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Tangshan billet forward spot thunder involves a value of more than 600 million! The sales model with local characteristics has become the cause of thunderstorm.
Jul 15,2020 08:10CST
translation
Source:Futures daily
The content below was translated by Tencent automatically for reference.

SMM Network News: in recent days, Tangshan area is not peaceful. After the magnitude 5.1 earthquake on July 12, the steel trade circle in Tangshan, the "steel capital" at the weekend, reappeared the long-term spot thunderstorm of the billet.

"the Tangshan forward billet default event originated from the fact that the two traders shorted the billet in the early stage and did not buy and hedge the billet in time, resulting in serious losses after the billet price soared, the capital chain was broken, and the contract could not be fulfilled. The total amount of billet involved is about 200000 tons, and more than 30 buyers and traders are involved." Qiu Yuecheng, director of black research at Everbright Futures Research Institute, said.

It is understood that driven by the pick-up in demand and rising prices of finished materials, the price of Tangshan billet has risen steadily since April. Recently, the ex-factory price of carbon billet in Tangshan is 3400 yuan / ton, up about 400 yuan / ton from the beginning of April.

Qiu Yuecheng believes that there are two main reasons for this long-term billet default: first, after the billet spot price rose sharply, the selling traders suffered serious losses; second, the poor management of the selling traders led to the breaking of the capital chain.

An industry source, who spoke on condition of anonymity, revealed some details of the thunderstorm to the reporter: the incident began because three larger steel traders in Tangshan emptied about 18-200000 tons of billet forward stock, and it is estimated that the empty unit price is about 3230article 3240 yuan / ton, and the agreed delivery date is July 10th. With the recent macro positive push black futures continue to rise, billet spot and forward spot prices also rise. As of last Friday, if the seller buys billet delivery from the market, it will lose about 150 yuan per ton, and the price difference loss is estimated to be at least 30 million. As for the margin, according to the current market price of 3400 yuan / ton, 15% of the deposit is collected, it is estimated that 200000 tons of goods, the value of the goods is 680 million yuan, the margin damage is about 100 million. At present, Tangshan mainstream warehousing billet inventory of 307300 tons, this default event involves a large number of traders, and the traders model are simultaneous upstream and downstream contracts, so the impact of this incident on the traders involved can be seen.

What is billet forward spot?

According to people in the industry, both Tangshan billet and strip have a long-term spot sales model, which belongs to local characteristics and emerged in 2017. Local steel traders generally call it billet "empty order" business, and the trade model is for both parties to sign a purchase and sales contract, the contract indicates the commodity name, specification, quantity, unit price, amount, quality standard, terms and time limit for quality responsibility of the supplier, packaging standard, supply and recovery of packaging, reasonable wear and tear standard and calculation method, mode of delivery and cost bearing, payment and settlement method, liability for breach of contract and so on. After signing the contract, the buyer pays 15% of the total value of the goods to the seller as a deposit, and the seller delivers the billet to the buyer on the due date.

During the interview, the reporter found that there are three reasons why this model is popular: first, compared with the spot price, forward trade will float dozens of yuan under the current market price, which can bring considerable profits for large traders. Second, the adoption of the margin system will greatly reduce the capital occupation of enterprises. For example, for billets of 3400 yuan / ton, if 1000 tons are purchased in the spot market, it will actually cost 340000 yuan, but if purchased through a forward contract, it will only cost 51000 yuan. Third, because the forward trade locks the selling price in advance, but before the agreed delivery date, the seller can choose to buy billet spot at a low price, which provides more trading opportunities for enterprises and has a greater chance of making a profit.

It is reported that in the actual transaction, the main participants in the billet forward trade are steel traders, which are basically short sold by large traders, and some small traders earn the price difference by reselling contracts, which is a false offer. Although there is a contract, it is not settled on the spot in the end, but only the difference between the payment and the order price is settled. Therefore, it is difficult to estimate the forward trade volume of local billet in Tangshan, the local transaction is more popular, and there are many market participants.

What is the impact of this default on the local market?

