Futures Daily: Futures Market to Help Domestic Nonferrous Metal Enterprises Make Stable Money

Date : January.18^th,2017

By Qiao Linsheng from Futures Daily

Complex and volatile non-ferrous metals market environment in this year

In 2017, there exist relatively big uncertainties in both domestic and global macro-economic environment. Market sources say that along with the continuing overcapacity cutting, destocking and pollution control, the pricing of domestic non-ferrous metals market will be in divided, resulting in increasing price volatility. In recent years, SHFE has consistently explored innovative models for the integration of futures and physicals in a bid to make non-ferrous metals futures market better serve the industrial companies. While strengthening the delivery management of non-ferrous metals futures, SHFE has also made the best efforts in improving the distribution of warehouses. In particular, the Exchange has successively established the delivery warehouses for such non-ferrous metals products as SHFE’s aluminum futures in major non-ferrous metals production provinces including Henan, which strengthens the risk management awareness of local non-ferrous metals enterprises, and promotes the development of local non-ferrous metals industry as well.  

 

1.Futures platform helps domestic non-ferrous metals market raise the right to speak

On January 15th, 2017, SHFE, Nanhua Futures and Henan Non-ferrous Metals Association jointly hosted an analysis meeting on non-ferrous metals market trends under the supply-side reform. Attending the meeting were representatives from SHFE, Henan Non-ferrous Metals Association, non-ferrous metals suppliers, traders, processors and importers and exporters from Henan and surrounding cities and provinces, some listed companies involving in non-ferrous metals as well as futures investment institutions.

 

In 2016, China’s non-ferrous metals market witnessed a magnificent upsurge, especially the eye-catching price trends of SHFE’s futures contracts such as lead, aluminum and copper. Market participants who attended the meeting estimated that domestic economy will run smoothly on the whole and the government will enhance the dynamics of supply-side reform in 2017. Under such a context, the price polarization of non-ferrous metals products will become even more obvious, since the domestic non-ferrous market is still under considerable pressure resulting from overcapacity cutting and destocking. Meanwhile, domestic non-ferrous metals price trends will also be influenced by global situations, given that US. economy may unfold a new era while EU and Japanese economies can still be variable. As for some domestic non-ferrous metals futures products, their pricing pattern pegging to the global market will change due to their significant volumes. Along with the increasing capacity of domestic non-ferrous metals futures market, industrial companies in major non-ferrous metals production provinces such as Henan are motivated to participate in the futures trading and utilize futures instruments after the establishment of delivery warehouses in relevant provinces, leading to the change in the business development philosophy and stable operation of local production enterprises.

 

How to boost the industrial companies and raise the right to speak of domestic non-ferrous metals market in the year of deepening reform on supply-side? Market sources said in the meeting that relevant authorities must take necessary steps to facilitate traditional financial institutions such as banks to offer loans to industrial companies and securities industry to help enterprises seek financing through listing. Besides, industrial companies must foster their risk management awareness and take the initiative to utilize the futures market as the trading platform and futures instruments to serve their production and operation as soon as possible.

 

In recent years, the increasing expansion of China’s non-ferrous metals futures market offers favorable participating opportunities for industrial companies.

 

Professional sources briefed that SHFE has actively propelled the construction of warrant trading platform and explored the innovative models for the integration of futures and physicals in 2016. Meanwhile, the Exchange has also strengthened the delivery management, improved its warehouse distribution and added registered brands from the angle of serving the industrial clients, so as to increasingly upgrade the capabilities of futures market to serve the real economy, ensure the continuous and healthy development of futures market and better serve the industrial companies. SHFE’s accumulated volume and turnover totaled 1.681 billion lots and RMB84.98 trillion yuan in 2016, achieving a year-on-year growth of 59.99% and 33.71%, respectively.

Zhu Bin, the deputy general manager and director of Futures Research Institution of Nanhua Futures, told our reporter that as for industrial companies, the risk management is the biggest and best service that futures market can offer.

 

“The main role of banks is to provide loan service, that of securities companies to provide financing, and that of futures market to provide risk management,” said Zhu Bin. The market has witnessed a relatively smooth and reliable operation ever since the launch of non-ferrous metals products such as SHFE’s copper contract in 1990s. Leading enterprises such as Jiangxi Copper have participated in the market trading at an early stage, and conducted the risk management of their operation by tactfully utilizing the futures market as the trading platform and futures instruments. On the one hand, these leading enterprises have achieved favorable economic and social benefits through the futures market, and on the other hand, they have taken the initiative to utilize futures instruments as a pacesetter of the non-ferrous metals industry, and also made a good start for the futures market to serve the physical enterprises.

 

At present, some non-ferrous metals futures products have witnessed the change in their pricing pattern pegging to the global market because more and more industrial companies participate in the domestic non-ferrous metals market with rising influence, and moreover China plays a significant role in non-ferrous metals production, import and export and consumption.

