China Securities Journal: Future and Cash Combination Provides Protective Umbrellas for Aluminum Enterprise

Updated on: September 28, 2017

Reported by Dong Yifei

Higher Production Costs, Limit Production Caused By Environmental Protection

Introduction

Since this year, under the big background of supply-side reform, the price of domestic electrolytic aluminum has been obviously increased, and the current price of electrolytic aluminum is above RMB 16,000/ton. Along with the increase of price, partial aluminum enterprises start to have “height fear” mentality, and the intention to participate in futures market hedging has been gradually increased. Last week, SHFE and China Futures Association (CFA) jointly held 2017 4^th Nonferrous Metal (Aluminum) Industry Training Base Activity and the Futures and Cash Combined Business Training Class of CFA, and the journalist of Futures Daily and the trainees of the training class visited the electrolytic aluminum enterprises in Xinjiang region.

From September 19 to 22, SHFE and CFA jointly held 2017 4^th Nonferrous Metal (Aluminum) Industry Training Base Activity and the Futures and Cash Combined Business Training Class of CFA, and more than 40 trainees from futures companies went deep to the electrolytic aluminum enterprises in Xinjiang region for visiting and studying, and meanwhile, deepening the contact between futures market and entity enterprises, and helping promote the futures market to better serve the substantial economy.

Coexistence of High Price and High Inventory in Aluminum Market

Since this year, under the influence of transformation reform, supply chain reform and environment protection production restriction policy, the price of coal, carbon, aluminum oxide, natural gas, petroleum coke and other commodities is constantly increased; meanwhile, the electricity cost and transportation cost are kept at a high level, especially for the carbon anode industry, under the pressure of environment protection production restriction, the supply scale is largely shrunken, making the market price repeatedly set new high. These factors have caused the corresponding increase in the production cost of electrolytic aluminum at home.

In the process of visiting the entity enterprises, the journalist of Futures Daily understood that, due to different regional distributions and the obvious difference in electricity cost, the production cost in various electrolytic aluminum enterprises can have relatively obvious difference. According to the information, the overall productivity in four aluminum factories subordinated to Shenhuo Group is 1700,000 tons, of which Yongcheng has 520,000 tons, Shangqiu has 240,000 tons, Qinyang has 140,000 tons, and Xinjiang has 800,000 tons. Currently, the operated productivity is 1,130,000 tons, including 330,000 tons of Yongcheng Aluminum Factory and 800,000 tons of Xinjiang Aluminum Factory; as for the branch factories in other regions, due to the relatively high operation cost (especially the relatively high electricity cost) and other reasons, the productivity is under suspension status.

According to the explanation of industry insiders, under the restriction of resources, energy and environment capacity, the output proportion of aluminum material in Pearl River Delta, Yangtze River Delta and Circum-Bohai Sea Region where the traditional aluminum processing is developed has been continuously decreased in recent years. Currently, through relying on the energy cost advantages and policy support of the western region, 80% of the newly increased productivity of electrolytic aluminum industry are centered in the northwest region, and the aluminum industry is transferred towards the northwest region as a whole.

In the investigation, the journalist understood that, the current domestic aluminum industry still presents the surplus of demand and supply. According to the statistics, the inventory of aluminum ingot at home is constantly increased from the lowest point (above 200,000 tons) to above 1,500,000 tons at the end of August, creating a new historical high. In light of the status of mutual high price and inventory, market analysts hold that, although the aluminum industry is under the surplus of supply and demand, the market has adapted to keeping inventory at a high level, and although inventory has influence on the price, it is hard to play a leading role, and it is expected that the policy still decides the price trend to a larger extent.

Since the electrolytic aluminum has become the key point for the supply-side reform this year, under the expected strong influence of market policy, the aluminum price has always been kept operated at a high level, and the powerful impetus of aluminum price has also commonly benefited the aluminum industrial chain, and improved the enterprise operation status. According to the statistics of Antaike, in August, 2017, the average profit of electrolytic aluminum industry in our country was about RMB 2,770/ton, which was the highest level in the recent years.

