Shanghai Securities News: A Review of This Wave of Commodity Futures Agitation

Updated on: April 29, 2016

Reported by Song Weiping and Wang Zhoujie, Journalists from Shanghai Securities News

In order to cool the market, Shanghai Futures Exchange, Dalian Commodity Exchange and Zhengzhou Commodity Exchange have made a total of nearly 20 important announcements since April, but Xu Sheng was not affected. His voice on the other end of the phone sounded extraordinarily calm.

Involved in the futures market for 17 years, he has witnessed numerous ups and downs. Starting with RMB50,000, he has raked in more than RMB100 million, and he is consequently called "The successful man in the futures market". In this round of rally, he insisted on seizing the opportunity to buy more stocks. He has achieved a profit of 30% since the beginning of the year.

In this round of rise and fall of commodity futures, ferrous products were in the eye of the storm. However, in Xu Sheng's opinion, this round of rise had nothing to do with a bull market, and it was only a dead cat bounce. "The market is actually very rational, and there is no what they say speculation." This did not make him change his investment philosophy that he had been insisting on, that is, focusing on medium and long-term trading and controlling positions at 30% to 40% at most and 10% to 20% at least.

On April 28, the domestic commodity futures market continued to fall, the trend of ferrous products was differentiated, chemical products and farm produce showed an overall weak trend, and the market was significantly cooled.

"Only after the tide recedes can you know who is going skinny-dipping ." The journalist of Shanghai Securities News conducted an in-depth study with the ferrous industry as a sample and found that all the respondents refuted the view of "bullish commodity", but considered this round of rise as a dead cat bounce under a long-term bear market, and they appealed for rational handling of changes in the commodity futures market and calm investment.

(Subtitle 1) An Indefinable Banquet

Since the late November of last year, the domestic commodity market gradually bottomed out, and Wenhua CCI once rose from 106 to 111. During this period, the buy market continued to fall, and CRB index fell from 183 to 154. By January 18 of this year, the single-day increase of Wenhua CCI had reached 1.58%. All goods showed compensatory growth. Among them, ferrous, non-ferrous and building materials sectors had particularly prominent performance.

In retrospect, this day laid the foundation for this round of rise.

Rebar rebounded significantly, the dominant contract of rebar futures rebounded from the lowest point RMB1,618/ton of last December to a high of RMB2,787/ton in this April. Despite the surprising rise, the price level of rebar cannot parallel historical highs. Extending the time axis to February 2011, we can see that rebar futures have experienced a four-year bear market, Wenhua Rebar Index fell by 70% from the highest point 5185 in 2011 to 1616 in 2015. Especially in 2014 and 2015, rebar prices experienced a round of unilateral significant decline, falling by 57% from RMB3,700/ton at the beginning of 2014 to about RMB1,600/ton at the end of 2015.

At that time, spot steel cannot be less inexpensive, and companies were deeply hurt by the industry gloom. The industry generally believed that steel price had fallen excessively. As for other commodities, commodity prices generally entered a long-term bottom after a five-year decline.

Jing Chuan, Vice General Manager of Zhongda Futures, had deep memories of it. He told the journalist of Shanghai Securities News that, most of the goods had fallen to troughs during the financial crisis, and some goods had even fallen to the level of the early stage of China's industrialization, for example, rebar and crude oil. These goods had fallen below the dynamic cost, so the downward momentum was insufficient."

On the edge of turning point, Jiang Nan, Director of Investment Research Department of Shanghai Hong Kai Fund, also observed some clues. On the one hand, the Chinese government fully supported steady growth from monetary policy, financial policy and industrial policy, and the Federal Reserve also slowed the pace of interest rate hike and made dovish remarks due to the reality of global economic weakness, providing an overall relaxed environment for bulk commodities. On the other hand, the supply side of bulk commodities was based on the "supply-side reform". Supply tended to shrink, and the demand side showed an expansion trend due to the stimulation of many favorable policies, significantly changing the previous "oversupply" situation.

Thus, bulk commodities were identified as "a value depression". Jiang Nan said that funds were allocated to bulk commodities due to inflation expectations and other factors.

Commodity market started to recover due to the common influence of increasing policy incentives and mitigated relationship between supply and demand, supplemented by credit cycle expansion, market sentiment and other factors. A researcher from an investment agency told Shanghai Securities News that he was unable to understand the basis for further rally in the market after April. In addition, there were signs of resurgence in the aspect of fundamentals and market situation, so he reduced positions after the middle of this month. He dare neither hold long or short position. Therefore, he chose to wait for further signs.

(Subtitle 2) Adjust the Mismatches between Industry Supply and Demand

Following the rise, guesses about a bullish commodity market began to spread in the entire capital market, but the journalist of Shanghai Securities News found through investigation that almost all the interviewed insiders judged this round of rise "a dead cat bounce".

Jing Chuan told the journalist of Shanghai Securities News that at that time, influenced by the news that more than 10 non-ferrous smelting companies cut capacity together, funds actually first flowed to copper futures as a bellwether, and then coal, coke and steel that can influence pricing in China, and even iron ore, moved inside the field of vision of funds.

