Steel enterprises use iron ore basis trade to reduce costs

SMM Network News: in recent years, iron ore base pricing has gradually become the main way of trade. The reporter learned that CITIC Pacific Steel Trading Co., Ltd. (hereinafter referred to as Pacific Steel Trade) has gradually realized the risk management effect of basis pricing through continuous learning. This year, it cooperated with CITIC Metals Co., Ltd. (hereinafter referred to as CITIC Metals) to try to carry out basis trade.

It is understood that Citic Metals earlier began to use SGX iron ore swaps and DCE iron ore futures to lock in profits and avoid risks, can provide a variety of comprehensive management services to end customers, and is one of the first traders in the industry to implement spread prices. As a traditional enterprise, Taifu Steel Trade is relatively conservative in accepting derivative pricing, but under the background of strong iron ore price, the company obviously feels that the fixed pricing method has its drawbacks. As a large production enterprise, it has little ability to influence the price of raw materials, so it can only passively accept the iron ore price and has no bargaining power. Therefore, in order to have the space to choose the price, enterprises gradually realize the advantages of basis pricing and begin to put it into practice.

Wu Gang, deputy general manager of CITIC Futures, told Futures Daily that Pacific Steel Trade does not directly participate in futures trading for the time being. Citic Metal has been avoiding the risk of price fluctuations through derivatives, and this time it is transferring the price risk through the futures market, so it is the buyer's price. In the link of determining the basis, the two sides are mainly considered according to two models: the first is the direct method, that is, it is determined according to the basis situation of the market at that time; the second is the valuation method, that is, according to the trend of the historical basis, and combined with the current trend to judge and estimate. Compared with the first method, the judgment based on the historical basis trend is more reliable and reduces the uncertainty of subjective judgment. However, it is difficult to judge according to the historical basis to achieve the satisfaction of both sides, so the two sides still discuss the basis according to the market situation at that time.

Wu Gang further introduced that the project selected two contracts between the two sides in late January 2020, totaling 40, 000 tons of PB blocks and 20, 000 tons of Newman blocks. Among them, the PB block basis price is I20050.0188 yuan / ton (basis difference), Pacific Steel Trade points 20,000 tons 14 and 29 days after the signing of the contract, respectively, and the point price is 591.5 yuan / ton and 641 yuan / ton respectively; Newman block basis pricing is I2005203yuan / ton (basis difference), Pacific Steel Trade points price 24 days after the signing of the contract, the point price is 623 yuan / ton. Compared with the normal trade mode, the two base trades have achieved the effect of reducing costs, in which the purchase cost of PB block is 779.5 yuan / ton and 829 yuan / ton, which is lower than the spot price of 829 yuan / ton and 848 yuan / ton, and also lower than the forward price of US dollar 782 yuan / ton and 836.5 yuan / ton. The purchase cost of Newman block is 826 yuan / ton, which is lower than the spot price of 838 yuan / ton and the forward price of 844.68 yuan / ton of US dollars. for the buyer, the purchase cost is 826 yuan / ton, which is lower than the spot price of 838 yuan / ton and the forward price of 844.68 yuan / ton. As for the seller who has sold the corresponding quantity of I2005 contract hedging after the signing of the contract, the sales price is locked in advance, the profit is stabilized, and the purpose of steady operation of the enterprise is realized.

Through data analysis, the seller made a profit of 3.09 million yuan on the futures side, a loss of 573600 yuan on the spot side (the point selling price is 573600 yuan lower than the dollar selling price of the day), and a comprehensive profit of 2.5164 million yuan; the buyer did not participate in the futures, and the profit on the spot side was 573600 yuan. The current comprehensive profit is 573600 yuan.

The seller's sales price on the spot side also fell as the market fell, but as the sales price has been locked in the futures market ahead of time, the profit has finally been locked and increased. On the other hand, the purchase price of the buyer on the spot side is lower than that of spot port procurement and US dollar forward procurement, which achieves the purpose of reducing procurement costs. " Wu Gang said that sellers lock in profits ahead of time through futures selling hedging, while buyers reduce procurement costs through basis trade. Especially during the epidemic period, the iron ore price fluctuated widely, the seller stabilized the profit and spot operation by selling value, and the buyer got the right to choose low-price resources through pricing.

Through this project, Wu Gang believes that in the context of large changes in the raw material market, the basis price trade gives iron and steel enterprises a great choice. In addition, if the buyer can also sell and preserve value to a certain extent, the enterprise will be more proactive and the effect will be more obvious when it comes to the falling market after the point price. Similarly, the basis trade also has its difficulties, that is, the recognition of the basis between the buyer and the seller, which requires happy partners to run in with each other, because there is no particularly clear law of the basis change.

In the view of Liu Jie, a participant in this basis project of CITIC Futures, CITIC Metals and Pacific Steel Trade are both well-known state-owned enterprises in the industry, and this basis trading will serve as a model for the industry.

The reporter learned that Citic Metals and Pacific Steel Trade are iron ore trading partners, and the two sides have been actively exploring new trade models to achieve stable returns. Liu Jie said that the basis trading has a high degree of process characteristics, for both buyers and sellers, the most important thing is the choice of the basis, if they choose the appropriate basis when hedging, they can achieve a win-win situation. After participating in the basis project organized by CITIC in 2017, Citic Metal has continuously improved the terms and implementation of the basis contract, and has completed the company's standardization process, and the two sides have a good consensus on the main terms of the contract. "Futures trading in large trading houses has become the main formation mechanism of iron ore prices to a certain extent, and it is hoped that the exchange will actively promote more measures to make the basis more transparent, so as to make the basis trading more active." Liu Jie said.

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