Xinhua News Agency：Futures Market Increases Innovation to Serve Supply-side Reform

Updated on: May 28,,2016

Reported by Chen Yunfu, Journalist from Xinhua News Agency

After the continuous unilateral fall for five years, main bulk commodity market has started the vibrating mode in succession in 2016, and the price of ferrous metals petrochemical industry and relevant agricultural product is decreased in varying degrees recently after the surge.

The intensified price fluctuation and the boosting of supply-side reform of industries with excess production capacity test the risk control ability of enterprises, while the futures market as the universal risk management and pricing market has manifested its utility.

Fluctuation of bulk commodity is intensified
the “black series” is paid attention by the market which has changed constantly in a few months. “The market price rebounded at the end of 2015 and enlarged increase amount in March and April, and the commodities including rolled steel and iron ore once limit-up continuously, but the price continuously fell after rise during the second half of April.” Sheng Zhicheng, the principal of Financial Department of Haitong Futures, said that the price of rebar has decreased from 2,700 yuan to about 2,000 yuan per ton.

In his view, price fluctuation of “black series” is the quick change of market supply need and its emotion. After the Spring Festival vacation, the construction site start working in succession and investors of capital construction is increased greatly, which has led to demand surge of rolled steel. However, the steel factory supplied insufficient production after the long-term price fall, and the combination of demand exceeding supply and price raise expectation as well as stock supplement and partial speculation demand, restoring production of steel factory in large area after price surge, large growth of supply, coming of slack season of consumption have made the market expectation to reverse once again.
The price fluctuation of “black series” influences the gross margin of steel factory directly. The marketing principal of one steel factory in western China told the journalist that, the profit of steel per ton is close to 1000 yuan during the period of high price while the current profit is less than 100 yuan. Because the company quickly enters into the futures market for hedging to lock profit after the profit has reached the situation which is not seen for many years, the recent production will not be influenced too much. If some hesitant steel factories purchase raw material for restoring production during the period of price raise, they may have to be caught in loss.
In fact, the fluctuation of commodity price is not only for “black series” and is not particular for Chinese market. In this year, many staple commodities including petrifaction of plastic and rubber and international agricultural products were all on roller coaster, among which, the price of plastic rebound by 20% but has fallen continuously since late March, thus it basically offset all the increase amount, while the oil price of New York market after falling by 10% in January, which is the lowest for recent 13 years, rebounds by 50% and returns to 50 dollars for each barrel.

Industry expert judges based on this that there is sign which shows that commodity market is possibly returning to fluctuating market after continuous falls.

Non-ferrous metals gets profit and the futures market increases innovation to serve supply-side reform
As the price fluctuation intensify, the turmoil of raw material tests the risk management ability of domestic enterprises. “As the earliest industry entering into futures market, the non-ferrous metal industry has gradually found out the effective solutions in fact, said Zhang Yisheng, an futures expert, compared to steel industry, the non-ferrous metal companies, after its 20 years’ development, are basically located at remote areas but its global resource allocation and international competitive power are obvious.

“If the capital market has given a wing to non-ferrous metal enterprises, then the futures market has also given another wing to enterprises through risk management tool.” In Zhang Yisheng’s view, financial market is an important support for the development of nonferrous metals industry, among which, the development of capital market supports the non-ferrous enterprise to be bigger with capital, while the risk management of futures market makes enterprise to be “stronger”.

Wu Yuneng, Deputy General Manager of Jiangxi Copper Corporation, said that every step of the Corporation to become Global 500 enterprise cannot be separated from the hedging of futures market. He said on the 13^th Shanghai Derivatives Market Forum that the main function of futures service and real economy is price discovery and risk management. Because the transparency of futures trading is high and price of futures has guiding significance to enterprise’s arrangement of production and management, thus enterprise can pass the price risk of goods in stock and realize the locking of material cost, stock and finished goods price through hedging of futures market.

“Previously, many enterprises believed that futures trading is a kind of gamble but more and more enterprises have realized that nonparticipation of futures risk management is more like gamble”, said by one Shanghai futures company, especially at the current period of economic downturn, on one hand, enterprise is faced with bigger price fluctuating risk, and on the other hand, under the background of supply-side reform, the prudent operation in transformation and upgrading is rather important.

“Under the background of supply-side reform, futures serving real economy have a brilliant future.” As for this, Xu Ling, General Manager of Haitong Futures, showed that futures companies were increasing innovation strength to promote innovative business and derived business and hope to provide more service to futures enterprise.

Ma Wensheng, President of Xinhu Futures, which firstly carries out the “Futures + Insurance” service in domestic market, told the journalist that, the “Futures + Insurance” is now carried out in agriculture sector of corn and is planned to generalize in industrial product sector including iron ore to provide more diversified risk management product for the market.

Openness and internationalization have become the new direction, the construction of pricing center is still on the way
“Price of everything bought is increased and price of that sold is decreased”, and the deficiency of pricing power of bulk commodity is the ache for domestic enterprises in recent years. Although the economic increase slows down, some institutions predict that China will still be the importing country of important bulk commodity in the future. But as the market system becomes perfect, and the commodity futures market taking RMB for pricing considers introducing foreign investor, the situation would be improved gradually. In insider’s view, the window for domestic market to strive for pricing power is opening.

Chang Qing, an futures expert once participated in building of domestic futures market, said that designer of futures market once have imagination of “three-level jump”:the first one is to promote the experimental unit of market and realize the change of partial commodity from planning to market under the system of planned economy and dual-track approach economy; the second one is to form the national uniform market and price based on the experimental basis; the third one is to promote internalization of market and form the international pricing center.

The statistics of Futures Industry Association of America showed that the business volume of the three main domestic commodities futures exchanges retaining its position among global Top 10 till 2015. Some insider pointed out that futures market has turned to qualitative change from quantitative change, especially the openness, internationalization and legislation have become the key words of industry development.

Currently, the crude oil futures as the futures type which is taken as the origin to base for market internationalization and introduce overseas investors has basically complete the consultation of system design. In Cai Dongcheng’s view, who is Professor of Business School of Shanghai Normal University, futures trading of crude oil in the market was just a beginning for futures market development of crude oil and petroleum products series, and meanwhile, the oil futures price pricing with RMB would assist the enterprise to avoid risk and promote the long-term and healthy development of relevant energy industry.

Some experts believe that, one thing which deserves attention is that, generalization of participation of overseas investors in crude oil futures design in the future will made the construction of international pricing center truly possible. The chief expert Wang Qibo believes that, limitation of overseas investors’ participation is to some extent the significant reason for deficiency of pricing influence, actually the trader at gold market including places such as South Africa has formed the habit of concerning about the price at Shanghai, but the foreign capital cannot be bought and sold and the Chinese price is limited to market reference.

Chang Qing pointed out that, to promote the dual-way opening of market, bringing in is more important than going out, as the futures market introduces the investor and capital of international market and encourages the domestic institution to go out to serve foreign investor, the representativeness and authority of pricing in the domestic market will be further enhanced, which will promote the domestic futures market to become the global pricing center.