This year, the aluminum market is mainly influenced by the supply-side reform and environment protection policy. In the Work Scheme about the Special Action for the Clean-up and Rectification of Illegal Projects in Electrolytic Aluminum Industry published in April, 2017, it is requested that the special action for the clean-up and rectification shall be completed within 6 months. Meanwhile, the heating season environment protection production restriction policy will be successively published. The industry insiders hold that, this will restrict the blind expansion of electrolytic aluminum productivity, and this year, it is hard to have the situation of big surplus of productivity, and the industry is now gradually entering into a balanced status.

The principal of certain aluminum enterprise at home expressed that, the influence of the currently promoted policies would be gradually reflected in the next half year, the situation of surplus productivity would be obviously alleviated in the next half year, and it is expected to reach to a balance in the middle of 2018.

The relevant analysts of Antaike expressed that, under the influence of the supply-side reform, the supply and demand relationship of electrolytic aluminum market will obtain fundamental reversion and improvement, and this year, the aluminum spot market is quite hot, and the intention for market participators to enter into the aluminum market as per the form of cash or futures is increased. Up till present, the total position amount of aluminum in Shanghai has reached to RMB 85.1 billion, which is increased by 96% than the beginning of the year, and the main contract position amount has broken through 1 million, creating a new historical high.

Future and Cash Combination Helps the Aluminum Enterprise to Develop Stably

According to the statistics of SHFE, from January to July, this year, the market operation of aluminum futures market was stable, the transaction was active, and the total transaction quantity was 28.75 million (unilateral statistics, the same below), and the transaction amount was RMB 2.0048 trillion, which was respectively increased by 20.99% and 43.10% on a year-on-year basis. The daily average position amount of aluminum futures was increased as a whole, and from January to July, the main contract daily average position amount of aluminum futures in SHFE was 265,700, which was increased by 15.4% on a year-on-year basis. Within 7 months this year, totally 600,200 tons have been delivered, and the delivery amount was RMB 8.382 billion, which would continuously keep the stable trend.

It shall be noted that, the relevance between the main contract for the aluminum futures of SHFE and the spot price of aluminum in Shanghai Metals Market (SMM) is 96.23%, and the price of futures and cash is kept at a consistent height; index about the convergence conditions of the futures and cash price fluctuation proportion is 0.03, which is under a relatively reasonable level; the difference rate for the due futures and cash price is 0.57%, indicating that the due convergence degree of futures and cash price is good. This is beneficial for entity enterprises to avoid the spot price risk through hedging delivery, and can improve the management benefits.

The relevant principal of certain aluminum enterprise told the journalist of Futures Daily that, under the policy influence this year, the fluctuation of aluminum price is relatively big. The futures market can exert price finding function, and the futures trend can fully reflect the market change and market prediction, and can provide information guidance for production operation arrangement. For instance, under the influence of relevant policies about electrolytic aluminum this year, the aluminum price is easily increased and hard to be decreased, and the big trend is unstable increase. Enterprises can arrange production and sales as per the trend changes, and compliance productivity can accelerate production recovery and commissioning, seize the shipping rhythm and time, sell few at a low price, and sell high at a high price.

Meanwhile, entity enterprises can also conduct product delivery sales through futures market, and select opportunities to obtain futures and cash price difference benefits. The aforementioned principal expressed that, the aluminum trend this year was unstably increased, so the sales of lots of hedging in advance can be unbeneficial. Based on such judgment, the company only conducts futures and cash hedging for the recent spot goods, i.e., when the futures price of the current month is far higher than the spot price, it is applicable to conduct partial hedging delivery sales. Finally, the company can utilize the delivery band advantages, to obtain futures and cash difference incomes, and during the transaction, the price per ton is about RMB 200 higher than the spot goods of the corresponding period and above RMB 12 million will be increased through futures market.

