[Bulk Commodities] Nine years in chemical futures and spot: the most expensive arbitrage lesson I've seen, part two — processing fees can bury you too
In the last lesson, J got caught off guard on a 2020 methanol futures-spot contango trade when storage fees spiked, and he lost enough to slap his own thigh in frustration. Looking back, he blamed it on the pandemic, that black swan, figuring his logic was perfectly fine as long as there was no extreme market move.
A lot of people reading that probably think: J was just a pure speculator who didn't understand the industry. If it had been a real industry veteran, wouldn't they have avoided the arbitrage trap?
In 2021, Old W showed us with real money that the answer is: not necessarily.
Old W is a seasoned polyester salesman, been at it over a decade, knows the upstream and downstream channels inside out. He's not a reckless type like J who only looks at drivers. He understands costs, understands factories' shutdown thresholds, and understands the buying rhythm of downstream yarn mills. In his view, staple fiber processing-fee arbitrage has a "natural anchor." But it was precisely this "understanding" that buried him in the end. This second lesson in commodity futures arbitrage is even more of a sigh than the first.
First, the illusion of a "safety cushion" in processing fees.
Let me briefly explain what the staple fiber processing fee is.
A lot of people don't even know how it's calculated, so let me put up the formula first: processing fee = staple fiber price - (0.855 × PTA price + 0.335 × ethylene glycol price). This is a classic cost-plus pricing model.
The historical data behind this formula is crucial. Before 2021, the staple fiber industry's processing fee level was overall in a fairly comfortable range. From 2017 to 2020, the industry's average annual processing spread held steady at 1,400-1,500 yuan/ton. After deducting roughly 900 yuan/ton in fixed processing costs, the industry's average processing profit could basically stay at a decent level of 500-600 yuan/ton.
So in the eyes of a veteran polyester man like Old W, the staple fiber processing fee has a "natural anchor." The logic is simple: if the processing fee falls below the cost line, factories lose money; lose money long enough and factories cut production; after cutting production, supply contracts and the processing fee rebounds.
In early 2021, the staple fiber processing fee was still high. But starting in March, because demand had been pulled forward earlier, selling pressure in the market surged, and the processing fee shrank all the way down. By the end of May, the industry was broadly in loss territory.
Old W felt the opportunity had come. He started buying staple fiber spot while shorting PTA and EG futures on the board (long staple fiber, short raw materials), starting with just a few hundred tons. His thinking was simple: once it drops below the cost line, the big plants will definitely cut production to defend prices, and as soon as the processing fee bounces even a little, I can get out whole.
Second, adding all the way down, enduring the "darkest moment."
But the market just wouldn't follow the logic.
After Old W bought in, the processing fee didn't rebound at all — it kept smashing downward. By July, the staple fiber processing fee had dropped straight to 637 yuan/ton, a new low since June 2015. What does that mean? At the time, the industry's general processing cost was 800-1,000 yuan/ton; after deducting fixed costs, a 637 yuan processing fee meant the whole industry was bleeding.
During this period, Old W kept adding to his position as losses mounted. He firmly believed that as long as the whole industry was losing money, production cuts would definitely bring a repair in the processing fee. So instead of cutting the position, he just gritted his teeth and held through the floating losses.
The spot position grew without him quite realizing it, from a few hundred tons to several thousand tons.
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