In recent years, the price of crude oil has fluctuated greatly, which has caused large fluctuations in the price of chemical products. Under the traditional free-to-market trade model, the chemical industry often has an embarrassing situation that “upstream companies sell low and downstream companies buy expensive”. With the compression of profits, price risk has threatened the stable operation of enterprises.
After the linear low-density polyethylene futures were listed on large trading houses in 2007, its impact on sales and procurement has become increasingly apparent. In recent years, more and more industrial enterprises have begun to use futures instruments to resist price risks, and gradually began to explore the basis point price trading model based on futures prices.
Recently, with the support of Dashang’s 2018 basis trade pilot project, Shanghai SECCO Petrochemical Co., Ltd. (hereinafter referred to as SECCO) and midstream enterprise Zhejiang Mingri Holding Group Co., Ltd. (hereinafter referred to as SECCO) Tomorrow) Strong forces, through the active promotion of Guotai Junan Futures, not only successfully carried out the basis trade experiment, but also further promoted this model as “inclusive + basis trade”. People in the industry generally believe that this will become a new direction for business management and trade models.
A bases on the spread price to develop the right trade
As an upstream production enterprise, SECCO often encounters problems in downstream customers that are difficult to reasonably price for forward orders and that the downstream consumption changes lead to supply and demand mismatches. Traditional spot pricing and sales models are increasingly unable to meet market developments. As a trade-oriented enterprise, there will be exposure on both the purchasing and sales sides tomorrow, and the sudden large fluctuations in prices will undoubtedly bring great operational risks to the entire enterprise.
“The risk cannot be eliminated, but it can be managed and transferred through financial derivatives.” said Chen Fangyi, manager of the investment and research department of Tomorrow. It can be said that tomorrow is one of the earliest chemical companies to accept and introduce the basis point price model. Not only did they start to form a professional team very early to learn and study the use of futures and other financial instruments to manage price risk, but also tried twice in 2015 and 2016. Over-the-counter options trading, at the same time participated in the big business in 2018 basis trading and OTC options pilot projects. The continuous learning and practice of financial derivatives tools has enabled tomorrow to innovate its business philosophy and expand its business path.
Based on the previous exploration experience, in the second half of 2018, in a business exchange with Guotai Junan Futures, tomorrow came up with an idea: Can you combine the upstream and downstream through the combination of basis price and OTC options to form a A new business model?
The purpose of the basis point price is to transfer the risk brought by absolute price fluctuations. Based on the agreed futures price of a certain month, the trading parties determine the transaction price by adding or subtracting premiums and discounts (basis) on this basis. The parties to the transaction convert from the game of absolute prices in the traditional trading model to the game of basis.
The basis fluctuation is small, and it has the characteristics of regression in the delivery month, which is relatively easy to grasp. During the pricing period, both parties can decide whether to carry out buying (selling) hedging operations in the futures market. As a basis buyer, you can lock in purchase or sales in advance, arrange production and manage inventory in a reasonable way. Pricing is based on the futures market, and you can freely control the pace of point price and flexibly control purchase costs. Basis sellers can lock in sales in advance, occupy market share, transfer price risk, and obtain reasonable profits.
At the same time, if a service provider signs a forward order with rights in the same period of upstream and downstream, and connects the upstream and downstream of the industry into a whole business, then the basis price and the combination of options can enable upstream companies to rise or fall in the forward market. Choose a relatively high price settlement to prevent the situation of “selling cheap”; enable downstream companies to choose a relatively low price settlement no matter whether they rise or fall in the forward market, to prevent the situation of “buying expensive”. The service provider pays according to the final settlement price when the order is settled. The upstream ship to the delivery location designated by the terminal factory according to the service provider’s delivery requirements, and the terminal factory customer signs an order to lock the cost of raw materials and obtain supply guarantee.
“Downstream customers prepay a certain deposit after signing an order. At the time of order settlement, they pay according to the spot transaction price. The service provider requires the upstream enterprise to ship to the designated shipping location of the terminal factory to maximize the efficiency of circulation and reduce the cost of circulation.” Chen Fang One said that when they gradually matured their ideas, they quickly started looking for partners.
B. Upstream and downstream enterprises go from game to win-win situation
In a short period of time, we have effectively communicated with the mainstream upstream petrochemical companies tomorrow, and discussed in depth the possibility of cooperation in new models such as basis price, far price, and price protection, that is, how to maximize the use of the existing operating systems of both parties. The cooperation potential and other issues exchanged real ideas and opinions.
