World's first futures market for bitumen

China's apparent use of bitumen has increased from 13.5 million metric tons in 2006 to 21.3 million metric tons in 2012 following the nation's extensive highway construction, according to the Shanghai Futures Exchange. Provided to China Daily

China will launch bitumen futures contract trading, the first of its kind in the global market, in Shanghai on Wednesday to offer companies more hedging tools and improve the structure of the economy, according to a statement from the Shanghai Futures Exchange on Tuesday.

Analysts said China has sped up the expansion of the commodity futures market to help enterprises to handle risk and to have a bigger say in the pricing of major commodities in the global market.

Analysts said bitumen futures contract trading may help stabilize prices of the construction material by providing more liquidity in the market. The trading could act as an efficient commodity hedge in the long run.

Bitumen futures have not been listed on any overseas exchanges, making this the first of its kind in the global market. Bitumen is a downstream refined petroleum product widely used in various industries, especially in developing roads. China's apparent use of bitumen has increased from 13.5 million metric tons in 2006 to 21.3 million metric tons in 2012 following the nation's extensive highway construction, according to the exchange.

It will offer eight contracts from February 2014 to September 2015. The futures' margins will be set at 4 percent of the value of the contracts. The price limit will be 3 percent, according to the exchange.

Jiang Mingde, chief economist and deputy general manager of Sinolink Futures Co, said the introduction of bitumen futures and recently listed contracts of commodities including steam coal is a result of intensive efforts by decision makers and exchanges as well as increasing demand from the commodity markets themselves.

"The market has a greater demand for risk management tools so the recently introduced contracts may cater for these needs," said Jiang.

Many factors including volatility in crude oil prices as well as the supply and demand imbalance in the bitumen market have exposed bitumen enterprises to operational risks.

"Without a hedging tool, producers are quite vulnerable to fluctuating prices," said Lu Yu, sales manager of a Shanghai-based trading company.

Market insiders said the introduction of bitumen futures contract trading will help the improvement of the pricing mechanism of the road-building material. Exchanges may learn valuable lessons from the launch when preparing for futures contracts trading of other petroleum products.

"Bitumen futures might be slightly volatile at the beginning because of a lack of liquidity and a higher bid and ask spread. However, with more synchronization with the spot market, price volatility will decline gradually. Futures prices will also give producers more guidance on prices," said Zhou Lei, an analyst with Xinhu Futures Co Ltd.

Bitumen futures have a strong trading practicality because they are easy to standardize, which eliminates problems when settling accounts, said Zhou.