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Guotai Junan Futures: Caustic soda pricing drift, warehouse receipt logic suppresses the market

K-LinePoet
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Yesterday, caustic soda futures prices fell sharply, mainly because the 07 contract in the Zhejiang region is expected to have a large volume of warehouse receipts. Originally, the benchmark delivery location for caustic soda was Shandong, and pricing was based on Shandong 32 caustic soda. The price drift left long positions facing uncertainty about which delivery area they would receive, making it necessary to open sales channels across different provinces. In addition, the main consumption area in Zhejiang is the Xiaoshao region; the downstream of liquid caustic soda in Zhejiang is mainly in dyeing and new energy. Dyeing plants generally have lower storage capacity and weaker ability to absorb 32 caustic soda. If the futures market’s backwardation (discount) cannot cover the sales losses from these warehouse receipts, long positions that take delivery would face direct losses, which is why the 2607 contract futures showed a significant discount to spot. From a supply-and-demand perspective, caustic soda operating rates were relatively low, inventories were being drawn down, and profits declined. The price cut in liquid chlorine put marginal unit profits at a loss. Downstream aluminum oxide production remains a relatively intensive period from mid-to-late June through July, which can create some demand for stockpiling. Shandong aluminum oxide companies’ caustic soda inventories continued to decline as well, leading them to proactively raise their caustic soda procurement prices. As a result, the market saw short-term basis volatility exceed spot volatility, with short-term delivery factors having a greater impact than supply-and-demand factors. Looking ahead, after futures offer a large backwardation, the market expectation for caustic soda will likely remain range-bound at low levels. Although warehouse receipts in Zhejiang are difficult to handle, there would be clear profits from taking Shandong warehouse receipts at the prevailing futures market prices. (Guotai Junan Futures)
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