Among many upstream companies, SECCO, the supplier of tomorrow’s upstream, attaches great importance to this project. SECCO is a wholly-owned subsidiary of Sinopec. As one of the most representative leading companies in the domestic petrochemical industry, SECCO mainly provides chemical raw materials for downstream petrochemical companies, with annual sales of more than 30 billion yuan. SECCO has the ability to provide high-quality polyolefin products and various industrial chain services. Adhering to the concept of “becoming the most willing to cooperate with business partners”, it pays special attention to issues such as business efficiency, business innovation and customer stickiness.
When tomorrow comes to the door of the house with ideas, SECCO is worried about how to solve the risk of raw material price fluctuations of forward orders, the problem of long-term raw material supply and supply for industrial customers, and how to maintain the value of accumulated inventory caused by their own supply and demand mismatch period. Added value.
After recommending the project to Secco tomorrow, Secco took the initiative to establish a project team with Tomorrow and related customers. After more than three months of preparation and demonstration, under the strong promotion and active innovation of Secco, this project was designed based on the basis 1. The use of options for futures insured trading mode. Specifically, tomorrow, through Guotai Junan Futures, it will provide financial instruments and service support to the upstream SECCO and seven downstream direct customers.
These 7 downstream entities are distributed in East China, North China, and Southwest China. They have strong geographical and industrial representation. The delivery methods cover roads, railways, and container transportation.
According to a reporter from the Futures Daily, the downstream factories participating in the project have a considerable degree of dependence on the Secco 0220KJ variety, and have a certain demand for the grade and quantity of materials. At the same time, they hope to lock in the highest purchase price and confirm the product cost in time. By mid-August 2018, SECCO and Tomorrow began to negotiate transactions with corporate customers and negotiate basis.
As a result, upstream and downstream enterprises have embarked on the road of cooperation and win-win from the original price game.
C. The weighted basis difference project gradually blossoms and bears fruit
By analyzing the historical data of the SECCO 0220KJ settlement price relative to the futures basis, it is found that the average basis in the most recent year is 284 yuan/ton, the average basis in the last 6 months is 305 yuan/ton, and the average basis in the most recent month The difference is 156 yuan/ton. Over the same period, the disk market began to weaken, and the basis for 0220KJ narrowed from 300 yuan/ton to 200 yuan/ton. From the perspective of the continuous influx of a large number of imports into the domestic market, the basis has the possibility of further narrowing.
In the end, tomorrow and SECCO will determine the basis for 150 yuan / ton, and downstream companies to determine the basis for 200 yuan / ton. The final determination of the basis is in line with historical fluctuations and respects market development trends. The upstream and downstream enterprises expressed unanimous approval.
At the end of August 2018, tomorrow, SECCO and 7 downstream companies signed a weighted basis trade contract. Among them, on August 30, SECCO and tomorrow agreed to use “9515 yuan / ton futures closing price + fixed basis difference 150 yuan / ton-100 yuan / ton one-month flat call option” as the contract tentative price. The designated trade number is 0220KJ, and the trading volume is 1007.5 tons. SECCO enjoys the right to order prices at any time according to the L1901 contract within one month, and obtains the potential benefits brought by price increases. SECCO locked the minimum sales price of 9565 yuan/ton. According to the contract, this price is the cash price, and the final settlement is to pay by acceptance. The price is increased by 80 yuan/ton.
At the same time, tomorrow, on the L1901 contract, short 1010 tons at the price of 9510 yuan/ton, and then buy 1010 tons of one-month flat call options at 9515 yuan/ton. Hedging market fluctuations makes the OTC options and futures markets unable to guarantee Risks caused by transactions at the same price.
On August 31, Hangzhou Xinguang Plastic Co., Ltd., Haining Jiahua Packaging Co., Ltd., Zhangjiagang Limin Clothing Plastic Packaging Co., Ltd., Panjin Dingcheng Plastic Products Co., Ltd., Shaanxi Zhongshuirun Chemical Technology Co., Ltd., Wuhan Saichengxin The 7 companies of Material Co., Ltd. and Zhejiang Yangyang Packaging Co., Ltd. use the “panel price of 9,500 yuan/ton + 200 yuan/ton fixed basis difference + 100 yuan/ton one-month flat put option” as the tentative price. Buy the designated brands 0220KJ for 500 tons, 50 tons, 200 tons, 100 tons, 60 tons, 50 tons, 50 tons. Each downstream customer enjoys the right to order prices at any time according to the L1901 contract board within one month, and obtains the potential benefits brought by the price drop. As a result, each downstream customer locked in the highest purchase price of 9,800 yuan/ton.
