Futures Daily: “Four-step” in Futures Market Becomes the “Accelerator” for Development of Jiangxi Copper

Updated on: December 9, 2016

Reported by Que Yanmei, Journalist from Futures Daily

As one of the entity enterprises participating in the futures market at the earliest time, Jiangxi Copper now has much experiences to use futures tool to make hedging. Futures has become one of important tools of the enterprise operation and management to some extent. The successful experiences accumulated by Jiangxi Copper attract many “new player” of futures to “take advice”.

The copper price may drastically fluctuates in the next year

Since this year, price of bulk commodity rises on the whole, the overall increase range is lower than black series, but since the end of October, obvious growth impetus appears.

In the “2016 Phase 5 (Copper) Non-Ferrous Metal Industry Training Activity Base” jointly held by SHFE and Education and Training Center (Party School) of Jiangxi Copper currently, the General Manager of Futures Department of Jiangxi Copper, Hu Jianbin is interviewed by the journalist of Futures Daily and he expresses that “there is basis for rebound of copper price in October of this year, now it is in the value return stage”.

According to his introduction, China’s grid investment increases by 28.47% from January to October in this year, it is predicted that the increase speed of domestic copper consumption may be kept at 7%, predicted increase speed is lower than 5% in earlier stage of the market. “Although the output of copper in this year is abundant, both supply and demand are prosperous, inventory change of copper is not big, supply and demand are in nearly balanced.” Hu Jianbin said.

He expresses that after Donald John Trump becomes the President of the United States in next year, the United States will launch the infrastructure construction plan. The “13th Five-Year Plan” of China electric power development has been released. Therefore, the globe copper demand will continue the solid growth. Meanwhile, although the copper mine is planed to make part reduction of output (due to environmental issue), the incremental quantity in next year may be zero, the original mine with reduced output may recover the production along with the increase of the copper prices.

“Both supply and demand will be increased, just attention to which will increase more, and the copper price has a recovery stage. The copper consumption is not bad as a whole in this year, and not so pessimistic as the market expectation.” In view of this, Hu Jianbin is optimistic about the copper price of next year.

However, in the view of principal He Xiaohui, the Copper Department of Advanced Technology & Materials Co., Ltd (AT&M), he thinks the copper price increase of this year is mainly affected by loose liquidity, and the fundamental factors of copper are not substantially changed.

“For the market of next year, the market is hopeful; infrastructure plan of the United States is to speculate expectation price, which is not greatly affected as a matter of fact.” He makes further explanation that annual consumption quantity of copper in the United States is 1.7 million tons to 1.8 million tons, there are not substantial changes.

Domestically, He Xiaohui thinks that the peak season of copper smelting production expansion has passed, the copper smelting production expansion in next five years will slow down the speed, but there are more than million tons of copper primary smelting and refining project will put into production. With the capacity expansion speed decreasing, the average speed increase of raw copper and refined copper output will be deduced to 6.7% and 5.9% respectively.

He predicts that the domestic copper consumption will be kept low speed increasing from 2016 to 2020; the annual average increasing speed is 3%-4%, the consumption peak value of domestic refined copper may appear after 2027. He Xiaohui says “power industry is the most important increasing engine of copper consumption in the future, mainly concentrated in electric network transformation and new energy industry, China is still the main contributor of the global increasing in copper consumption.”

He Xiaohui thinks the gravity center of copper price will be shifted up, but bull market is lacking of fundamental supports, supposedly the copper price will be widely and violently vibrated in the next year.

Jiangxi Copper has participated in the “four-step” of futures

In fact, recently, along with the entrance of financial capital, the price fluctuation of bulk commodities (including copper) has been intensified; more and more enterprises start to focus on futures, actively study and participate in futures market. In the training activity of non-ferrous metals (copper) industry, Shanxi Futures Industry Association organized various futures operation institution analysts from Shanxi and the relevant industrial clients of steel industry to Jiangxi Copper to study and “take advice”.

One trade entrepreneur participating in the training told the journalist of Futures Daily that, the current relation between the finance and the entity were becoming closer and closer, and it could be hard for enterprises to survive, in case of failing to participate in futures market. “After the market baptism in former years, the trade enterprises currently survived mostly utilized financial derivative instruments to assist the operation. Under the condition of full participation, those who fail to participate will face the destiny of being eliminated sooner or later. ”

As the “elder brother” of domestic copper smelting industry, Jiangxi Copper has become a veteran in utilizing futures market for hedging. Since it has been engaged in futures market for more than 20 years, it has much experience to utilize futures tools and to avoid operational risks. At present, futures has become a necessary tool for them to assist the operation, and just like what is said by Jiangxi Copper people, “Listing can make Jiangxi Copper bigger, and hedging can make Jiangxi Copper stronger steadily”.

