China Securities Journal: Nonferrous Metals Personnel Know More about Futures, Futures Personnel Know More about Nonferrous Metals

Updated on Sep 15,2014

September 15, 2014

By Wang Jiao

In a clean factory where production is in order and workers operate while simply pressing keys, piles of zinc ingots are produced with hot steam. These zinc ingots are produced in the world’s biggest lead smelting enterprise – Henan Yuguang Gold and Lead Co., Ltd., and they are also registered at the London Metal Exchange (LME) and the London Bullion Market Association (LBMA).

On September 13, a journalist of the “China Securities Journal” followed the 4th Session of Nonferrous Metals Industry Training Group of the Shanghai Futures Exchange (SHFE) to visit Yuguang. This activity, with rich content and great practicalness, aims at strengthening communication between futures and spot enterprises and making “nonferrous metals personnel know more about futures and futures personnel know more about nonferrous metals”, so as to achieve a even closer combination of futures and spot goods. That is, it will not only cultivate professionals in nonferrous metals futures, but also strengthen the nonferrous metals industry’s service capacity.

“In the beginning of 2014, our company signed a raw material import contract with a company and the silver content in mineral powder is about 6 tons. The contract stipulates that no pricing is made before April and the price is calculated at the average price of London silver in May. As our company’s silver mainly sells domestically, how to hedge at the risk of pricing market mismatching?” An official of the Futures Department of Yuguang explained the company’s efficient utilization of domestic and foreign futures markets with an example.

On June 4, Yuguang sold 400 contracts of silver in 1412 contract at the average price of RMB4,030/kg and bought 192,900 ounces silver at the average price of US$18.8/oz; on July 11, it bought in 400 contracts of silver in 1412 contract at the average price of RMB4,407/kg and sold out 192,900 ounces silver at the average price of US$21.47/oz. The total profit reached RMB155.2/kg after the transaction.

Speaking of the necessity of hedging, the official said that the processing enterprises aim at earning reasonable processing charges. Along with the continuous fall of processing charges caused by the continuous expansion of this industry, the processing enterprises are on the edge of losses. If they do not hedge on raw materials purchase, even the meager processing profit will disappear due to the great price fluctuation. Therefore, it is particularly necessary to enhance enterprises’ participation in the futures market, which is also an important trend of the market development.

However, fundamental changes have occurred in the traditional theoretical development of hedging, and the traditional hedging methods not suit all conditions. A successful hedging needs the judgment of market trend and the flexible control of hedging proportion, instead of mechanical participation.

“Hedging is a highly combination of futures and spot goods, and an enterprise should closely combine its futures and spot goods departments. Mutual understanding, communication, and timely information exchange should be made between the two departments, so as to ensure that the futures personnel learn about the trend of spot goods, and the spot goods personnel are familiar with the futures price trend, thus laying a foundation for successful implementation of the hedging scheme. An official of Yuguang said that an enterprise should comprehensively consider the gain and loss of futures and spot goods, and correctly regard losses resulted from hedging. Combining with the spots good markets, though the hedging might lead to losses in some cases, it avoids the even greater losses in the spot goods market. Therefore, the hedging effect should not be judged only on one-side as long as losses resulted from the hedging are less compared with no hedging.

An official of the SHFE introduced that to intensify the service efforts on the nonferrous metals industry, cultivate professionals in nonferrous metals futures, strengthen the communication between futures and spot enterprises, and realize the goal of refining the nonferrous metals futures products, the SHFE launched the industry training base program at the end of 2011, in hope of cultivating needed operational and managerial professionals for nonferrous metals enterprises’ involvement in the futures, as well as theoretical and practical professionals for futures companies to serve the nonferrous metals industry.

After two years of trial operation, the Nonferrous Metals Industry Training Base Program of the SHFE has conducted 14 sessions of training for nearly 400 futures analysts. The Training Base combines the massed theoretical study with the on-site teaching of nonferrous metals enterprises. The SHFE is responsible for the establishment of the training platform and the overall design and systematical construction of the Base; the training agency constituted by the Shanghai Futures Association and the futures associations of other areas is in charge of enrollment and other organization work; and the nonferrous metals enterprises with mature experience in futures application assume the tasks of receiving on-site visit, explaining the industry chain, and conducting training on practical futures operation. This Program has practically solved the general problem of the disconnection between futures analysts and the business circles, so it has been warmly welcomed by all trainees. The business circles said that they have had a deeper understanding and recognition of the futures industry through the industry training base’s activities, and the training results have been widely acclaimed.