It is reported that the daily delivery volume of local billet in Tangshan is 50-70,000 tons, and the average monthly delivery volume in 2019 is 2.16 million tons, 1.8 million tons, 1.59 million tons and 1.49 million tons respectively, while the average local monthly demand from 2017 to 2019 is 1.84 million tons, 1.68 million tons and 1.8 million tons respectively. As can be seen from the above data, the actual monthly supply of billet is slightly less than the demand, but the gap between supply and demand is small. The default of 200000 tons has a limited impact on the actual supply gap in the local market.

A person from a local steel company in Tangshan told reporters that this incident was a breach of contract by three traders, which directly affected the profits and losses of enterprises that signed contracts with them. at present, spot prices on the market have not caused obvious fluctuations. But in the long run, this default will put more forward trading participants into a wait-and-see state, waiting for a solution to this event. In essence, this incident is a trade model endorsed by the enterprise's own credit, which encounters the outbreak of credit risk and has a far-reaching impact on the Tangshan billet market. Spot transactions are based on trust, and in the absence of external supervision, they can only rely on the enterprise's own credit guarantee. After this incident, the billet trade credit threshold will become higher in the future. For enterprises with small volume or insufficient credit, it is expected that it will be difficult to find buyers for billet forward trade short-selling orders, and it can be foreseen that the liquidity of spot trade in the future will decline significantly.

In the view of the above interviewees, the disadvantage of billet forward trade is the lack of platform endorsement and external supervision, relying only on a contract between enterprises as proof. Under this model, encounter a continuous rising market, the loss of billet sellers can be pushed up to an unbearable level in a short time, when the enterprise cash flow is difficult to turn around, the probability of default is greater. However, if the seller enterprise, while selling short, hedges by doing long in the futures market in the same proportion or in part to lock in the existing profits, then most of the risks of the enterprise will be transferred to the speculators in the futures market. on the other hand, the risk that the enterprise will bear is only the difference of the expansion of the basis, so that the risk can be controlled is the plan for the smooth operation and long-term development of the enterprise.

How to use futures tools for risk management in the later stage of steel trading?

Most billet traders have a large scale of capital, and the upstream signing of a long-term association with steel mills and the downstream sales of rolling mills is a "reservoir" of the steel market and a natural risk, so, when the billet long-term trade model is tested at the present stage, can traders use futures tools to avoid operational risks?

The reporter learned in the interview that in recent years, steel enterprises and steel traders have used financial derivatives tools such as futures and options to help enterprises solve the problems of high product inventory, tight supply of raw materials, and large price fluctuations. The overall awareness of risk management has been significantly improved, but the differentiation of different enterprises is also more obvious. Relatively, the enterprise risk management awareness of large enterprises and East China region is stronger than that of small and medium-sized enterprises, northern and western regions.

An industry source in Tangshan, who spoke on condition of anonymity, told reporters that when traders are optimistic about the market situation, they expect the settlement price of steel mills to rise, and they can lay out part of the main rebar in advance in the futures market, according to the operation of the enterprise. can release a certain amount of risk exposure. At this time, when steel prices rise in the spot market and purchase prices rise, there are certain gains in the futures market that can make up for hedging spot losses.

In fact, when signing sales contracts with downstream rolling mills, when bearish on the market, we can also advance the layout of the main rebar short orders corresponding to the contract in the futures disk, so as to achieve the effect of "short orders" and lock in the highest spot cost.

Qiu Yue has put forward three suggestions: first, to clarify the objectives of risk management and hedging from his own specific conditions and risk management preferences; second, to pay close attention to market changes and strengthen the analysis and grasp of the market. Third, according to their own exposure, risk management preferences and financial objectives and other factors, formulate the most suitable hedging strategy and trading plan.

With the continuous development of China's futures market and the increasing maturity of standardized financial instruments, the current combination of futures has become an important way to achieve sustainable development of the real economy. In actual operation, enterprises can make full use of futures, options and other tools to formulate hedging plans and strictly implement them, so as to achieve risk control and sound operation.

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