According to the introduction, Jiangxi Copper has participated in futures hedging and experienced four stages.

In the first stage, they utilized future delivery function to solve debt problems. In 1989, the central government tightened up monetary policy, and the domestic triangle debt started to occur; during 1991-1992, the scale of triangle debt was developed to 1/3 of the total scale of bank credit. Jiangxi Copper also failed to be immune from it; although the goods were sold out, the downstream enterprises’ debts were serious, and the enterprise failed serious financial risk, endangering the normal production operation of the enterprise.

In 1992, Shanghai Metal Exchange (one of the predecessors of SHFE) was established, and Jiangxi Copper became the first batch of members thereof. The futures market can offset the disadvantages of mobility in spot market, and the guarantee function performed thereby can not only guarantee Jiangxi Copper to realize the coordination of production and marketing, but also realize 100% of loan withdrawal through delivery.

“We utilized the delivery function of futures market to realize sales, and at that time, our cash flow conditions were better than other relevant enterprises”, said by Hu Jianbin frankly.

In the second stage, Jiangxi Copper promoted product quality and created international brand through futures market. According to the introduction, Shanghai Metal Exchange used to divide products into Class 1, and Class 2, implement high-quality and high-price premium system, and encourage enterprises to produce qualified products. Initially, the cathode copper of Jiangxi Copper has been classified into Class 2 copper, and the profit-making capacity thereof is restricted.

After that, Jiangxi Copper vigorously carried out quality tackle, and improved the product quality. In March, 1993, it completed the registration in Shanghai Metal Exchange, and then in April, 1996, Jiangxi Copper Guiye Brand cathode copper was successfully registered in LME, and became the first international brand of domestic cathode copper registered in LME. And then, the silver, gold, and ISA electrolytic copper have successively completed the registration in LBMA and LME, and by virtue of the futures market, it has improved the international brand position of Jiangxi Copper.

In the third stage, Jiangxi Copper utilized the futures market to lock the profits, and avoid market risks. During the financial crisis in Asia, the price of copper has entered into the historical low-order regions for operation, but in 2011, the copper price was returned to above USD 10,000/ton. “During the period, the price fluctuation of copper is very big, making some mine productions in the industry hard to be maintained. In the face of such situation, Jiangxi Copper conducted futures hedging”, introduced by Hu Jianbin.

According to information, Jiangxi Copper was purely a mining company at that time, and the mine hedging was generally sold high, so how to confirm the selling price? “At that time, our mining cost was relatively definite, and the higher the selling price of copper mine was, the higher the profit of the company would be; meanwhile, we calculated the hedging objective in the opposite way”, said by Hu Jianbin.

According to the introduction, they calculated the hedging objective through the following three aspects at that time: Firstly, the profit growth of the enterprise exceeded the average growth level of the listed company, reached to or exceeded the growth level of similar enterprises in the industry; Secondly, it was the expected market average price and the fluctuation interval; Thirdly, it was the opinion of the supervision department and the contributor.

In the view of Hu Jianbin, future hedging is good for the non-ferrous industry to resist systematic risks. Taking the financial crisis in 2008 as an example, the average profit level of non-ferrous metals industry was far better than that of the steel enterprises, and one of the important reasons was that there were three mature future varieties at that time, including copper, aluminum and zinc; the non-ferrous metal enterprises conducted hedging at the futures market through various modes, and successfully avoided the price collapse risk.

Hu Jianbin said that, in the face of systematic risks, if the hedging tools cannot be effectively utilized, enterprises will face severe survival crisis.

“In the face of the pressure of international market, Jiangxi Copper has fully utilized the futures market hedging function, to lock the target price of its self-produced mine, effectively avoid the price fluctuation risk of spot market, and exert a positive function in stabilizing the production and operation order, and realizing the stable and fast development of the enterprise”, said by Hu Jianbin, and precisely because of such concept, all Jiangxi Copper’s strategies over the years (1997-2004) were successful, and the enterprise has realized stable and sound development.

In the fourth stage, Jiangxi Copper realized coordinated development through futures and spot interaction. According to the introduction, currently, the annual cooper output in Jiangxi Copper is about 1.2 million tons, of which 200,000 tons are self-produced raw materials, and others are outsourced raw materials.

Hu Jianbin tells the journalist that “The main business of Jiangxi Copper is processing trade, and the profit-making mode actually refers to gaining the processing expenses, and the risk can be reflected in the entire smelting and processing process, and our raw material and product hedging takes the processing expenses as the objective, which is full-amount hedging, but as for the self-produced mines, we will choose for hedging.”

