Futures Daily: Smart Futures Use Emboldens Shagang Group Against Grim Steel Market

Updated on: January 28, 2016

Reported by Que Yanmei, Journalist from Futures Daily

Continued market downturn led to cheerless performances of numerous listed steel players last year. Preliminary earnings estimates of Baosteel indicates a 2015 operating revenue of RMB 164.1 billion, showing a YoY decrease of 12.6%, and a net profit attributable to the shareholders of the listed company of RMB 961 million, a YoY decrease of 83.4% where Magang Group, parent company of Maanshan Iron & Steel Co., Ltd. declared its huge deficit in 2015 not long age.

By far, Shagang Co., Ltd., a listed company under the “fighter” private steel player Shagang Group has not announced its earnings estimates 2015; however, data previously exposed by media show in 2015, Shagang Group secures an operating revenue of RMB 205.843 billion, profits and taxes of RMB 474 million and profits of RMB 189.7 million.

It’s learnt one of the major reasons for stable operation of Shagang Group in the “chilly winter” of the steel market is lean management through cost saving and efficiency improvement. In recent years, Shagang Group has adopted diversified measures for reducing costs and raising efficiency, which include the “edged tool” of futures for reducing raw material costs, besides its great efforts in exploring internal potentials.

Shagang Group as among first movers

It’s learnt by report of Futures Daily that since the launch of rebar futures, Shagang has utilized the futures market for serving its production and operation and is now a bellwether in futures trading among the mass of the steel players.

Head of Shagang Securities and Futures Department revealed in the interview that Shagang Group has been utilizing the futures instruments flexibly in face of the aggravate fluctuations of iron ore and steel prices in recent years to reach the goals that reducing raw material costs and securing costs in advance, in addition to its sound achievements of hedging and risk avoidance in steel marketing. For example, price of rebar in early 2014 was around RMB 3,400/ton when that of iron ore futures was about RMB 700/ton, which determined the profit from the production of a ton of steel as about RMB 200. Shagang Group secured its profits by selling out its rebar futures at SHFE and buying in iron ore futures at Dalian Commodity Exchange (DCE).

Such operations were well returned, according to the head, however, normally early position liquidation would occur, not to wait till the last moment of delivery. Operations were of course adjusted according to market changes. If terminal spot goods were cheaper, they would buy in more spot goods and sell out corresponding futures. 

Not only can domestic steel trading be hedged in the futures market, but also similar operations apply to steel export. It’s introduced steel export of Shagang Group was increased by more than once and its current monthly export amounts to about 0.4 million tons. “Export is normally order-based production that lasts a certain duration. As the company receives orders of December in September, so it can choose to exercise partial hedging in the iron ore futures market of DCE to secure raw material costs in advance”, said the head of Shagang Securities and Futures Department.

While participating in futures hedging, Shagang Group takes initiative in applying for delivery brands for its own brand. By far, “Shagang” ribbed steel bar, wire and hot rolled coil are registered delivery brands of SHFE. According to head of Shagang Securities and Futures Department, it greatly benefited brand value appreciation, branding and quality improvement after some of its products had been registered as delivery brands.

In fact, Shagang has been in hedging operations with futures since the launch of rebar. In the past six years, Shagang has achieved generally sound hedging operations from the vague ideas about hedging at the beginning till the gradual formation of its own hedging operation system.

It’s learnt that accumulative rebar trading volume of Shagang in the future market has topped 0.4 million tons since its launch. Head of Shagang Securities and Futures Department told the journalist that Shagang’s engagement in hedging was not aimed at gaining super profits but adding a channel for securing production profits or procurement costs so that Shagang no longer “walked on one leg”. Proper utilization of hedging ensures normal production and operation of an enterprise in case of market fluctuation.

Flexible and efficient hedging mechanism

Whether a steel enterprise succeeds in futures hedging depends on whether an efficient and flexible decision-making mechanism is available to a great extent. Success of Shagang in futures hedging is attributed to a flexible mechanism.

Years of efforts have returned Shagang with an independent hedging system and risk prevention system, a hedging decision-making committee composed of members from top management, production, procurement, sales, finance and investment department and a hedging system suitable for the enterprise.

It’s introduced top leader of Shagang’s futures business is its Chairman of the Board and there is also a decision-making leading group under which the Futures Department of hierarchical management and clear functions and responsibilities is affiliated. “Now we attach great importance to the utilization of the futures market. Only a powerful leadership can make prompt and rational decisions in response to market fluctuations”, said the head.

For example, Shagang has assigned two levels of decision-making authorizations for trading positions of different amounts. Within a certain position amount, the trading operation department has the decision rights to open the transaction flexibly. Position opening or trading exceeding the authorization of the trading operation department shall be negotiated by the Decision-making Committee of the Group who will then develop an operating plan to be executed by the trading operating department.

Besides its decision-making mechanism, the futures performance assessment mechanism of Shagang is also leading the industry. For example, currently quite a few steel enterprises assess the hedging performances in two accounts, one for futures and the other for spot goods whereas Shagang has only one for overall assessment and arrangement of futures and spot goods. 

In addition, hedging of Shagang focuses on its own production and operation, that is, flexible operations based on market situation without speculation. “Rigid hedging is unwise. A mechanism for futures market information collection, judgment and quick response shall be established to mitigate risks to the maximum and ensure stable corporate operation”, said the head.