By Zhang Yao and Chen Qiang
With nickel futures listed for trading on the Shanghai Futures Exchange (SHFE) on March 27, 2015, how will it impact nickel manufacturers and stainless steel manufacturers? What have relevant enterprises done and what are they planning to do in order to cope with the listing of nickel futures? And how do senior personnel in enterprises think of the short-term and mid-term trend of nickel futures? What attitude do they hold toward the listing of nickel futures? With these questions, our reporter had an interview with Du Peng, the Futures Department of Jinchuan Group Co., Ltd., the largest nickel manufacturer in China, and with personnel in the Raw Material Purchase Department of TISCO, China’s largest stainless steel manufacturer.
Spot market quotations will “follow the trend of futures”
Du said that domestic listing of nickel futures will surely have effect on enterprises on the nickel industry chain, whose degree is hard to foresee so far but depends on the degree of market participation after the listing. However, it’s sure that the listing of nickel futures in China will facilitate the participation of relevant home enterprises in the futures market, because they used to have to get approval from relevant regulators in order to get involved in futures trading on the London Metal Exchange (LME).
Du believed that the listing of nickel futures would probably change the quotation mechanism of nickel spot in China. Nickel manufacturers and stainless steel manufacturers in China take significant positions on the nickel industry chain, with the former representing the supply while the latter the demand. Since repeated pledge for loan cheating was revealed last year in Qingdao Port, which involved 18 banks and a hole probably more than RMB10 billion, the current financing demand of nickel industry in China has drastically declined and spot consumption can generally indicate the real market demand for nickel. The two kinds of manufacturers have reciprocal impact with the nickel futures market, in that fluctuations of nickel futures price will attract and drive enterprises to take part in the futures market, which shall be more mature and active due to more participants. Thus a benign cycle can be generated.
At present, the quotation of nickel spot in China mainly refers to Electronic Wuxi and Jinchuan Spots. Du stressed that with the listing of nickel futures on the SHFE, participants in the spot market will “follow the futures market” as to quotations, which is likely to resemble the universal practice in the copper spot market, namely, to fix the spot price by adding premium and discount to the contract volume of a month, though on the premise that nickel futures trading must be active enough.
Related personnel in the Raw Material Purchase Department of TISCO believed that the listing of nickel futures shall exert effect on its purchase in three aspects: firstly, purchasers and hedging operators can reflect the characteristics of participants’ expectation of the market through futures price, which is a new channel for learning about market situation, making purchasing decisions and timing of hedging; secondly, through buy-in on the futures market, position closing can be replaced by spot delivery on the expiry date as another way of spot purchase; thirdly, a hedging vehicle will be granted to relevant enterprises.
Related enterprises in action already
Reports say, TISCO Purchase Department is paying close attention to nickel futures price and tends to make futures price the base price in their new purchase agreement. Meanwhile, TISCO has set up a futures working group and will have hedging operations targeted at the demands of spot department. And relevant TISCO departments have designed hedging flows and planned hedging schemes, with spot department and futures department having irregular communications and exchanges. All these will provide faster and smoother reaction path for actualization of hedging practices.
Reports say, the present hedging practices in TISCO feature accurate calculation in quantity and price, the monitoring of compliance department and a strict risk monitoring flow, so that there’ll be hardly speculative behaviors or investing practices.
“The listing of nickel futures on the SHFE means a new option of nickel delivery in China so that hedging delivery can be more easily realized, which provides more opportunities and higher operability for nickel futures arbitrage and arbitrage on sell order and buy order.” Du said. “As an important nickel manufacturer, Jinchuan boasts hedging demands and natural strengths in order to switch products between the futures market and the spot market according to futures-spot price difference and optimize the effect of hedging.”
Du also stressed that in the operation of nickel futures, Jinchuan Group strictly observes relevant laws and regulations and corporate rules, and cooperates actively in the registration of brands for delivery on the SHFE. Nickel futures being a new product in China, Jinchuan will consider the actual market situation and the experience of operating other products for the actual operation and participation in the market, mainly making the futures a tool for hedging and risk control.
A bullish market in the short term
How will nickel futures perform after its listing? Du personally held in short and medium terms, the nickel futures will see an uptrend and expected positive performance in the consumption of the second quarter.
The metal demands of China have grabbed the attention of worldwide investors. During quarter 1 of 2015, especially the Spring Festival, abnormal operation of downstream and terminal manufacturers in China caused slack consumption of base metals, hence a slight downtrend of base metals’ prices. But turning to quarter 2, higher consumption should lay down a solid foundation for a bullish market, and greater performance of home stock market may somehow drive China’s metal futures market. Besides, retracement of nickel futures on the LME has lasted for a long time, witnessing the nickel index tumbling from US$20,000 per ton of mid May last year to the present US$14,000 per ton or so, roughly the level of early 2014. Such a wide-range and long-lasting retracement partly released the risk of high inventory and price in the nickel market.
From the perspective of the spot market, Indonesia’s prohibition on raw ore exports has exerted impact on Chinese market, leading to higher backwardation, which somehow reflects the tight supply in China’s spot market. But surely, there are still risks of downward metal price this year, as strong dollar and declining crude oil price can both curb the bull market of bulk commodity; and with the productivity in Indonesia released, nickel price will face great challenges. All told, people can only be cautiously optimistic about the trend of nickel market this year.
A TISCO employee deemed it hard to judge the price trend of nickel futures at home, as there’s no way to determine the trading volume so far. “With smaller trading volume, the sudden injection and retreat of major capitals may make the price seriously deviate from the market, which is obviously not the original intention for futures listing. Futures price can accord with and reflect the market only when the capitals involved are large enough. Enlargement of trading volume has to be gradual, which means some futures product will undergo fluctuations at its beginning in order to seek the return of supply-demand balance point.”
The employee remarked the stainless steel futures on Electronic Wuxi had well reflected the market situation, but the nickel futures listed on the SHFE are expected to bear higher credibility and more participating capitals.
Tips for enterprises
Du commented that enterprises should accept the change and get ready for it. Futures have shown both advantages and disadvantages since their launch, and manufacturers should heighten their capacities in order to wield the double-edged sword with optimal effects. Jinchuan has been engaged in the hedging of nickel and copper on the LME since 1990s with generally favorable results so far.
And TISCO personnel believed the business practices in traditional enterprises can hardly meet up with the purchase and sale of bulk commodity today. They explained that due to a long production cycle of steel, the time difference between raw material purchase and steel selling can lead to price fluctuations. The futures market can help alleviate the impact of price fluctuations on enterprises during their operations in a bid to maintain their regular profits. Enterprises that perform well in the futures market, like Jiangxi Copper Corporation, can still retain high profits despite continuing decline of the copper price, which should be attributed to their combining correct operation in the futures market with regular businesses. “Large-scale enterprises should not just evade risks in futures, but learn to control risks and scoop profits through flows and decisions based on market analysis.”
Du has expectations of the nickel futures market, but holds it needs some time to judge whether nickel futures can become an investor-focused product like copper and zinc futures. China’s earliest listed copper futures takes the lead among the nonferrous metal products and enjoys wide market participation, attracting investors ranging from mining and smelting enterprises to downstream copper processors and intermediate traders. That’s why the copper futures market has matured and consolidated after years of development. However, other base metal products show different characteristics, like the aluminum futures less active than the later-listed zinc futures. In fact, the activeness of a futures product will reflect the participation degree in the market, while higher degree of participation will help promote the activeness of relevant products. If a similar benign cycle is formed for the nickel futures, it will surely make another successful product and an ideal hedging tool.
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