According to the information, Jiangxi Copper will fully utilize the price information and the market opportunities provided by the futures market, serve the enterprise operation decision-making, and then comprehensively utilize the futures market from information flow, logistics flow, fund flow and other aspects, and realize the close interaction of futures and spot. Hu Jianbin said that, the futures market has brought lots of timely information to the enterprise. Besides, the futures market also has the price finding function; the long-term price will provide direction guidance, and some market opportunities to the enterprises.

In retrospect of the experience for participating in the futures market over the years, Hu Jianbin sighed very deeply with emotion. He said, over the years for participating in the futures market, it was exactly the period for the fastest development of Jiangxi Copper, and the annually output copper was developed to 1.2 million tons from the initial 75,000 tons.

The combination of futures and spot will bring a sparkle to the operation

According to the information of the journalist of Futures Daily, for Jiangxi Copper, the essential changes have occurred to the connotation of current futures hedging, i.e., it has been developed into the modern combination investment theory from the traditional theoretical development. “The current futures market has no longer restricted to the demand of spot hedging, and to some extent, it has become the important tool for enterprise asset management”, said by Hu Jianbin.

For instance, enterprises regard futures market and spot market as two investment markets that can bring out the best in each other, and then combine the two through balance, and regards the transactions in spot market and futures market as a portfolio, so as to realize the maximum investment profit.

Along with the expansion of Jiangxi Copper’s production scale, the source of their raw materials and the product varieties are increasingly diversified; the hedging mode of the company is also transmitted from physical flow to value flow, and the hedging strategy is also gradually transformed from the initially sales hedging to more complicated residual quantity hedging and position optimal management.

“Currently, Jiangxi Copper not only regards future as a hedging tools, but also a market, and organically combines futures market and spot market”, said by Hu Jianbin, and after the hedging, there will be partial positions, and these future positions shall be managed; besides, in the management process, it is requested to apply the concept of interest arbitrage.

However, he also emphasized that, the hedging objective of Jiangxi Copper was to realize stable and robust operation, and then conduct position management on this basis. Along with the production scale of the company being constantly expanded, the hedging position of Jiangxi Copper is also constantly increased, and this will also increase the fund demand, position risk and management difficulty. For this reason, Jiangxi Copper has reinforced position management, and before futures trading, it will firstly virtualize the hedging of internal position, to reduce the quantity of futures trading, and then at the end of the month, it will conduct position balance analysis in combination with the inventory purchasing & sales and inventory, to prevent redundancy and deficiency. “Position management is the key work for us to be engaged in hedging”, said by Hu Jianbin.

In the view of Hu Jianbin, the hedging for copper enterprises is the organic combination of futures and spot business, and no good hedging effect will be obtained, when they are separated. Thus, enterprises should integrate hedging business in the original operation and management mode, promote the close combination of futures and spot department, and realize benign interaction.

Establish scientific hedging evaluation system

Hu Jianbin tells the journalist that “Just because of participating in the futures market, and comprehensively applying hedging, Jiangxi Copper can expand its operation thoughts, improve quality, create brands, and realize the stable and robust development of the enterprise, and become the leader of copper industry in China”; besides, the participation in the overseas market hedging can make Jiangxi Copper’s horizon become broader, and constantly promote its competitiveness.

For entity enterprises participating in futures hedging, risk control is very important. According to several years of hedging experience, in 2009, Jiangxi Copper established three-in-one hedging decision-making, management and risk system that was focused on hedging “decision-making committee”, “executive committee” and “risk control leading group”, so as to ensure that the hedging of the company can be successfully conducted.

Meanwhile, Jiangxi Copper has also set Risk Control Internal Audit Department as the daily management department of internal control, to audit and supervise the internal control system, fund safety, etc. of the company and its holding subsidiary, and submit the suggestions for improving the operation and management, and put forward the opinions for correcting and handling violations. Of which, the futures risk control is listed into the important working contents for the Risk Control Internal Audit Department.

Besides, Jiangxi Copper has also set the hedging operation system from economic and market research to spot contract and order, futures trading, financial payment and risk audit, compliance audit, and effect estimation, and meanwhile, perfected the hedging procedures from information collection and market analysis to hedging operation, fund receipt and payment, hedge accounting and effect evaluation.

In the view of Hu Jianbin, the entity enterprises must establish a set of scientific hedging evaluation system in the hedging process. He thought that, it is unreasonable to use futures profit and loss to judge whether the hedging is successful or not, and this will make enterprises face various pressures and resistance in the process of participating in the futures market, and when facing such pressure, the relevant hedging department will become timid, so the participation enthusiasm will be largely decreased.

“Hedging effect evaluation must take the profits and losses of spot and futures into comprehensive consideration, and the reasonable evaluation method is to combine the futures and the spot”, said by Hu Jianbin.