Futures Daily: Listed Steel Companies Participated in Futures Hedging Actively

Updated on: September 1, 2017

By Chen Donglin, Journalist from Futures Daily

Stabilize performance growth and smooth the profit curve

So far, the 2017 semi-annual reports of companies listed on the Shanghai Stock Exchange and Shenzhen Stock Exchange have been released successively. By gathering the information of listed steel companies, the journalist from Futures Daily found that many listed steel companies participated in futures hedging actively. In particular, the listed steel companies with an increase of more than 50% in stock price in the first half of the year have announced their participation in the hedging business and the corresponding management measures.

Steel companies are optimistic about the future business situation

The semi-annual report released by Maanshan Iron & Steel Company Limited says that as the growth of the automobile, home appliances, equipment manufacturing and other downstream steel-consuming industries has increased, steel demand has improved. At the same time, China has made significant achievements in deepening the work of addressing overcapacity in the steel industry, especially in the prohibition of substandard steel products, easing the oversupply of steel to a certain extent, so steel prices have risen. In the first half of 2017, the net profit attributable to shareholders of listed companies was 1.643 billion yuan, higher than the 759 million yuan from last January to last September; at the same time, the company is faced with a good production and operation situation now, it is expected to remain profitable in the third quarter, and the company estimates that its accumulated net profit from the beginning of the year to the end of the next reporting period will be substantially higher compared with the same period of last year.

The semi-annual report of Valin Steel, a leader in Hunan's steel industry, says that China has been promoting the supply-side structural reform since 2016 and has increased efforts to reduce steel production capacity, eliminate intermediate frequency furnaces and control substandard steel products, eliminating the phenomenon that bad money drives out good and making the competition environment in the steel industry become healthy. In the future, with the implementation of environmental protection policies, the high-handed posture towards capacity reduction and cracking down on substandard steel will be maintained, which will further inhibit the release of production capacity, and the supply side of the steel industry will continue to improve. In the first half of 2017, the company achieved a net profit of 1.186 billion yuan and the net profit attributable to shareholders of listed companies reached 956 million yuan, which is the best semi-annual performance of the company since its listing.

Hedging is valued by listed companies

The operating income and profit growth of listed steel companies is also accompanied by the continuous quality and quantity improvement of hedging business. In the interviews with listed steel companies and relevant institutions, the journalist learned that steel companies had changed their model of participation in the futures market from the initial single-variety hedging to the current raw materials and finished products-integrated hedging, and they stabilized corporate profits through the rational use of the futures tool so as to meet the demand of the capital market for stable growth of companies. So far, the futures tool has been used in various upstream and downstream aspects of the steel industry chain.

Hedging transactions are more and more valued by listed companies. Independent directors of Valin Steel said in the comments on the company's derivatives investment and risk management that steel and iron ore hedging business helped avoid the risk of violent price fluctuations of products and raw materials, control business risks and improve profitability, so it was in line with the interests of the company and all shareholders. The comments of independent directors of Angang Steel Company Limited on the company's derivatives investment and risk management said that the maximum annual hedging margin and trading varieties determined by the company were reasonable, in line with the company's actual production and operation situation and helpful for the company to have reasonable control of trading risks.

From the perspective of the specific amount of hedging, the annual size of hedging business of Angang Steel Company Limited was maintained within 50% of the purchase and sales targets. The planned hedging amounts of different varieties in 2017 are as follows: about 500,000 tons of steel and 3.7 million tons of crude fuel. In terms of specific amounts, the maximum annual hedging margin of Angang Steel Company Limited is 350 million yuan. The size of hedging business of Nanjing Iron & Steel Co., Ltd. shall not exceed 30% of the annual budget for purchase and sales, and the maximum margin for hedging business shall not exceed 150 million yuan. Currently, the margin is about 50 million yuan. The semi-annual report of Maanshan Iron & Steel Company Limited indicated that the company's other receivables increased by about 153.29% compared with the previous year mainly due to the increase in steel futures margin in the period.

Cai Yongzheng, the head of the Securities Department of Nanjing Iron & Steel Co., Ltd., told the journalist that as one of the largest steel mills in China, Nanjing Iron & Steel Co., Ltd. considered inventory selling hedge as an important part of daily hedging, that is, to lock in the margins of pre-sold steel, billet and open billet inventory, achieve inventory hedging and prevent inventory loss caused by falling prices through selling hedging for steel futures. "In June 2015, considering that many construction sites would stop work because the Youth Olympic Games would be held in Nanjing in August, which would affect steel demand, and there is also a substantial increase in the inventory of the company, the company chooses to sell rebar futures at the right time to offset potential losses during the period when futures are on par with spot goods. Facts have proved that the steel price in East China did fall sharply after the decline in the demand of construction sites. From June to July, the decline in the spot price caused an inventory loss of 150 yuan/ton. However, due to the buying hedge operation for the RB1510 contract when the purchase price was 2,363 yuan/ton, the company earned 78 yuan/ton in the futures side after the price fell to 2,285 yuan/ton when positions were liquidated, finally reducing it losses from 150 yuan/ton to 72 yuan/ton.”

The futures tool helps diversify business operation

In addition to using futures to lock in the cost on the raw material side, listed steel companies also carry out hedging for finished steel to achieve risk management in the whole process from purchase to sales. Lao Hongbo, General Manager of Zhejiang CIEC Zhongbang Supply Chain Services Co., Ltd., told the Futures Daily journalist that in addition to independent hedging, listed companies could also cooperate with suppliers with futures and spot capacity to fulfill the purchase and sales tasks of entities while controlling price risks. "For example, a steel mill has the demand for hedging against decline in production and processing profits, and a supplier puts forward the corresponding purchase and sales plan after a thorough understanding of the mill's production cost structure and product sales methods. That is, while providing the steel mill with raw materials at the agreed price, the supplier also repurchases the steel produced by the steel mill at the agreed time with reference to the steel futures price of SHFE. While cooperation with the steel mill, the supplier takes the initiative to hedge against risk exposure in the futures market to get certain income, and the steel mill can smooth its profit curve through this way of cooperation. Through cooperation with the supplier, the steel mill has not only hedged against decline in steel inventory, but also ensured the long-term production profits. In the current environment where the upstream and downstream fluctuations of ferrous goods have intensified, locking in the long-term profits of terminal steel production capacity is a wise decision, which can make the steel mill concentrate on production and operation."

In addition, listed steel companies can further use the futures tool in price discovery, warrant pledge, basis trading, over-the-counter options and other areas.

According to Yang Fan, Vice General Manager of CCB Trading, the rebar futures of SHFE have good liquidity and market participation, and many futures risk management companies have been engaged in the over-the-counter options for rebar. Compared with the futures market in the exchange, the over-the-counter options can provide more personalized services for listed steel companies. In addition, listed steel companies can also have a short-term increase in their credit line in banks while locking in profits in advance by selling the call options of steel. The  financial derivatives with futures as the core have provided comprehensive financial support services for listed steel companies.

Wei Yingsong, a senior analyst of Shanghai Ganglian E-commerce Holdings Co.. Ltd., believed that listed steel companies could lock in profits and shift peak and load by participating in hedging, which was conducive to the long-term stable operation of the companies. However, the steel companies must be clear with their own purpose and carry out hedging based on the risk exposure in actual operation. Long-term participation in hedging can help companies develop production plans and ensure their smooth operation. " In addition, listed companies can use futures and other financial derivatives to connect with the capital market, which can help them stabilize performance growth and smooth profit curve."