Securities Times: The Steel Futures Price was Exaggerated by the Excessive Speculation of Idle Funds

Updated on: April 28, 2016

Reported by Shen Ning, Journalist from Securities Times

Since the beginning of this month, the domestic black variety futures once continuously rose considerably, especially rebar rose obviously. A "heat" of steel futures attracts extensive attention from all walks of life, someone don't understand the situation and have a suspicion that it’s not true. In order to understand the real situation of market fluctuations, the journalist from Securities Times recently conducted interviews and surveys on some hot issues.

In the view of most industry experts, the rebound of steel is in line with the actual supply-demand in market and steel futures are driven by spot price. As for idle funds speculation and individual investors entering the market, the fact was exaggerated. It is worth noting that, under the joint actions of several big futures exchanges, the price of relevant varieties has declined recently, and the market has gradually cooled down.

Steel price rebound in line with the actual supply-demand in market

Zhu Shiwei from Yongan Futures believes that the current round of rebar futures essentially lies in the drive of actual supply-demand in market. "At the end of 2015, steel industry has experienced sustained price decline for two years, either profitability, or operating conditions, or inventory decreased to very low level; the supply side of iron and steel industry was adjusted; some steel mills shutdown or stop production. With the steady economic after 2016, stimulus force of policy, credit cycle expansion, demand for steel heated up, demand growth and supply reduction, a typical short-term supply and demand mismatch, plus the low inventory is formed, the price of steel after depression for two years will rise.

From the price difference of rebar futures and spot, as of April 26, 2016, main rebar futures contract's closing price is 2554 yuan/ton, Shanghai rebar spot price is 2966 yuan/ton, with the difference of 412 yuan/ton (the main rebar spot price minus the futures contract price). Although the rebar futures contract has experienced a substantial rise, it is still far below the spot price, while the price of rebar futures is still undervalued.

"In fact, the premium status of the futures runs through this rising round, and the mutual feedback of futures and spot is more closely related to each other, which reflects the characteristics of price discovery. In other words, the level of tight supply of rebar has exceeded market expectations, and the market is obsessed with past pessimism, so the sharp rise in futures is also reasonable." Zhu Shiwei said.

Another insider in spot industry said that the continuous rise, fluctuations of domestic rebar prices was the results of policy expectation, supply and demand changes, credit expansion and market trend and other factors. "With the gradual implementation of large-scale infrastructure investment, the economic recovery trend is obvious. Infrastructure, real estate and ships, automobiles, home appliances, machinery and other major steel industry demand rise, resulting in domestic steel market supply is tight in a short period, which thereby push steel prices rebound."

According to the data tracking of Galaxy Futures, at the beginning to the end of April, the price of the Shanghai rebar (HRB400, 20mm) was increased from 1920 to 2,940 yuan/ton, which was a gain of 1020 yuan/ton. The spot price of hot roll coil rose from 2,200 yuan to 3,290 yuan, up 1090 yuan/ton. In the same period, the RB1605 contract was increased from 1771 yuan/ton to 2,755 yuan/ton, up 984 yuan/ton. HRC1605 contract rose from 1973to 3017/ton, up 1044 yuan/ton. By comparing the current increase of the period, the spot rise is bigger than that of the futures. Just from daily trading band, rebar and hot roll coil spot once daily gain up to 550 yuan/ton, and the futures biggest one-day gain is 157 yuan/ton. The volatility of futures is steady and more rational than spot. Finally, from the perspective of price difference of futures and spot, the futures prices have been on spot discounts, for example: RB1605 has premium 100-200 yuan than the spot price, if capital have feverish speculation on the futures, it does not always keep such a big discount.

Idle funds exaggerated the steel futures price

On April 21, the transaction volume of steel futures hit a record high, and there are rumors in the market that the capital is overhyped, and rumors of "futures companies is opening account continuously" and "The potential dealers rush to open account to be engaged in futures market " have also appeared frequently. However, from what the journalist from Securities Times know about the situation, it’s the so-called idle funds’ exaggeration.

Analysts pointed out that on the one hand, rebar trading volume is indeed a record high, but the main reason is that in the current real economy, the enterprise has a larger enthusiasm for the current yield of hedging and demand, it is also the inevitable trend in the futures market for gradual stable development and growth. On the other hand, because the futures are the margin trading system, the value of the transaction is the nominal value of the leverage, not the actual amount of capital invested.

In terms of trading volume and inventory volume, in April 2016, the average volume of rebar futures contract reached 14.65 million lots, an increase of 127.3 % year on year, and 8.97% increase from the previous month, still within reasonable range. In April 2016, the average inventory volume was 4.2 million lots, an increase of 16.06% from the previous month, with a year-on-year increase of 9%, compared with the last 5 million lots in 2015. In terms of the inventory volume, combining with the characteristics of the futures market is zero-sum game, no extra larger capitals enjoy gain from this price increase of rebar, the market does not exist the so-called "black hand" pushing up prices of rebar, so rebar futures is completely the inevitable result driving by the actual supply-demand in market.

From the point of the stock funds of commodity futures, it still maintains 80 billion yuan at the beginning of the year; black variety futures increased slightly, and migrated from other futures varieties, such as non-ferrous metals futures. "So we don't think there is a lot of stock fund going into the futures market to exaggerate the futures price." The analyst said.

Galaxy Futures says, combining with the actual condition of opening account in Galaxy Futures and the research on other futures broker, after comprehensive analysis on data, we found that: compared with January and February, in March-April this year, the number of opening accounts increase about 30%, margin increase10-15% MoM. Compared with March - April 2015, the total number of opening accounts fell by 19.84% year on year, margin fell 9.76% year on year. Margin growth ratio was far lower than the number of accounts opening.

Zhu shiwei also pointed out that the market has a lack of empirical evidence for topics such as "The potential dealers rush to open an account to be engaged in the futures market" and "The market stirs the heat of speculation". From the perspective of the clients of the futures company, there are no queuing, opening accounts, etc. Of course, part of the dormant account is affected by the market sentiment and restarts futures trading, which is a normal phenomenon. In terms of the futures company's customers, there is no the phenomenon that individual investors queuing up to open an account. Of course, some dormant accounts, affected by market sentiment, resume futures trading. This is a normal phenomenon.