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Urea futures still have room for further gains Author/Source: China Fertilizer Network Date: 2019-12-03 Clicks: 41 After a prolonged period of decline, urea futures have finally started to rebound. Following a sharp rise last week, the main contract came under pressure from short-selling forces in the range of 1,670–1,680 yuan per ton (the same unit is used throughout), and was unable to break through the 1,680-yuan mark. Why is it in the range of 1,670 to 1,680 yuan? Currently, the main contract for urea futures is about to enter the delivery month, and some of these urea futures contracts will turn into spot contracts for delivery upon expiration. The trading method between futures and spot markets is known as arbitrage, which involves taking advantage of any price difference between urea futures and spot prices by buying at lower prices and selling at higher prices to make a profit. Traditional forward arbitrage involves buying urea in the spot market and selling urea futures; once the futures contract expires, the physical urea is delivered to close the position and realize a profit. Currently, if urea futures rise too rapidly and become detached from actual spot prices, arbitrage opportunities between futures and spot markets are likely to arise. Among the urea supplies available for delivery at present, the lowest cost for delivering those available at low prices to the urea futures delivery warehouses for futures settlement is around 1670–1680 yuan. Clearly, the price of urea futures is under pressure from the arbitrage opportunities available in the urea market; bullish funds do not want to provide arbitrageurs with favorable conditions for such arbitrage activities. The range of 1,670 to 1,680 yuan represents a reasonable futures price pressure range for urea, based on the spot price of urea. Can urea futures drive up the price of urea in the spot market, helping it break through 1,680 yuan? Urea futures fulfill the function and role that futures are meant to have, which is price discovery. If there are still significant positive factors in the future, then urea futures prices could outperform urea spot prices. If there are no more positive factors in the future, then neither the futures nor the spot prices of urea will have any momentum to rise, and it will not be possible to break through 1,680 yuan. As the main contract for urea futures is about to reach delivery, its spot nature becomes increasingly strong. Either excessive increases or decreases in futures prices will create significant opportunities for those engaged in arbitrage between futures and spot markets. Urea futures prices will tend to move in line with spot prices, and it will be difficult for them to exceed current levels when there is no significant rise in spot prices. How can long-position funds in urea make profits during a downward market trend? As a newly listed product, urea futures involve parties in the market who are not very familiar with one another, which leads to numerous loopholes in trading. The decline in urea prices is the main trend, but local seasonal rebounds cannot be ignored either. If the long-position funds gradually push prices up, trapping the short-position funds over time, and then take advantage of the short-term shortage in spot supplies to exert pressure on those short-position funds both in the spot market and in the futures market, thereby eliminating their chances of turning the situation around, then the long-position funds in the urea market are very likely to profit. Once the urea futures enter the delivery month, prices will be influenced by the delivery process, leading to sharp fluctuations in price. It will become quite easy for the main contract of urea futures to exceed 1,680 yuan.