The futures market has the function of discovering prices and managing risks, and is a natural “safe haven” for entity enterprises. In recent years, futures and derivative instruments are being recognized and accepted by more and more entity enterprises, and a group of leading enterprises with more proficient application of futures and derivative instruments have emerged in black industries such as coal, coke and mining zones.
Recently, the Futures Daily learned that Wuchan Zhongda Metal Group Co., Ltd. (referred to as Wuchan Zhongda Metal) and Xuyang Group have been included in the new list of production and financing incubation bases for 2024 announced by Dalian Commodity Exchange. In the future, how will these two leading black enterprises leverage their experience and advantages, play the role of a leading enterprise, and create a good ecosystem for downstream active participation in the futures market on-chain? With these questions in mind, the Futures Daily interviewed them.
The intense Fluctuation in prices has spurred the demand for Risk Management in enterprises
As a leading integrated service provider of bulk commodity Supply Chain in the industry, Wuchan Zhongda Metals focuses on the black industry chain, involving bulk commodities such as iron ore, coke, and steel. In recent years, affected by multiple factors such as the global economic situation and domestic policies, the black commodity market has experienced severe price fluctuations, exacerbating the business risks of industry chain enterprises.
Assistant General Manager of MCC Metal Peng Shuke told reporters that in recent years, the company has steadily carried out inventory management, basis trading, etc. mainly in iron ore, coke, steel and other futures varieties based on its own production and sales situation, and has achieved good results.
According to Peng Shuke, in October 2022, Wuchan Zhongda Metal undertook a long-term delivery of iron ore and coke orders for a steel mill customer. To deal with the price fluctuation during the delivery period, Wuchan Zhongda Metal decided to buy hedging on the corresponding futures varieties and successfully completed a risk management operation through cash-for-physical hedging. Peng Shuke said, ‘With this strategy, while ensuring the supply of raw materials to customers, the company has also achieved risk avoidance and procurement cost locking for price fluctuations.’
Xuyang Group is the world’s largest independent producer and supplier of coke, and one of the early black industry enterprises in China to participate in the futures market. In recent years, Xuyang Group has embarked on a distinctive market Risk Management path through coke and coke futures hedging, and promoting the pricing of coal and coke products based on price differentials.
“Affected by the global macro environment, international situation, and other factors, the prices of bulk commodities in the black series have fluctuated dramatically, posing a major challenge to the daily production and operation of enterprises,” said Ma Saijia, head of the hedging department of Xuyang Group. On the one hand, although the decline in new construction of real estate has led to a weakening of prices for black series products, manufacturers have maintained low inventory of raw materials. Once the market suddenly reverses, it will be difficult for enterprises to respond in a timely manner, which will affect the continuity and stability of enterprise operations. On the other hand, the significant fluctuations in coking coal prices will directly affect the stable profit of coking, posing a test to the profitability of enterprises.
During the interview, it was learned that Xuyang Group has adopted differentiated participation models for different varieties. ‘In the operation of coking coal, we liken futures contracts to ‘suppliers’ and use the futures market to carry out raw material procurement,’ said Masa Jia. He believes that different futures contracts are like different ‘suppliers’ that can provide commodities with unified quality standards. Enterprises can compare prices, transportation distances, freight charges, and other factors to choose the appropriate futures market price for raw material procurement. In daily operations, it is often difficult to lock in spot quantities and prices, but through the futures market, it is possible to efficiently lock in the cost of raw materials.
In terms of coke, XY Group has effectively facilitated product sales by becoming a warehouse of DCE. ‘Warehouse receipts are registered based on future production capacity as credit, which does not affect the company’s daily production and sales work. After the holder of the warehouse receipt requests delivery, we will arrange production, which is conducive to saving time and storage capacity, dropping the enterprise’s transaction cost,’ said Ma Saijia to reporters.
“There are many participants in the futures market, who observe from different angles and make trading behaviors based on market understanding, which promotes the formation of a fair market price and injects sufficient liquidity into the futures market.” Marseille further stated.
