PEOPLE’S DAILY: HOT-ROLLED COIL FUTURES LISTED TODAY TO HELP STEEL INDUSTRY MANAGE PRICE RISKS

Updated on Mar 21,2014

March 21, 2014

Li Xinchuang, President of China Metallurgical Industry Planning and Research Institute

Approved by the China Securities Regulatory Commission (CSRC), hot-rolled coil futures is listed on the Shanghai Futures Exchange (SHFE) on March 31. The listing of hot-rolled coil futures will further perfect China’s steel futures products, provide steel manufacturing, circulating, and consumption enterprises with an effective risk management instrument, elevate the influence of China’s steel price on the international market, and enhance China’s right of speech in international steel market.

According to the requirement of “steady start with high standard”, the SHFE has carefully planned and earnestly implement all work items for the trading and, with the purpose of serving the national economy and real enterprises, it has paid close attention the situation of hot-rolled coil spot market, so as to avoid market risks. It has also strengthened its market regulation on hot-rolled coil futures and well performed its regulating and service duties in such key links as trading, settlement, delivery, and monitoring. Besides, it has made efforts on market training and institutional investor education, and done its best in serving industry customers, so as to ensure steady operation of hot-rolled coil futures.

The steel industry, as a basic industry of the national economy, has played prominent role in China’s economic construction. However, China’s steel industry has experienced unprecedented difficulties in recent years. Such negative factors as high metallurgy material price, sharp decrease of steel price, and increasing asset-liability ratio of enterprises have led to the continuous decrease of steel enterprises’ profitability and greatly affected the stable and healthy development of steel industry.

According to the statistics of the China Iron and Steel Association (CISA), key steel enterprises counted by the CISA has achieved the sales revenue of RMB3,687.56 billion and achieved the profit of RMB22.886 billion in 2013, but the ratio of return on sales was only 0.62%. Such a low profit rate has reflected the overcapacity of the industry. Under such a circumstance, a series of national policies has been issued to make resolving overcapacity as the key to industrial restructuring and to focus on managing atmospheric control, energy conservation, and emission reduction. These measures will effectively contain the increase of new capacity and the release of existing capacity, and their will help to relieve the oversupply in the steel market. However, as it requires a certain process and time to resolve overcapacity and adjust the structure, the oversupply in the steel market cannot be reversed in a short term.

In 2014, the steel industry will face many reform and development opportunities and also more severe market challenges. In terms of finance, in order to prevent the further aggravation of the overcapacity, China will strengthen the control on overcapacity industry’s financing. With the launching of financial industry reform and interest rate liberalization, under the influence of macro economy, industry policies, and enterprises’ operation situation, steel enterprises have faced prominent financing pressure. What’s more, the increasing constraints on environmental protection, energy saving and emission reduction have caused greater operational difficulties for enterprises. Besides, the great fluctuation of metallurgical raw materials’ prices and steel price has further aggravated steel enterprises’ market operation risks in the following aspects:

First, the increase of raw materials’ prices has aggravated steel enterprises’ costs. With the rapid growth of China’s economy, the output of China’s crude steel has grown rapidly. However, due to the high dependence on foreign iron ore and the influence of market supply and demand, the price of import ore has gone up rapidly. In 2002, the price of China’s import ore was only US$24.8 per ton; in 2011, the price has reached the record high of US$163.8 per ton. Judging from the industry development trend, the long-process production with iron ore as its raw material will dominate China’s steel industry for a relatively long time. As China does not have good natural iron ore resources and the increase of final iron ore output is limited, it will be hard for China to break the situation of import ore price’s monopoly and steel enterprises will face relatively greater iron ore cost pressure.

Second, steel output remains high while steel prices fall sharply. In 2013, driven by the increased demands of domestic and foreign markets, China’s crude steel output has reached the record high of 779 million tons. Under the situation that the crude steel output of other countries and regions in the world has decreased by 0.9% year-on-year, the proportion of China’s crude steel output in the global output has increased to 49.2%, up by 1.8 percentage points compared with the same period of last year. However, China’s low industrial concentration, fierce market competition, and prominent supply and demand contradiction have led to the continuous decrease of steel price. In the end of 2011, domestic steel’s aggregate price index was 120.45 points and it fell to 99.14 in 2013, presenting a sharp decrease of 17.9%. Affected by the lasting high raw material prices and the continuous decrease of steel price, enterprises’ profitability has been greatly challenged.

It can be noted that metallurgy raw material and steel price risk has mainly contained the increase of enterprises’ profitability, and the market has an increasing demand for avoiding price risks. Under such a circumstance, the launching of hot-rolled coil futures is a trend, and it will provide steel industry with a control instrument to avoid price risks, which are mainly reflected in the following aspects:

The first is to add another strategy and instrument for risk management, thus realizing hedging. Futures, as a kind of financial instrument, is neutral and inclusive in itself. Any qualified enterprise and investor can use this instrument, including financing. The openness and inclusiveness of the futures market just symbolizes the highly developed market economy and the free flow of social resources. Judging from the pricing trend of international bulk commodities, financial market’s influence on prices has been constantly increased, and futures market’s price-discovery function has been gradually reflected.

With regard to steel enterprises, listed futures products that are related to the steel industry include steel rebar, wire rod, coke, coking coal, steam coal, and iron ore. As hot-rolled coil has a different application from steel rebar and wire rod, the listing of hot-rolled coil futures is not only a supplement to steel rebar and wire cod futures but also a kind of enrichment to China’s steel futures industry chain. As a result, steel enterprises will have more choices when participating in futures markets and can thus flexibly use futures’ hedging function to avoid market risks.

In addition, as hot-rolled coil has a wide downstream application area, including automobile, shipbuilding, hardware, and machinery, the listing of hot-rolled coil futures will provide downstream steel enterprises with an effective risk-avoiding instrument.

The second is to discover price, thus increasing degree of information concentration. As China’s steel industry has lower industrial concentration, fierce competition, and frequent and great market price fluctuation, steel enterprises, under the traditional production and trading pattern, mainly rely on the price change in spot market to adjust their management directions and operating strategies. As transactions in the spot market are sporadic, and most prices are reached between the buyer and the seller privately, both trading sides can only get scattered price information which cannot guide the market. However, all investors can participate in hot-rolled coil futures and the listing of hot-rolled coil futures will bring about complete market information. As a result, the price trend will be guided and the information concentration degree will consequently be increased, thus providing basis for all industry parties to formulate operating strategies.

The third is to build a global pricing center, thus enhancing the price influence and changing the passive situation. China is the largest hot-rolled coil manufacturing country in the world. In 2013, China’s output of hot-rolled coil reached 183 million tons, taking up 17.1% of the total steel output. As hot-rolled coil is the major steel product in international steel trading, hot-rolled coil futures is expected to become an internationalized steel futures product after its listing, which will help China to gradually become the pricing center of global steel price and will increase China’s price influence on global steel market.

The launching of hot-rolled coil futures is an objective requirement for the development of China’s steel industry. Hot-rolled coil has good spot market and relevant policies, and it meets the requirements of being a commodity futures target. Therefore, the basic conditions for developing hot-rolled coil futures have already been mature. Futures is an indispensable link in the steel industry. Both steel manufacturing enterprises and steel trading enterprises should face it positively and rationally, study and make use of futures tools actively, and strengthen financial talents’ training, so as to realize the stable and sound development of the steel industry by well combining the spot and futures markets.