 

According to Zhu Bin, China has an increasing right to speak in global non-ferrous metals market, and fundamental changes in domestic market may already impact the price trends in global market. Although China’s pricing influence is not well accepted yet in the global market and lag still exists in the guidance of domestic prices to global prices, most of ups and downs in global non-ferrous metals market will be a flash in pan in the absence of concerted movements in domestic market.

 

A representative from SHFE said in the meeting that SHFE has actively explored the development of non-ferrous metals options such as copper, and strived to launch it at an early date. In the future, the development of China’s non-ferrous metals industry will enjoy great potential and promising prospects, and futures market will serve physical enterprises in a more deepening and extensive way along with the continuous development of innovative business in China’s non-ferrous futures market.

 

2. Non-ferrous metals price volatility increases as a result of growing macro-economic uncertainties

From the view of macro-economic influence, non-ferrous metals prices are significantly affected by the macro-economic environment.

 

According to Zhu Bin, macro-economic environment uncertainties will greatly grow in 2017. As for the global market, political and economic situations in some regions seems very uncertain, such as general elections in EU members and relative high probability of unfolding a new economic era in US.

 

In the domestic market, the supply and demand balance for commodities may change profoundly under the vigorously promoted supply-side reform, let alone the relatively volatile RMB exchange rate and variable capital interest rate. Therefore, non-ferrous metals in domestic market may see increasing volatility in the price.

 

In particular, it is a big probability event that China’s economy will tend towards L-shaped growth. China’s GDP growth has been experiencing a phase to find the bottom of dip from the beginning of 2016 after it stepped into a landslide phase and a slow falling phase since 2009. At present, the investment is still the core motive power of domestic economic growth, mainly driven by the input in infrastructure, real estate and manufacture. It is estimated that the manufacture investment will pick up, and infrastructure investment remain stable in 2017.

 

“From a long run, China’s house purchasing population will step over its peak soon. Hopefully, the implementation of PPP will stimulate the new growth in real estate investment. It is noteworthy in market that the recovery of manufacture investment will be inevitable along with the decrease in the actual rate for manufacture sector,” said Zhu Bin. The most significant change in China’s economy has been the rising of consumption since 2013. And consumption will be the ballast stone for the growth of China’s economy in the future.

 

Around the globe, the probability of significant changes is quite low although there exist many uncertain factors in the market. Therefore, in the non-ferrous metals market, the frequency of occurrence of Black Swan events will decrease in 2017.

 

“At present, we need to reevaluate the development trends of Eurozone economy. It is estimated that the overall situation of Eurozone economy will not be too bad except that the election results in some EU members may be highly variable, causing a negative impact on the stable growth of Eurozone economy. Multiple factors indicate the recovery of the growth of Eurozone economy, including manufacture sector moving into expansion phase, marked turn for a better labor market and increasingly narrowed devaluation space for Euro,” said Zhu Bin. The biggest issue that Japanese economy faces today is the weakened investment. The prospect of Japanese economy is doomed by the country’s labor market structure resulting from a flat infant birthrate. As a result, the growth of Japanese economy will be a constant. Meanwhile, the low unemployment rate and inflation rate make lives easy and comfortable, but easy and comfortable lives cannot make Japanese build consensus on the reform.

 

As for the growth trend of US, the world’s largest economy, the increasing income is its source of growth. At present, US economy shows signs of a slow but relatively sustained recovery, such as the rising employment rate and steadily recovering confidence in consumers and market investment. In addition, the probability of economic policy fluctuations becomes relatively high in short time since the new US president will take the oath of office soon. And both domestic and global non-ferrous metals markets will be greatly impacted by such news as Fed’s rate hike.

 

3. More and more significant polarization of domestic non-ferrous metals prices

The characteristic price synchronization of both domestic and global markets has been less obvious for the previous more than 1 year, causing a clear price polarization among non-ferrous metals products. It is estimated that the rich-poor divide will become even more apparent in domestic non-ferrous metals market because the pressure of overcapacity cutting or destocking, production costs and raw material sources for different products are highly variable. 

 

A representative from a lead manufacturer in Jiaozuo, Henan, told our reporter that the lead enjoyed strong performance in both domestic and global market in 2016, and its price rose from about RMB13,000 yuan per ton to about RMB23,000 yuan per ton in domestic market, and from about USD1,500 per ton to about USB 2,600 per ton in global market, respectively.

 

“Lead price increase is mainly due to insufficient supply of raw materials. The supply for lead market will be impacted by overcapacity cutting and increasingly stringent environment protection measures for an extended period. It would be little chance for lead price to drop below RMB15,000 yuan per ton in 2017 and years to come.” According to a representative from a lead manufacturer in Jiaozuo, local environment protection organs have all currently strengthened their efforts in environment protection inspection and law enforcement. Environment protection officials have conducted field inspection frequently, causing a significant decrease in the operating rate of enterprises that fail to meet the environment protection criteria. For instance, lead output has decreased by nearly one third in a few of medium and large enterprises, and about one half in some small enterprises. As for this enterprise in Jiaozuo, it cuts its target yield from 220,000 tons in 2016 to 180,000 tons in 2017.