In terms of funds and goods flow, a 10% deposit is paid when the downstream contract is signed, and the balance is paid after the settlement of the basis price. The upstream party pays a 10% deposit when signing the contract, and pays the remaining balance after the basis price is settled. Tomorrow will arrange the upstream delivery of goods to the downstream customer’s designated address within 7 working days to complete the final transfer of cargo rights.
Due to the nesting of over-the-counter options in trade contracts, during the option’s validity period, the downstream factories also obtained the point-of-valuation rights brought about by the decline in the market price and enjoyed the additional benefits of further reducing procurement costs. “We have locked in the lowest sales price and the lowest profit in advance, and enjoy the right to count prices at any time within a month, and can also obtain additional benefits when prices rise.” Xie Ling, SECCO’s polyolefin business manager, said.
D jointly overcome difficulties to achieve project value
According to the reporter of the Futures Daily, in this project, SECCO and downstream customers did not directly enter the futures market, do not need to open an account for futures, and do not need to configure professional futures talents to hedge. “As long as you understand the agreement, such a valuable model can solve urgent needs for companies that are eager to enter the market and are limited by various difficulties.” said Wen Yongxiang, vice president of Guotai Junan Futures.
As a new project in the market, the process of its advancement has not been smooth, and solving problems by drawing off cocoons can provide valuable experience for later participating companies. For tomorrow, determining the basis of the transaction with upstream and downstream is a difficult process, but initially convinced everyone to establish an industrial chain connection, the process is also cyclical.
It is understood that because the project involves both basis point price and insured services, and the upstream and downstream companies do not understand enough, the early communication needs to start with the most basic transaction logic, existing pros and cons, transaction process, rights and obligations, transaction risks, etc. A lot of preparation work is required, resulting in a relatively high communication cost.
“To solve this problem, SECCO played a key role.” Chen Fangyi said that the exploration of basis trade for most industrial enterprises is to walk directly and start running. This model does not simply do one thing with a customer, but connects the upstream, downstream and downstream together. The transaction model is novel and there are many transaction links. The customer needs an understanding, familiarity and understanding of the new project model and partners. The process of acceptance. As a veteran supplier, SECCO is in the traditional petrochemical industry. After understanding the positive impact of this innovation on the enterprise itself and the industry, it took the lead to understand and accept it, which played a great role in guiding downstream participants. “The joining of SECCO has largely solved the trust problem in the midstream and downstream, and promoted the efficient decision-making and execution of each node.”
In addition, as a low-margin industry, efficiency is critical to the development of product processing companies and the industry as a whole. Since all customers in the project do not need to re-build warehouses and warehouses through intermediary service providers, downstream companies with meager profits can save about 200 yuan/ton in terms of capital, warehousing and short transfers. The integration of upstream, downstream, and downstream has greatly improved efficiency, and the parties to the transaction are no longer a zero-sum game relationship as before, but as a whole, asking the market for profits and the environment for benefits. Xie Ling, SECCO’s polyolefin business manager, said: “Inside SECCO, this project has been highly evaluated and recognized, and has played a positive role in innovation, including providing value-added services and increasing customer stickiness.”
“This project is related to 9 industrial enterprises. Their integration and connection require extremely high operational efficiency, which is a great challenge to professional service providers.” Wen Yongxiang, vice president of Guotai Junan Futures explained, reminding customers of the balance when trading Very important, and provide professional and safe transaction services to upstream and downstream enterprises, to solve the actual transaction difficulties and pain points for customers, in order to create economic benefits.
The representatives of all parties in the project believe that the realization of the core functions of the basis trade pilot project depends on the futures and options markets. The risk is controllable, and the buyers and sellers switch from the traditional absolute price game mode to the game of basis fluctuations, which not only meets their respective needs, but also reduces the risk of transactions. The design of the entire transaction model avoids speculative risk exposure and realizes a closed-loop operation where all parties can expect transaction prices. It should also be realized that although this trading model has obvious advantages, it has higher requirements for trading capabilities and relatively complicated trading links. The promotion of the new model is inseparable from the training and cost support of the big business, and it requires continuous cooperation and efforts of all parties to prevent risks.