What is the effect of the futures price stabilization order?
In recent years, affected by multiple factors such as the impact of the epidemic, supply chain disruptions, and loose liquidity, global commodity price volatility has intensified.
While strengthening the two-way adjustment of supply and demand and market supervision, my country's bulk commodity market supports the use of market-oriented methods to guide the upstream and downstream of the supply chain to stabilize the supply of raw materials and coordinate production and sales.
Based on the two major functions of price discovery and risk management, the futures market helps industrial companies cope with risks and ensure supply and price stability.
"Futures price stabilization order" is one of the innovations.
Innovate rights-included trade model
"There is a saying in the cable industry, which is called 'success is copper price, failure is copper price'. Copper and aluminum account for more than 70% of the entire production and processing costs. It is very important for enterprises to lock in lower procurement costs in an environment of sharp fluctuations in copper and aluminum prices. The relevant person in charge of Zhongchen Cable told reporters that they were most worried that the copper price would rise sharply as soon as the cable manufacturing project won the bid, swallowing up all the contract profits at once.
This kind of worry is quite common in the field of metal and steel processing.
A person in charge of a steel processing company said that when signing contracts with downstream companies, he was most afraid that the price of steel would continue to fall, which would lead to excessive purchase costs at the beginning, and he would pay for one order.
It is under such circumstances that more and more real enterprises have entered the futures market, using futures, options and other financial derivatives to deal with the challenges of fluctuations in raw material prices and product prices, to do a good job in risk management, and to stabilize production, trade, and operations. .
However, there is a problem of high threshold for enterprises to use futures and options tools by themselves.
Many physical enterprises lack futures hedging professionals, making it difficult to carry out futures hedging.
Even though many companies participate in futures hedging, their risk control capabilities are relatively weak, and it is difficult to control the risks associated with participating in futures hedging transactions.
For listed companies and state-owned enterprises, a major challenge is that the accounting standards have not yet regarded option puts (selling options) as hedging tools, so that corporate option puts are classified as investment income, resulting in many Listed companies and state-owned enterprises regard option put right as an investment tool and dare not try it rashly.
In response to these pain points, starting from September 2021, the Shanghai Futures Exchange has explored and launched the "futures price stabilization order" business to help physical enterprises resist the risk of price fluctuations and operate stably through the linkage model of futures and cash.
In recent years, the price of steel has fluctuated greatly, and the industrial chain, especially the middle and lower reaches of the enterprise, has a stronger demand for hedging.
Therefore, the pilot project solves the problem from the iron and steel industry.
SHFE joined hands with Baowu Group to support iron and steel industry chain enterprises to purchase and sell production capacity on the platform of Baowu Group, while actively using option tools to hedge risks.
Through Baowu Group's provision of spot supply guarantees for entity enterprises, and the Shanghai Futures Exchange and futures companies providing entities with tools such as risk hedging to reduce price fluctuations, the effect of "Baowu guaranteeing supply and stabilizing futures prices" is achieved.
This "futures price stabilization order" model is completed in the form of a trade contract, with embedded option terms.
The steel mill signed a rights-included trade contract with the Shanghai Iron and Steel Trading Center (an enterprise under Baowu) to sell steel to it, and determined the final settlement price based on whether the option expired or not, thereby locking in the lowest selling price of the upstream steel mill.
Shanghai Iron and Steel Trading Center signed a right-containing trade sales contract with the futures company to sell steel to it, and the terms of the contract were the same as the former.
Futures companies sign ordinary trade contracts with downstream customer companies, sell steel products to them, and hedge risks in the futures market at the same time.
In the initial stage of the pilot project in the previous issue, a certain proportion of support was given to the cost of purchasing options for steel mills (reflected in the right-containing trade contract), encouraging and guiding enterprises to use derivatives tools to achieve price stability.
According to the person in charge of the Derivatives Department of the Shanghai Futures Exchange, the pilot business of "futures price stabilization order" can not only help companies prevent risks in steel price fluctuations, but also help change the current situation of short-term price games between upstream and downstream companies in the industrial chain, and link companies' supply guarantees with The price stabilization of futures is organically combined, and market-oriented means are used to stabilize production, supply and price.
At the same time, it also drives enterprises in the steel industry chain to learn and use futures, guides upstream and downstream enterprises to better deal with the risk of price fluctuations, and effectively solves the pain points and difficulties of industrial customers participating in the futures market.
Steady operation with linkage between futures and cash
Since the "futures price stabilization order" pilot business was launched in September last year, upstream and downstream enterprises in the steel industry have responded positively.
For example, Maanshan Iron & Steel, as the first state-owned steel mill to participate in the pilot project, hedged about 2,000 tons of steel through the rights-included trade model.
