How to choose CPL contracts: natural month or settlement month?

Since the average CPL RMB spot price became the reference for the mainstream contract settlement last year (2023), it has also become an important reference for actual settlements in the industry. Various settlement methods derived from the average spot price have begun to gain popularity.

Among these, the two most commonly used and representative methods are the natural monthly average (the arithmetic average of prices from the 1st to the last working day of each month) and the settlement monthly average (the arithmetic average of prices from the 24th of the previous month to the 23rd of the current month). The only difference is the settlement period; the latter is mainly to align with the mainstream monthly settlement prices.

Now, as the market enters a new round of contract negotiations, a review of the contract execution during the whole year of 2024 reveals that the two methods, due to their nearly one-week stagger, will inevitably show differences. This was expected, but the extent of the difference in 2024 has exceeded many people's expectations.

Previously, most believed that when extending the timeline, even with a one-week stagger in the settlement period, the final results might differ only slightly. However, the question remains: is one year a long enough timeframe?

From the results of January to October 2024, the settlement monthly average was higher than the natural monthly average, with an average difference of 81yuan/mt each month. This conclusion is striking. If we consider a monthly contract volume of 2,000 tons, this amounts to 162,000yuan/mt each month, totaling 1.62 million yuan/mt from January to October!

Why is there such a large difference? Is there a statistical error? The explanation is quite simple: it is solely due to the significant decline in the absolute price of CPL from January to October this year, which has magnified the differences caused by the one-week stagger.

In the chart below, the height of the bars represents the difference between the two average spot price calculations for each month, while the red line graph depicts the natural monthly average for that month. It is easy to see a pattern: when prices fall, the settlement monthly average is higher than the natural monthly average, resulting in a positive difference; when prices rise, the settlement monthly average is lower than the natural monthly average, resulting in a negative difference.

From January to October 2024, there were many instances of price declines, particularly significant in September and October, leading to an average price difference of around 300yuan/mt.

If we consider the absolute price of CPL at 13,700yuan/mt in January and 11,000yuan/mt in October, this represents a decline of 2,700yuan/mt over ten months, averaging a drop of 270yuan/mt per month. Given that a month is calculated as four weeks and the time is staggered by one week, the average price difference can be roughly calculated as 270/4, which is about 67.5yuan/mt. Thus, measuring against the actual value of 81yuan/mt, the discrepancy is 81 - 67.5 = 13.5yuan/mt. Considering the time discrepancies and the instability in the number of working days, this error can be deemed reasonable. Therefore, we can conclude that the method of price calculation is not significantly problematic; the main reason for the difference between the two averages from January to October is the substantial decline in CPL prices in 2024.

Based on this, the average price strategy for 2025 also needs to anticipate the trend of absolute price fluctuations. From a long-term perspective, prices will ultimately revert to the mean, and historically, it is clear that current prices are relatively low. However, looking ahead to next year, it is still necessary to consider various factors such as oil prices, PPI, and supply and demand. A prudent approach would be to ensure consistency in the cycles of procurement and sales. If it is a one-sided negotiation, it is advisable to continue using this year's average price cycle from a fairness perspective.