Securities Times: Tin Pricing System Upgrading “Futures + Premiums and Discounts” Comes in Fashion

Updated on: January 26, 2016

Reported by Shen Ning, Journalist from Securities Times

In recent years, non-ferrous market continued to fall, relevant entity industry operating pressure rocketed. Copper and zinc enterprises exercised risk management by fair use of futures tools. The pricing model of “Futures Contract + Premiums and Discounts” is being gradually recognized by industry. This model is said to be hopefully promoted in the tin industry. Tin futures, the new arrival on the Shanghai Futures Exchange (SHFE) will play a more important role in the “futures serving real economy” initiative.  

Futures and spots combined is imperative

Industry insiders note that, the reason that futures market can become the benchmark price of the commodity price system was because it is an information aggregation of numerous factors that influence market demand and supply. Should one industry relies merely on spots market price signal to guide production and consumption, its production and operating activities may lag behind the change of market demand and supply relations.

By contrast, futures market conveys spots demand and supply relations and changing trend to the market. The futures market becomes an information aggregation of numerous factors that influence the market demand and supply, enabling futures pricing with better predictability and authenticity. As a result, the modern bulk commodity price formation mechanism with futures price as the core, overcomed two deficiencies under the traditional mechanism: lack of pricing benchmark and information content, while on the other hand it accommodates the global trade needs of bulk commodities.

It is understood that, current domestic tin spots trade still takes market info institution as pricing benchmark, though this pricing is not widely accepted by market in authoritativeness and fairness.

“Starting from last year, international tin price keeps down, falling from CNY120,000/ton to the lowest of CNY80,000/ton. Tin manufacturers retain improvement in overall profit status. Wispy pricing gap may have big influence over business operation. As a result, industry requires more marketization model,” said a spots entrepreneur.

Now model may refer to copper and zinc products

Industry insiders noted that, copper and zinc industries that also belong to non-ferrous metals presented huge reference value for the tin industry. Currently, the corresponding spots market of the relatively mature futures varieties such as copper and zinc has formed the “futures contract + premiums and discounts” pricing model following incessant efforts of cultivation of all parties.

Hu Jianbin, Futures General Manager of Trade Business Unit, Jiangxi Copper Corporation (JiangCopper) said in an introduction about copper industry: “when our company began to enter the copper bar market, we didn’t follow the long-standing market practice – i.e. supplier negotiates with the demand side. Since the supplier desires high price whereas the demand side hopes the lowest the better; it’s difficult to wind up.”

According to Hu Jianbin, JiangCopper affiliated Jinrui Futures went south of China to learn about the market there and discovered that downstream clients had different demands. Under this circumstance, sole spots were not enough to satisfy demands but futures tools could be leveraged to supplement. Some price point model was also created. After purchase of raw material, sell the futures; during sales of products, once transaction is done, operation may be conducted by utilizing quotation price in accordance with price fixing of all clients.     

Statistics show that, SHFE tin futures went listed in March 2015. By the end of 2015, tin futures contract volume totaled 1.032 million lots (bilateral calculation), which was approximately 1.032 million tons, and a transaction volume of CNY 0.11 trillion. Annual daily average transaction volume attained 5,000 lots, daily average transaction volume saw CNY590 million, and daily average position was seen with 4,000 lots. Entity enterprises gradually deepened in participation of hedging in the tin futures market. Futures market serving tin industry began to function.

Industry expert noted that, tin futures liquidity was to be further lifted. Viewing from the perspective of hedging, it was not necessary to place too much emphasis on the difference in price between futures and the spots. As long as spots and futures went in the same direction, hedging was sure to be achieved. When transactions were not active or hedging was difficult to manage, enterprises could take the natural hedging approach, lock the price of the purchase and sales contract to accomplish profit by means of linear hedging.

“The tin futures market was not active at the beginning either. After the appearance of utilizing point price mode, it was gradually accepted by the market. The difference in demand between manufacturers and consumers, including the difference between price fixing ways can all be supplemented by mobilizing futures market,” said Hu Jianbin.

It is understood that, point price is a pricing mode used at spots purchase and sale. Point price transaction is meant by unspecified price at the time of confirming basis of price of the spots with the spots buying and selling parties. What is confirmed is a pricing formula, i.e. spots basis of price = futures price + premiums and discounts.

Tin futures worthy of wait

For SHFE’s futures, industry has high expectation over it. According to information, some enterprises have begun to use tin futures to manage risk, and have achieved good results.

A domestic tin ingot manufacturer told journalist operation cases of its own: they purchased 100 tons tin concentrates on December 18 last year, grade of 40%, processing fee of CNY18,000/ton, pricing fundamentals were SHFE’s dominant contract price. The seller gave a settlement price with SHFE’s dominant price as the pricing basis and settled with a price of CNY93,410/ton. Along the tin concentrates pricing, the company sold 100 tons hedging on SHFE at Huxi 1605 contract price of CNY93,410/ton. One month later, the enterprise processed the tin concentrates into tin ingots and put them on spots market for sale. 100 ton tin ingot was priced in accordance with the SHFE dominant contract price. On January 18 this year, SHFE dominant 1605 contract settlement price was CNY94, 270/ton. At the time of pricing the spots, buy in futures in correspondence with the selling-short of an earlier period at the same price (CNY94, 270/ton).   

Head of this tin enterprise claimed that, “After the futures and spots hedge, we acquired a profit of CNY18,000/ton, the same as the processing fee we acquired at the time of buying in tin concentrates.” No matter how the futures market price fluctuates, enterprises can obtain processing fee revenue via hedging operation and matching futures market profit & loss with spots market cash flow, avoid the fluctuation risk of futures and spots market price. As for the downstream processing enterprises and trading companies, due to their different production and operation purposes, other hedging strategies might be adopted.

Relevant insiders forecast that, SHFE would see more and more participators, and futures price would be more market guidance oriented.

Securities Times journalist learnt from SHFE, that SHFE would continue to go deeper into the market for the purpose of diversified industrial services in the future, learn about market change and enterprises’ demand by hosting or co-hosting trainings, workshops and conducting market investigations, lift enterprises’ recognition over futures, guide enterprises to hedge benefit, promote futures price to become the pricing benchmark for sale and trade of spots enterprises, and elevate tin futures market’s width and depth in serving entity enterprises.