therefore, it would be safer to operate PTA futures, and players prefer to keep on sidelines as for PX futures. Under this circumstance, players mainly adopt strategy of longing PTA-PX spread, shorting PX and shorting PX-crude oil spread.

In terms of fundamentals, for the rest of 2023, PX supply increase would exceed the production loss, estimated based on plant restarts and turnarounds.

ZPC and India's Reliance cut operating rate earlier and are expected to recover PX plant operating rate, equivalent to a combined capacity of 2.5 million mt/yr that is affected. Then, where would be 7.73 (5.23 + 2.5) million mt/yr of PX capacity to recover production. However, capacity that has turnaround plans totals only 3.14 million mt/yr, indicating growing supply pressure.

In addition, US has switched from summer gasoline to winter gasoline on Sep 15, and thus demand for blending component with high octane number decreases. Some TDP units shut earlier in Northeast Asia may get restarted, and then PX plant operating rate may rebound.

In a conclusion, PX inventory is expected to rise despite new PTA plants to come on stream in the fourth quarter. However, if ZPC implements maintenance on PX lines, the situation would be different.