Besides, he think that, for the downstream enterprises that conduct bidding and pricing in advance (such as the cable industry), it is applicable to seize good opportunity as per the market trend of this year, and enter into the hedging of purchasing aluminum ingot, so as to avoid the risk of price increase.

“The period before and after the Spring Festival is the slack season for the consumption of aluminum ingot, during which the downstream enterprises are having vocations, but the upstream production enterprises will not stop the production, and the desynchrony of upstream and downstream production of the industry will cause the periodic surplus of products, and the futures and cash price difference is relatively big, during which we will implement hedging in futures market, and finally sell aluminum ingot through delivery mode”, he supplemented.

Except for conducting delivery through personal account opening hedging, the upstream production enterprises also select pricing hedging sales mode, and utilize the futures market to lock the sales price in advance at a relatively high level, and then deliver on schedule. Currently, some traders with good credit and strong strength also permit the aluminum factory to confirm the price as per the future contract pricing.

Speaking of the experience of production enterprises in directly using stock market for hedging operation, the principal thought that, the first thing was to seize the right time, and it was better to operate under the situation that the future price was higher than the enterprise production cost, and the enterprise could have profits, so that the enterprise could not only have relatively less pressure, but also basically lock stable profits; secondly, it is requested to strive for operation methods, and shall not only lock the selling price of aluminum ingot in advance, but also lock the easily fluctuant cost of main raw materials, so as to more effectively lock profits.

He told the journalist that, in 2004, the company planned to put above 100,000 tons of electrolytic aluminum project into production, of which the aluminum oxide and other raw materials had been purchased, and the cost had been basically locked. Before starting the project, the aluminum price was relatively high, during which there was about RMB 1,000 of profits per ton. The company conducted hedging operation for 50,000 tons of aluminum ingot in the futures market in advance through correctly analyzing the market trend, so as to avoid the risk of decrease in future price. After the later period of aluminum ingot left the factory, the price was decrease as expected, so this operation obtained quite considerable incomes for the company.

Establish Sound Futures Hedging System

The journalist understood in the visiting process that, currently, the spot enterprises conducting hedging in the futures market would form a set of complete hedging system and risk management and control measures as well as sound risk management plan.

As introduced by a principal from certain aluminum enterprise, the enterprise has sound future hedging management system. Firstly, before each specific operation, it is requested to submit the hedging scheme to the relevant leaders for approval. Secondly, the company has established special institution to conduct futures hedging transaction, and the futures operation leader group and the specific operation and implementation group members have defined division of responsibilities in specific execution. Thirdly, in the futures hedging transaction, it is requested to strictly operate as per the approved scheme, and principally, the hedging period shall not exceed 3 months, and the hedging quantity shall not exceed 20% of the output during the period. Fourthly, the fund risk control and position operation shall be subject to the management of various departments, of which the fund risk control is mainly in the charge of the financial department and the enterprise management department, while the position operation is mainly in the charge of the business department. Fifthly, in order to ensure that the futures and spot goods department of the company won’t generate dissociation, special information R&D department and smooth communication and coordination mechanism are established, and when being encountered with major decisions or emergencies, it is applicable to convene coordination conference at any time to discuss the solution. Sixthly, under the situation of relatively big hedging position, the operated position will be distributed to different equity companies.

He thought that, entity enterprises should have risk management and control awareness for participating in the futures, and should conduct hedging through mainly combining their operation conditions, and should prepare enough deposit for the hedging position, including the additional deposit that shall be paid for keeping the position after floating deficit occurs. Meanwhile, after establishing the position, it is requested to keep the spot gods, and prepare for the delivery. Futures refer to a tool that can avoid the fierce fluctuation of price, so please do not have psychology of speculation behavior. Besides, it is requested to pay attention to seizing the big trend of market conditions, and conduct operation when the product can have certain hedging profits.