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The head of the industrial product department of DCE gives a detailed explanation for the trading unit of coking coal futures
The head of the industrial product department of DCE said when giving an interview to reporters a few days ago that the size of coking coal futures contracts is 60 tons per contract, which is suitable for the current investor structure of China’s futures market, matches investor’s fund threshold, reduces hedging cost and meets market liquidity.
According to him, if the trading unit of futures contract is too big, investors will invest a lot of funds which will lead to weak liquidity. And if the trading unit is too small, trading cost will be high to the disadvantage of large customers in hedge or investment. In general, spot size and the trading volume of a single transaction are important reference elements in trading unit design. Futures of big varieties may have big trading or delivery unit, so as to help industrial customers participate in trading and delivery. But small contract size is of benefit to hedging enterprises, as small trading unit may improve the accuracy of hedging strategy, and hedging volume can be divided into a few orders in implementation, and thus providing opportunities of obtaining a more advantageous trading price. In addition, contract liquidity is another important element to be considered in the design of contract size. When DCE designs the trading unit of coking coal futures contracts, it mainly aims at being close to the spot trading practices of coking coal, reducing the hedging cost of enterprises and conforming to the current structure of futures market investors.
Relevant introductions show railway transportation occupies an important position in China’s coking coal transport. The transport capacity of a railway wagon is 60 tons and that of a truck is generally 30 tons. The trading unit of 60 tons a contract is equivalent to the transport capacity of one railway wagon or two trucks, and therefore is suitable for both the circulation practice of trucks and trains and the shipping with ships of thousands tons and even dozens of thousands of tons. Meanwhile, in terms of contract size, if the price of coking coal is RMB 1,500 per ton, the value of a contract or 60 tons is about RMB 90,000, which is equivalent to that of domestic natural rubber and cotton, but is less than that of the varieties with greater unit value, such as coke and copper. In its arbitrage relation with coke variety, 1.3 tons of coking coal is needed to produce 1 ton coke. Relevant statistics show that around 0.6 tons of coking coal and fat coal may produce one ton of coke, and if the trading unit of coking coal is set at 60 tons per contract, one contract of coking coal may be arbitraged with one contract of coke, as the current trading unit of coke is 100 tons per contract.
As to the question how to match the trading unit of 60 tons per contract with the spot trading size of thousands of tons, the director said that DCE takes into consideration market liquidity and meets industrial demand by letting the trading unit of coking coal be different from its delivery unit. The trading unit of 60 tons per contact is basically suitable for the finance threshold of most investors, while the delivery unit of 6,000 tons can help spot enterprises participate in delivery, he said. In this way DCE can meet the demand of small investors for liquidity in futures market and adapt to the large scale of industrial entities, while reducing the participation cost of industrial customers, helping spot enterprises participate in delivery and ensuring the big enough liquidity in market.