Since the beginning of this year, affected by the epidemic, market volatility has increased, and corporate hedging needs have increased sharply. The influence of this business has continued to expand. Worry, more importantly, stabilize the confidence of the enterprise.
A commodity trader told reporters that traditional rights-containing trade contracts are common in the field of commodity spot transactions.
However, rights-containing trade contracts in the spot field once faced the problem of "difficulty in execution". The reason is that once the price of bulk commodities fluctuates violently, some companies simply choose to breach the contract to avoid the risk of failure of their own bets. The relatively high default rate makes it difficult to effectively implement the contract.
Today, the "futures price stabilization order" model of the Shanghai Futures Exchange is an innovation of traditional rights-included trades. Hedging the risk of price fluctuations, making the execution of rights-containing transaction terms more operable and secure.
It is reported that in order to enhance the transaction security of the "futures price stabilization order", the Shanghai Futures Exchange requires relevant trading parties to open special accounts on the one hand to ensure that the flow of funds, goods and information can be traced and monitored to achieve transaction security for all parties; On the one hand, it can also know in real time whether the hedging position matches its actual spot trade scale, and urge companies to strictly implement hedging strategies.
A person from a large state-owned steel mill told reporters that at the end of March this year, they tried to participate in the "futures price stabilization order", and agreed with downstream production companies to sell 2,000 tons of hot-rolled coil steel delivered by the end of April.
Specifically, the steel mill first signs a trade contract with rights with the risk management subsidiary of the futures company, and then the risk management subsidiary of the futures company signs a sales contract with the downstream production enterprise, and at the same time realizes the price fluctuation risk hedging of the trade terms with rights through futures hedging .
During the period, the steel mill paid a certain premium to the risk management subsidiary of the futures company in the rights-containing trade contract to ensure that even if the hot-rolled coil steel product encounters a sharp price fluctuation of 200 yuan/ton in the future, the original selling price will not be affected.
Through the "futures price stabilization order" business, the steel mill locked the highest sales price at the end of March, and compared with the spot price of steel at the end of April, the steel mill still sold forward orders at a higher price, achieving the expected hedging effect.
"At present, we are promoting this business to downstream enterprises, and hope that the upstream and downstream industrial chains can cooperate to avoid the risk of sharp fluctuations in steel prices. Because there is no need to worry about related companies encountering capital chain problems due to sharp fluctuations in steel prices, we can help some Downstream companies participating in the 'futures price stabilization order' offer longer payment periods," said the person in charge of the company.
More expansion of pilot varieties
On the basis of summarizing the pilot experience, the "futures price stabilization order" model has formed a "reproducible, scalable and sustainable" experience, which has been promoted in more varieties.
Participating enterprises effectively hedged the risks of price fluctuations in rebar, hot-rolled coils, and petroleum asphalt, which played a positive role in the stable operation of enterprises.
In June this year, the Shanghai Futures Exchange also cooperated with the Zhejiang International Oil and Gas Trading Center to launch a pilot project of "futures price stabilization orders", expanding the pilot products to petroleum asphalt, low-sulfur fuel oil and other energy and chemical products.
Chen Rong, chairman of Zhejiang Oil Center, said that the pilot business of "futures price stabilization order" is an important step taken by SHFE and Zhejiang Oil Center on the road to building a benign interaction ecosystem between futures and futures.
The SHFE provides option tools to reduce the risk of price fluctuations; Zheyou Center, as a spot platform, guarantees supply for the market through pre-sale of production capacity; futures companies provide option services for market participants.
Both the futures market and the current market will use financial tools to serve real enterprises and achieve stable supply and stable prices.
The reporter learned from the Shanghai Futures Exchange that there are currently 18 companies participating in the "futures price stabilization order" pilot business, including 5 iron and steel companies, 9 small and medium-sized steel processing companies, and 4 energy and chemical companies, with a total of 161,000 tons of heat. The spot trade of rolled steel and rebar, and 10,800 tons of petroleum asphalt provides price stabilization services, helping enterprises to effectively hedge the risk of price fluctuations of rebar, hot-rolled coils, petroleum asphalt and other bulk commodities with the help of derivatives tools, and helping physical enterprises to operate stably.
Industry experts said that the futures market, as an important part of the modern financial system, is an indispensable stabilizer for promoting the macroeconomic stability of a big country and the high-quality development of the national economy, and it is also an important tool for enhancing the pricing power of commodities and financial assets.
my country is a major producer and consumer of bulk commodities in the world. Innovating futures and options service models and promoting real enterprises to participate in futures market management risks are of great significance for serving the high-quality development of the economy and enhancing the influence of my country's important commodity prices.
Look forward to more futures market innovations like "futures price stabilization orders".
Zhu Huichun