China Times: Risk Hedging Instrument ushered in Paper-making Industry with SHFE’s Pulp Futures Project Approved

Date: March 14^th, 2017

By Ye Qing from China Times

Recently, China Securities Regulatory Commission (CSRC) approved the pulp futures project application proposed by Shanghai Futures Exchange (SHFE). Both China’s paper production and pulp net import rank the first in the world. The development and launch of pulp futures will help domestic pulp industry chain enterprises mitigate their operational risks through the risk management instrument of futures market, and therefore make futures market better serve the real economy.

Our reporter learned that SHFE will further well prepare itself for all the listing work based on market survey after the project initiation is approved, such as pulp contract design and rules research and analysis. According to the estimation made by industrial sources, the import cost of pulp will increase inevitably if the US dollars rallies in the near future as expected, since China needs to import pulp to meet more than half of its demands. Ever since the beginning of this year, the trading volume and price of imported pulp have risen simultaneously, while the price of domestic pulp maintained a steady uptrend.

In accordance with port data statistics, at the end of February, 2017, the pulp inventory of Qingdao Port totaled about 468,000 tons, up 47% month on month, or up 30% year on year; and that of Changshu Port, about 400,000 tons, up 19% month on month, or down 11% year on year. From the point of price, hardwood and softwood pulp rose USD 30 per ton in global market on March,2017. In domestic market from February 7^th to 28^th, 2017, the price of hardwood pulp rose from RMB4,781 yuan per ton to RMB5,124 yuan per ton, up 7.17%; and that of softwood pulp, from RMB4,891 yuan per ton to RMB5,208 yuan per ton, up 6.48%.

According to the public data, from October, 2016 to March, 2017, chrome paper rose from RMB4,800 yuan per ton to RMB6,400 yuan per ton in price, offset paper, from RMB5,300 yuan per ton to RMB6,500 yuan per ton, ivory board, from RMB5,000 yuan per ton to RMB6,600 yuan per ton, corrugated paper, from RMB3,000 yuan per ton to RMB4,600 yuan per ton, and low-end copy paper, from RMB5,600 yuan per ton to RMB6,500 yuan per ton. It is understood that the mark-up of pulp in this year is partly due to the reduced production capacity under the increasingly stringent environment protection regulations.

However, industrial sources say, as for corrugated paper, most of domestic small and medium paper mills began to cut off the prices as the potential capacity is expected to be released. Nevertheless, some paper mills still chose to give the notice for markup at this moment. Jianghe Paper announced that based on the prices subsequent to February 20^th,2017, carton base paper will increase by RMB500 yuan per ton in price, other paper, RMB200 tons per ton, and carbonless board (787X1092mm), RMB6 yuan per ream, effective as from March 6^th.

Our reporter also learned that in April, 2014, China Paper Association (CPA) and Shanghai Futures Exchange (SHFE) signed a framework agreement on strategic cooperation in Shanghai. The agreement stipulates that both sides will carry out multifaceted cooperation on the research and development of pulp futures and paper derivatives and establish an all-round strategic partnership, in a bid to serve the market-oriented reform and upgrading of China’s pulp industry. The signing shows that the cooperation between the SHFE and the CPA in the research of pulp futures has entered the phase of steady implementation.   .

Paper-making industry is one of the fundamental raw material industries for the national economy, and both China’s paper production and consumption rank the first in the world. As pulp is an important raw material of paper-making industry, China has become the largest net pulp importer. Therefore, in order to facilitate the stable development of the pulp market in the long run, launching pulp futures at the right time and bringing off price-finding and hedging functions of the futures market will be of great practical significance toward filling in the gap of no pulp futures product in China’s futures market and providing relevant industrial enterprises with a hedging instrument.