China Securities Journal: Insiders Recommend that Futures Companies Provide Good Hedging Service for Enterprises

Updated on: March 29, 2016

Reported by Ma Shuang, Journalist from China Securities Journal

On recent “Steel Market Analysis Seminar” in Wuhan organized by Shanghai Futures Exchange, the insiders said that this round of steel price rebound was not over yet, the second half of the domestic steel market may maintain low volatility, and steel prices are expected to be higher than that of last year at the bottom. In the volatility market, futures company should focus on enterprise hedging services.

Deputy General Manager of Steelhome.cn, Chief Analyst Liu Wenlu analyses that there are five main points in factors influencing the domestic steel market in 2016: first, under the background of investment to achieve steady growth, the domestic steel market demand decline slowed; second, the four major mining market expansion strategy against the trend is expected to change, the space for iron ore price falling further is not large; third, monetary policy tends to loose, fiscal policy more active, the price level is expected to rebound; fourth, reducing production capacity is a long way to go, and domestic steel market is in low price, low inventory, low operation efficiency of iron and steel enterprises; fifth, the rebound in steel prices has not been completed, in the next half year, the domestic steel market is volatile in the low, steel prices are higher than last year at the bottom.

Liu Wenlu pointed out that, specifically, at the supply side, it is expected that China's crude steel production reaches 0.78 billion tons in 2016, down 2.5% on year-on-year basis; steel exports maintain the level of 2015, which is 1.1 tons; steel imports 12 million tons, 1 million tons less than in 2015, crude steel resources supply 0.68 tons, down 2.4%.

As for the upstream, China's import iron ore in customs average price is $60.48 dollars/ton in 2015, and will be reduced to about $50/ton in 2016. In addition, China's iron ore inventory in ports is lower than the same period in history. At the end of February, China's iron ore inventory in major ports is 95.75 million tons, down 3.4%, compared with last year, down 6.8% compared with the same period in 2014. Demand for iron ore continues to decline in China this year. It is estimated that in 2016, China's iron ore (62%) demand will decrease 33 million tons, compared to 2015; it is estimated that China's domestic iron ore production of raw ore in 2016 is 1.28 billion tons, down 7.3%; iron ore imports about 0.98 billion tons, increased by 2.9%. In addition, iron ore of four major mines is planned to increase by about 37 million tons in 2016, of which Rio Tinto plans to increase production by 22 million tons, BHP Billiton plans to increase by 15 million tons, Vale do Rio Doce and FMG have no plans to increase production.

As for the inventory, in the domestic steel market, the inventory of main varieties of steel is significantly lower than last year's level. As of March 11, the major domestic market of construction steel, plate, hot rolled plate and cold rolled plate market inventory was 11.46 million tons, down 28% compared to the same period last year, declined 40.2% compared to the same period in 2014, declined 45.5% compared to the same period in 2013, declined 37.8% compared to the same period in 2012.

As for the downstream, it is estimated that in 2016 China's hot-rolled ordinary steel average price fell by about 150 yuan/ton. By the end of 2015 and to the early 2016, domestic steel market price is expected to complete building the bottom, and a rebound is expected after the Spring Festival to remain weak balance, the average market price in the next half is expected to be higher than the first half of the year.

The insiders point out in succession, in the concussion period of steel price; the futures company should provide good hedging service. Wang Xiangyu from Mailyard Futures shared steel enterprises hedging operation in the seminar. She suggested that futures company should do arbitrage related services for enterprises, so that enterprises can successfully and effectively use futures tools in the management.

According to her, the annual output capacity of a steel mill is up to 10 million tons. It is a large, private joint enterprise integrating iron, steel, timber, coke, mainly engaged in construction steel, rebar, wire rods and so on. In recent two years, rebar prices fell by as much as 60%, of which, since 2014, the dominant furures contract of rebar fell ahead of spot goods. Under this background, futures company, in consideration of specific futures position, makes hedging scheme based on the normal range of rebar futures basis fluctuations, while enterprises, according to future-spot law and indication of the futures, sell ahead of time, yield 50% in half year. Using futures tools, the enterprise’s futures department not only hedges the downside risk of spot, but also makes a substantial profit.

She also analyzes the current existing problems of spot enterprises engaged in the futures business, that the thought tends to be dominated by spot goods, insufficient awareness of the financial futures market attribute; deficiency of enforcement of system, lack of standards; confusion of hedging and speculative positions, etc. In view of this, she suggests that the futures company provides good service for it: first, discuss regularly the market research with enterprise, use futures tools effectively and timely to intervene in the business management; second, when the enterprise positions are at risk, make hints timely, perform discovery function of futures price; third, use warehouse receipt pledge and delivery service to help enterprises solve the money problem, increase sales channels.