The combination of futures and spot markets enhances the risk resistance of upstream and downstream
It is reported that in early October 2020, the Coking Export Department of Xuyang Group signed an export contract for a ship, with a contract price of 1850 yuan/ton. However, due to the low inventory of the port at that time, the Spot price at the port quickly surged to 2000 yuan/ton. Xuyang Group was worried that the procurement cost would increase, leading to export losses, so it decided to buy futures contract 2101 in the futures market first and then Close Position when the Spot procurement is completed. On November 30th, the export stocking was completed, and the comprehensive procurement price rose by 300 yuan/ton, but the futures price rose from 2100 yuan/ton to 2450 yuan/ton, with a profit of 350 yuan/ton, effectively offsetting the loss of Spot procurement.
"This combination of futures and cash operations ensures the high-quality delivery of the company’s export business, and at the same time drops the losses caused by the spot price pump. It is precisely because the futures market has set up a ‘protective net’ for the downstream enterprises of the industry on-chain, so that they can be more comfortable in the complex and changeable market environment. Marseille said.
Similar examples of upstream and downstream services in the futures industry are also common in the daily operations of large metal companies. According to reports, in September 2023, a steel mill customer of a large metal company purchased 10,000 tons of coke for delivery the following month. They were concerned that a future price drop would increase procurement costs. After understanding the steel mill’s concerns, the large metal company conducted comprehensive analysis of the basis level and coke spot trend, and decided to engage in price trading with the steel mill. The two parties agreed that the steel mill had the right to price at any time in the next month, with the benchmark price set at the coke market maker contract 2401 market data at that time, and the contract basis determined to be -150. At the same time, the large metal company purchased 10,000 tons of coke spot and hedged it on the futures market, establishing a basis position. One month later, the coke futures price dropped, and the steel mill priced it. The large metal company closed the position on the futures and transferred the spot rights to the steel mill.
“Through the linkage of the Spot market, steel mill customers purchase the required Spot at a lower procurement cost, while we obtain additional profits from the strengthening of the basis, achieving a win-win situation with customers in a single transaction,” Peng Shuke said.
Based on advantages, provide services for high-quality development of industries
In terms of leveraging the advantages and proactivity of leading enterprises, enhancing customer stickiness in the upstream and downstream industries, and promoting the stable development of the industrial chain, what practical actions does DCE’s Production and Financing Cultivation Base have? The reporter obtained exciting news during this research interview.
Peng Shuke told reporters that with the increasingly widespread use of futures and derivative tools in the steel industry chain in recent years, Wuchan Zhongda Metal has fully utilized its familiarity with futures market tools, strong Risk Management capabilities, and other advantages to help downstream customers in the industry improve their understanding of the futures market, using futures contracts as the underlying assets in Spot trading, conducting price-based trading, options trading, and other businesses, allowing more and more upstream and downstream industrial enterprises to flexibly participate in the futures market based on their own risk preferences and price needs.
Xuyang Group has realized the important role of on-chain collaboration in the downstream of the industry for enterprise development, based on its good performance in the futures market. It has always taken practical actions to fulfill its leading role, actively playing the role of ‘linking the upstream and downstream’, providing buffer space for the supply and demand relationship between upstream and downstream enterprises in the industrial supply chain, ensuring the smooth operation of the industrial supply chain and reasonable market price fluctuation through derivatives services.
“In addition to carrying out daily business cooperation, we also pay great attention to listening to the development demands of upstream and downstream partners, take the initiative to help partners such as Hongyuan Coal Industry and Jizhong Energy to build internal risk management structures and systems, and arrange their business personnel to come to our company for learning and practical operation.” Ma Saijia said that the concept of win-win cooperation has been integrated into the development concept of many industrial partners. For enterprises in the cultivation base of industry and finance, it is important to continue to play a good role in “piloting”.
Marseille said that in the next step, Xuyang Group will continue to enhance its own production and financing synergy, deepen the learning and application of over-the-counter business and Options products, and continuously promote the business model of spot-future combination such as basis trading and warrant trading. With its own trade resources and advantages, it will empower industrial development. On the one hand, continue to play the leading role of the production and finance incubation base, continuously output research findings, successful cases, and management experience, and drive more enterprises in the black industrial chain to participate in the futures market; on the other hand, actively cultivate and empower each other with enterprises in the industrial chain, and use the high-quality development of enterprises to further enhance the resilience and anti-risk ability of the black industrial chain.
(Article source: Futures Daily)
Source: Eastmoney.com
Author: Futures Daily