 

A representative from a lead manufacturer in Anyang, Henan, said that it will be difficult to ease the shortage of lead market supplies for the first half of 2017. And in the second half of 2017, although market supplies may increase along with the releasing of part of capacity, primary lead will not see too much growth in the supply.

 

Also, according to this reprehensive, since all parts of the country were frequently blanketed in haze and smog in past months, causing a considerable pressure on environment control, secondary lead will not increase too much in the supply, either. It is estimated that the lead price will stay at a high level.

 

At present, the supply of aluminum is relatively sufficient in domestic market. Attendees from multiple aluminum-related enterprises briefed that most of domestic large and medium scale aluminum-related enterprises boast relatively strong risk resistance capacity, since they are currently conglomerated operations, basically covering the aluminum industrial chain from head to toe, including coal mining and power generation, power supply, alumina production, aluminum electrolysis production and aluminum production and sales. Under this circumstance, the aluminum output is quite stable, bringing sufficient supplies to the market. However, the aluminum price still depends on the locality because both power and raw material costs highly varies in different regions.

 

According to market sources, the demands for down-stream aluminum products have grown significantly in recent years, such as aluminum foil, providing relatively strong support to the aluminum price.

 

Zhu Bin also predicted that both domestic and global copper price trends will be neutral to slightly strong, with increased volatility. It is estimated that the growth of copper ore yield will be significantly lower than that of consumption, leading to an ascending cycle of copper price. If the global inflation exceeds the expectation in 2017, LME copper price will be driven to USD6,000 to 6,300 per ton. Aluminum market will operate steadily in the future, with a neutral to slightly weak trend in price. Zinc market will jitter with a narrowing volatility, and highs for LME zinc and SHFE zinc will be USD3,000 per ton and RMB25,000 yuan per ton, respectively. Nickel price is expected to rise, with increased volatility.

 

4. Facilitating major industrial provinces to make good use of futures instruments with rationally distributed delivery warehouses

Market sources said that SHFE has unceasingly explored the innovation models for the integration of futures and physicals, and made best efforts in the improving warehousing distribution while strengthening the delivery management of non-ferrous metals futures products, in a bid to better serve the industrial companies through the non-ferrous metals futures market. In recent years, SHFE has successively established the delivery warehouses for non-ferrous metals products such as aluminum in major non-ferrous metals production provinces such as Henan, greatly facilitating the development of local non-ferrous metals industry as well as the upgrading of risk management awareness of local enterprises.

 

Su Junjie, the vice chairman of Henan Non-ferrous Metals Association, briefed that as one of major non-ferrous metals industrial provinces, Henan is not only a top producer across the country, but also a large consumer for non-ferrous metals. In particular, some products even need considerable external supplies every year due to the over-demand situation occurred in the market. Furthermore, many non-ferrous metals products in Henan have been high-end oriented and in great demand, inputting new energy into this large industrial province.

 

Professional sources also told our reporter that the market competition will be even more fierce at the rapid development stage of non-ferrous metals industry. Along with the increasing extension of the industrial chain, the industrial chain enterprises have been in urgent demand for capitals, risk management, formation of steady operational environment as well as stable returns. Meanwhile, only through the integration of industry and capital, can enterprises become bigger and stronger. It is an unmistakable trend in the market development for enterprises from major non-ferrous metals industrial provinces such as Henan to introduce futures operation concept, make use of the futures platform and master the futures instruments.

 

When exchanging views with some aluminum and lead manufacturers and aluminum products processors from Henan, our reporter also learned that non-ferrous metals enterprises in Henan are still on the initial stage of utilizing the futures market and futures instruments. Although many enterprises recognize the importance of futures market and deem futures instruments as an effective approach to mitigate operational risks, not many have taken real actions and some even stuck to outdated management styles. Ihe urgent problem to be solved is how to guide enterprises in major industrial provinces to make good use of futures.

 

Under the complicated and changeable market circumstances, some enterprises from Henan, one of major non-ferrous metals industrial provinces, have mitigated the price fluctuation risk and realized stable returns through hedging copper and aluminum products on SHFE since the second half of 2015.

 

“At present, China’s output of 10 non-ferrous metals has totaled 50 million tons, such as copper, aluminum, lead, zinc, nickel and tin,” said Su Junjie. China has become an important non-ferrous metals industrial country. While devoting great efforts to the industrial development, relevant Chinese enterprises must learn how to minimize corporate risks by rationally allocating resource through the futures market and make good use of global market resources as well.