If the five-year adjustment of bulk commodities is considered as overselling and this year's rise is considered as a dead cat bounce, then is the bounce adequate? Has the current rebar futures deviated from the fundamentals?

Zhu Shiwei, Yongan Futures analyst, gave the journalist a negative answer.

He pointed out that as of April 26, the close price of the dominant contract of rebar futures was RMB2,554/ton, and Shanghai rebar spot price was RMB2,966/ton, so the difference between rebar futures price and spot price (rebar spot price minus the price of the dominant contract of rebar futures) was RMB412/ton. In other words, although rebar futures contracts experienced a sharp rise, their price was still far below the spot price, and rebar futures price was still underestimated.

An analyst of Galaxy Futures also said that comparison showed that the fluctuation of futures was more rational and stable than that of spots. In terms of single-day fluctuation, rebar and hot rolled coil once increased by RMB550/ton a single day, while the maximum single-day increase of futures was RMB157/ton. In other words, the rise of rebar spots was more significant than that of rebar futures, and the rise of futures price was always driven by spot price.

Thus, outsiders became skeptical about excessive speculation in the futures market, followed by various conjectures, and there was even news that the volume of rebar transactions exceeded the total volume of the Shanghai and Shenzhen stock markets.

However, Zhu Shiwei said that the trading volume of rebar futures was still within a reasonable range, and position increase was also limited." He pointed out that the position data did not support the view of excessive speculation of rebar futures. Futures implement the margin system, and it is leveraged to a certain degree. The actual amount of funds is far less than the nominal turnover, so the statement that the volume of rebar transactions exceeded the total volume of the Shanghai and Shenzhen stock markets is utterly ridiculous.

In addition, the surplus budgetary funds of commodity futures were still maintained at the level of the beginning of the year, namely about RMB80 billion. There was a slight increase in the ferrous sector, but it was moved from futures varieties in other sectors. "Therefore, we believe that it isn't a fact that a large number of stock funds has flowed to the market to trade futures."

An analyst of Galaxy Futures also said that the trading volume of rebar had really hit a historical high, but the main reason was that: first, companies had great hedging enthusiasm and demand for the current hedging profits in the context of real economy; second, this was an inevitable trend as the futures market gradually stabilized and grew.

At the same time, the hearsay stories were in ferment among the public. In this regard, someone in Yongan Futures told the journalist that based on the company's customer situation, it was a fact that some dormant accounts resumed futures trading due to the impact of market sentiment, but there were not circumstances such as lining up to open accounts and craze for account opening.

Shanghai Securities News journalist found that compared with January and February, the total number of new accounts opened in March and April increased by about 30%, and margin increased by 10% to 15%; compared with the same period last year, the total number of new accounts decreased by 19.84%, and margin decreased by 9.76%.

The interviewed analysts generally believe that the substantial increase in volume means significant differences between market participants. As long as there are differences, there are collisions. Only collisions can reflect the basic function of the futures market to "find prices", while prices eventually reflect the result of collisions.

(Subtitle 3) Game between "Industry Group" and "Macro Group"

Since this round of rise is caused neither by excessive speculation nor by account opening by dealers, what is the real reason?

The above-mentioned researcher of an investment agency said that the essence of this round of commodity rally was that market expectations for re-inflation, coupled with domestic loose policy and asset shortage, caused an influx of over-the-counter funds as cutting capacity came to a close, leading to an upsurge in commodity. The entry of such funds has changed the original investor groups in the market. They paid more attention to macro logic and long-term trends, and they did not care about some short-term bearish indicators in the context of government policy on steady growth and cutting capacity.

"Therefore, from a dynamic perspective, the rally of commodity is the result of commodity supply and demand improvement as well as macro asset rotation. However, from a static perspective, the previous trading groups in the commodity market are fixed. They are too accustomed to the inherent thinking mode and trading logic, so they cannot hold their own when the overall pattern is changed."

Zhu Shiwei from Yongan Futures described this phenomenon as a game between "macro group" and "industry group". In the case of rebar, the ferrous industry suffered serious losses after a few years of price decline. The "industry group" was pessimistic about the future market, so they actively adopted the hedging strategy when rebar price rose to a certain extent to lock profits.

For the "macro group", they saw signs of macroeconomic stabilization and improvement, and they had a positive attitude towards the future market, so they were optimistic about rebar in operation.

Zhu Shiwei said that the game between the "industry group" and the "macro group" had also led to rebar price fluctuations to a certain extent. From the perspective of results, the "industry group" has locked profits and strengthened their stable operation, while the "macro group" has obtained income from investment through a macro perspective.

Insiders believe that in this game, the rise of steel futures prices is the result of the great differences between two kinds of judgments, namely "optimistic about the short-term market" and "pessimistic about the medium and long-term market". At present, there are obvious signs of economic stabilization in the first quarter in China, but worries about inflation caused by massive liquidity also exist. Meanwhile, as a significant industry in China's supply-side structural reform, steel is facing many policies. Therefore, steel futures will still be stimulated by factors such as policy, fundamentals and information in a period in the future.

In fact, only when we understand the logic of the rise in the commodity market can we rationally interpret the trading data of the futures market and achieve stable development in the collisions between the thinking of different market participants. Rational investors such as Xu Sheng will constitute surging passion in the history of China's futures market.