Futures Daily: SHFE Helps Industrial Enterprises to Build Core Competitiveness

Updated on: September 27, 2017

Reported by Chen Donglin

2017 4^th Special Training for Hedging Enterprises held by SHFE was held in Shanghai. Experts attended the conference held that, the utilization of futures and other financial derivative instruments could not only improve the operation capacity of enterprises, but also help the enterprises build core competitiveness.

In the recent years, more and more enterprises have applied futures and other financial derivative instruments to improve their own production operation capacity; the enterprises’ capacity for using futures instruments as well as the industry-finance combination level have also been obviously improved. “For small-scaled enterprises, they utilize futures instruments mainly for exerting the function of locking cost, stabilizing profits, and ensuring production, so as to improve the comprehensive operation capacity of enterprises. But for large-scaled enterprises, the application of futures and other financial derivative instruments is not only one of the capacities that must be equipped for enterprises, the objective is to construct new type of industry-finance combined commercial mode.”, expressed by Zhang Yisheng, the Director of SHFE, and the Nonmember Director of CFA during the conference.

In the actual operation of enterprises, the first thing we met is price risk. “Taking the copper tube processing enterprises as an example, the bargaining capacity of enterprises in the industrial chain is relatively weak, and the fluctuation of copper price will not only influence enterprise profits, but also directly influence the survival of enterprises. The profits of copper tube processing enterprises occupy about 2% of the price of copper tube, and about 90% of the cost will be decided by the price of raw copper.”, expressed by Cao Jianguo, the President of Hailiang Stock to the journalist of Futures Daily.

Secondly, it is the inventory risk. “Currently, enterprise hedging work has been converted to the formulation of quarterly and annual hedging scheme in combination with spot goods, and then the current net inventory hedging from the initially pure raw material end purchasing and hedging”, From the perspective of specific operation layer, Cao Jianguo expressed that, “Net inventory refers to the risk exposure exposed after deducting the overall sales volume priced thereby from the overall purchasing quantity priced thereby, and it shall be noted that, the definition of purchasing quantity and sales quantity shall be distinguished from traditional mode of spot goods. Taking the purchasing end as an example, even if the purchased goods have entered into the warehouse of the company, as long as the goods haven’t been priced, they will not be included in the purchasing quantity, and the price risk of goods are still in the former enterprise.”

Just because Hailiang Stock has fully utilized the futures instrument, it survived from several times of extreme fluctuation in copper price, and currently, it has become the world’s biggest copper tube processing enterprise. Cao Guoqiang specifically explained to the journalist about how Hailiang Stock used futures instruments to serve enterprise operation. “The net inventory exposed by price risk is exactly the risk exposure faced by enterprises in futures operation; while entity enterprises adopt futures and cash combined mode to offset the risk exposure, and they have also realized the promotion of operation benefits. Due to adhering to futures and cash combined operation concept, enterprises can obtain stable processing profits through merely conducting offset management for the risk exposure faced thereby.”

The use of futures and other financial derivative instruments can not only improve the operation capacity of enterprises, but also promote the industrial concentration and the formation of long-term trade. Due to the high mobility and high transparency characteristics of the futures market, the price of market transaction is widely accepted and applied in various links of industrial chain trade”, Zhang Yisheng expressed, “The formation of long-term trade based on the futures price can let enterprises have more energies to conduct the R&D and promotion of production technologies, and for enterprises with advantageous technologies, while stabilizing the operation risk, their scales will be constantly expanded, so as to promote the industrial concentration.”

Except this, “through relying on the floor trading market provided by the exchange, off-site derivative instruments can also provide financing, import and export trade, exchange rate, risk hedging and other all-directional services for enterprises. OTC option can provide more individualized services for enterprises, for instance, when it comes to listed companies that require stable profits but don’t want to undertake deposit risk, it is applicable to realize it through purchasing OTC option.”, expressed by Wang Huadong, the President of Hongyuan Futures.

“In industries with relatively high industrial concentration, leading enterprises may also become the option business market maker”, Wang Huadong explained, “In countries with more developed financial derivative instruments, except large-scale investment banks as option market makers, influential leading enterprises inside the industry also often act as the market makers to provide market mobility. The implementation of market maker business is not only the demand of the leading enterprises for offsetting risk, but also the reflection for them to bear the industrial development responsibilities.”