Futures Daily: The Hedging of Role Model Effect" of Steel Companies Enhanced

Date: September 25, 2015

Reported by Que Yanmei, Journalist from Futures Daily

This year, under the background of steel prices falling down, some steel companies have been decisively involved in futures hedging, and the operation burden was at ease. As the number of successful hedging cases has increased, more and more steel companies have begun to focus on the risk-protection function of futures, including some state-owned steel companies who were less involved in the past.

Tang Fuping, General Manager of Ansteel Group, expressed when investigated in its subsidiary company that, the current serious situation of iron and steel industry would continue, the oversupply contradictions would become more prominent, steel companies should prepare to cope with long-term difficulties.

He also said that, in the current market situation, general measures were unable to effectively cope with challenge of the market, we had to constantly adjust business strategy, innovative work ideas and methods, seek the way out in the sectors of financial, real estate and futures.

Yao Lin, President and General Manager of Ansteel Group, also accepted the idea of using futures as auxiliary tool to assist business. He said that, they will strengthen market development, work on product adjustment, capital operation and futures, and expand profit margin.

Domestic steel prices have continued to fall this year and profits of steel enterprises have generally been squeezed. The mid-year report disclosed by Ansteel Group showed that in the first half year, the Group's revenue was 28.992 billion yuan, down on a YoY basis of 24.06%. Net profit attributable to the parent company was 155 million yuan, down on a YoY basis of 73.14%.

It is learned that Ansteel Group is a listed steel company with relatively favorable performance. According to relevant statistics, in the first half of 2015, 10 of the 35 listed steel companies in China suffered a decline in profit, and 18 enterprises were under deficit. Among them, 8 listed steel companies turned into losses from profit, 9 listed steel companies losses greatly.

"The steel enterprises have already been very difficult in operating now, if they are unable to control raw material price risk, their loss will be bigger, while using futures tools to control price risk, manage inventory, and the loss will reduce." Xu Xiangchun, Information Director of mysteel.com said.

He said, in the past, limited by the system and mechanism of state-owned enterprises, Ansteel and some other enterprises may not have strong demand for futures tools to avoid operation risk, but now the market situation is different from the past.

For example, a steel company that runs relatively better may currently have a profit of 10 to 50 yuan per ton, but if the raw material falls after purchase, the original profit will be none. Raw material price fluctuations must be controlled in order to keep profits. Some steel companies have already showed advantages in using futures to manage risks.

An insider of a steel company in Hebei said that, because of sharp fluctuations of raw material price from this year, there are a lot of opportunities for steel companies to hedge, and the actual hedging effect is very good, It is learned that, the way steel enterprises operates futures hedging is, buy iron ore contracts on the material terminal and sell steel contracts on finished product terminal. Iron ore product of this year appeared two larger rebounds, and rebar is basically fall down all the way.

The insider said that, this year the company bought iron ore futures to hedge, and sell rebar futures at the same time, avoid the risk of fluctuations in the price of raw materials and finished products. In general, they feel much relaxed than those who did not hedging.

In Xu Xiangchun’s view, there were relatively little state-owned enterprises exploiting the futures to manage risk, the state-owned enterprises are often afraid to participate in market on large scale, but with the deepening understanding of the futures and increase of successful cases, the steel companies ‘recognition on futures is improving.

Xu Xiangchun reminded, futures are neither flood nor beast, it can be useful when operating well, it can promote enterprise operation. Steel companies should take advantage of futures, but must not speculate.