Ethylene glycol options and styrene options are about to be launched. What do experts think of the market?

On May 15, ethylene glycol options and styrene options will be listed on the Dalian Commodity Exchange. Options instruments are known as the “Crown Pearl of Derivatives”. What impact will the listing of two chemical options have on the related chemical industry? What are the specific rules design and hedging models for option contracts? How should companies make good use of options tools to meet their personalized and precise hedging needs? On the occasion of the listing of the two options, experts in the industry expressed their opinions and witnessed the arrival of the era of futures and options for the entire chemical sector of DCE.

A steady and positive trend is emerging, and it is time to list options instruments

A reporter from Futures Daily learned that the emergence of options is inseparable from the characteristics of market development. The existing characteristics and changes in the ethylene glycol and styrene markets also indicate that it is time to list option instruments.

Reporter: How are ethylene glycol and styrene produced? What is the global and domestic market development pattern and production and sales distribution?

Li Xingbiao, head of the Commodity Research Department of CITIC Futures Research Institute: The main production methods of ethylene glycol include the ethylene method and the oxalate ester method. The two methods account for 63% and 37% of my country’s output respectively. Its upstream raw materials are mainly naphtha, ethane, coal, etc. Styrene production methods are divided into three processes: ethylbenzene dehydrogenation, propylene oxide-styrene (POSM) and pyrolysis gasoline extraction (C8 extraction), with production capacity accounting for 81%, 17% and 1.3% respectively. Ethylbenzene dehydrogenation uses ethylene and pure benzene to produce ethylbenzene, and ethylbenzene is dehydrogenated to obtain styrene; the raw materials of the POSM process include ethylene, propylene and pure benzene, ethylene and pure benzene are used to generate ethylbenzene, and ethylbenzene reacts with propylene Styrene and propylene oxide are produced; C8 extraction extracts the styrene component from gasoline cracking.

In terms of ethylene glycol supply and demand, in recent years, ethylene glycol production capacity has grown significantly faster than demand expansion. In the past three years, the utilization rate of ethylene glycol equipment has dropped by at least 15 percentage points compared with before 2019. Asia is not only the region with the largest production volume, but also the region with the highest demand base. A large amount of ethylene glycol supplies from the Middle East and North America flow into the Asian market every year, with China and India being the largest inflows. In recent years, my country’s ethylene glycol production has continued to grow. In 2022, domestic ethylene glycol production will be 13.687 million tons, with a compound growth rate of approximately 20.6% in the past three years; imported volume is 750.1 million tons, a decrease of 3 million tons from the high point in 2020. The average import rate in the past two years has dropped by nearly 15%.

In terms of styrene supply and demand, from 2019 to 2022, China’s styrene production capacity expanded from 9.37 million tons to 17.78 million tons, a capacity increase of nearly 90%; output increased from 8.57 million tons to 13.91 million tons, an increase of 62%; import volume It fell from 3.24 million tons to 1.14 million tons, a decrease of 65%. Global styrene production capacity has increased rapidly as China has entered a production expansion cycle. As of the end of 2022, the main global styrene production areas include Northeast Asia, Europe, and North America, accounting for 58%, 14%, and 14% respectively. The main consumption areas are also concentrated in the above regions. From the perspective of global supply flow, the Middle East and North America are the main outflow places, and Northeast Asia and India are the main inflow places.

Reporter: What are the downstream application fields of ethylene glycol and styrene? What impact will the price fluctuations of ethylene glycol and styrene have on social life, industrial production, etc.?

Xie Yilun, Financial Engineering Analyst of Orient Securities Futures: Ethylene glycol and styrene are both important domestic chemical intermediate products, with market sizes of approximately 100.7 billion yuan and 112 billion yuan respectively. Among them, ethylene glycol has a wide range of downstream applications: first, to produce polyester resin, such as plastic bottles, fibers, coatings, light box sheets, etc.; second, as a solvent, it is widely used in fields such as inks, dyes, coatings, pharmaceuticals, and cosmetics; The third is as a coolant and antifreeze, which is widely used in automobile cooling systems and other cooling and heating systems; the fourth is to make fuel cells.

The downstream application fields of styrene are also wide: first, it is used in the production of polystyrene. Styrene is an important raw material for manufacturing polystyrene (PS). PS is mainly used to manufacture disposable tableware, electrical appliance casings, toys, and thermos cups. etc.; second, it is used in the production of rubber, which is used in the manufacture of tires, seals, etc.; third, it is used in the production of ABS plastic, which is widely used in electrical casings, car interiors, toys and other fields.

Due to the wide range of downstream fields, price fluctuations of ethylene glycol and styrene have a direct or indirect impact on related industrial production and even daily life. For example, from August to October 2021, ethylene glycol prices continued to rise, increasing downstream production costs for automobiles, coatings, pharmaceuticals, and cosmetics. Fluctuations in styrene prices will affect the production costs of polystyrene, ABS plastic, rubber and other industries, and the prices of plastic products and electrical appliances needed for daily life may change as a result.

Reporter: How were the price fluctuations of ethylene glycol and styrene last year? What operating pressures and risks did industry chain companies face? How do you view this year’s trend?

Li Xingbiao, head of the Commodity Research Department of CITIC Futures Research Institute: Last year, ethylene glycol prices came under pressure and downwards, and production companies faced operating pressures of high inventory and low demand. Specifically, the average spot price of ethylene glycol at the beginning of last year was 5,200 yuan/ton, and then continued to decline to 4,000 yuan/ton at the end of the year, a drop of more than 20%. Some manufacturing companies last yearHow should companies in the glycol and styrene industry chain use futures and new option tools to improve risk management levels and operating capabilities?

ChatGPT: Enterprises in the ethylene glycol and styrene industry chain should actively use futures and new options tools to establish a complete risk management system and improve risk management levels and operating capabilities to better respond to market changes and risk challenges. On the one hand, futures trading is used for price locking and risk aversion, and at the same time, more market information can be obtained through the futures market to provide a reference for corporate decision-making. On the other hand, gradually expand the application scope of option tools, including option trading, option arbitrage, option portfolios, etc., and improve risk management and operating capabilities through the flexible use of option tools.

Ethylene glycol and styrene companies can establish a complete risk management system based on their own risk characteristics, including risk identification, risk assessment, risk control and risk response, and conduct risk avoidance and risk transfer through futures and options tools. At the same time, it is necessary to strengthen market analysis and forecasting capabilities and continuously improve the sensitivity and accuracy of market supply and demand relationships, so as to better conduct futures and options transactions and improve risk management levels and operating capabilities.

At the age of 30, as the 29th and 30th commodity option varieties in China, the listing of ethylene glycol and styrene options will provide the market with a new risk management model and provide enterprises with more flexible and matching risk hedging tools. China’s options are ushering in a new era. Mastering the basic skills of futures and options has become an indispensable skill in the current risk management of real enterprises. Is everyone ready?

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