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Recently, jointly sponsored by China Iron and Steel Association (CISA) and Dalian Commodity Exchange (DCE), the “Forum on Futures Market Serving Iron and Steel Enterprises” was held in Dalian. The invited representatives of 11 iron and steel enterprises fully compared notes at the forum, carrying out discussions on the iron and steel enterprises’ understanding of the futures market, specific operational modes and other aspects and putting forward pertinent opinions and suggestions. After the discussions, the iron and steel enterprises further reached the consensus that the futures market should serve as the risk management center for the enterprises and adhere to the idea of integrating the operation of the futures with purchasing, selling and other aspects. At the forum the representatives also provided their suggestions in further urging the industrial clients to understand and participate in the development of the futures market.
With the futures of coal, coke and iron ore listed and operating effectively in recent years, the domestic major steel enterprises have widely improved their awareness of the futures instrument, and the operational modes are becoming increasingly abundant. “In the futures market, Nanjing Steel Group conducted the hedging of buying for a lot of price-locked long-term orders with the aim of locking in the costs,” said a representative of Nanjing Steel Group at the forum, “Without locking in the prices in the futures market, the enterprises dare not accept the long-term orders, as it means significant risk exposure.” He stressed that the hedging of futures could bolster the spot businesses to a large extent, enabling them to accept the trade orders which originally stand at loss or below the break-even line. After the comprehensive balance between the futures and spot earnings, the business space of the company is expanded. The representative of Shougang International Trade also said that only with the futures instrument did the company dare to accept the long-term export contracts. According to the sources, Nanjing Steel Group also used the futures delivery to conduct the hedging of selling for inventories, mainly to prevent the risk of price decreases for inventories.
An official of Ansteel said that as an entity enterprise, Ansteel has found it impossible to do without the instrument of the futures. Through the hedging of the futures, the risk of price fluctuations can be transferred effectively, with the costs for purchasing materials controlled and the sales profits of the products locked in.
A representative of Nanjing Steel Group said that the futures margin system can improve the capital usage efficiency. As all iron and steel enterprises lack money at present, it is definitely conducive to the company to use the funds of margin in the businesses requiring full-sum funds.
For the enterprises participating in the futures market, developing a complete and efficient organization structure is the foundation for effective use of the futures instrument. Attaching importance to the development of the futures department, the system of “responsibility of chief leader” and comprehensive consideration of futures and spot profits and losses are the three “golden keys” for the enterprises’ efficient use of the futures instrument which are indispensable and widely recognized in the industry.
Guo Yanchao, consultant to Chinatex Grains and Oils, expressed similar views at the forum, saying that an industrial processing enterprise should establish the correct organizational structure. The futures department is set up mainly to place orders and lock in profits for the company instead of completing a target of earnings.
At the forum, the representatives of the 11 steel mills also hoped that the CISA and the DCE could provide the enterprises with more training opportunities. According to the sources, at present the operators at the futures departments of many domestic steel enterprises are transferred from production, procurement and other departments, lacking the knowledge about the futures instrument.
