Since last year, the prices of commodities have fluctuated sharply, and the prices of some varieties have skyrocketed and plummeted, which has brought risks to the production and operation of industrial chain enterprises. In particular, the price fluctuation of copper, which has both metal and commodity properties, is affected not only by production costs and the relationship between supply and demand, but also by financial and other factors, which makes the fluctuation of copper price more severe than that of other varieties. Affected by the epidemic, Shanghai copper fell to an 11-year low of 35300 yuan per ton in March in 2020, a drop of more than 30 per cent, and then copper prices rebounded from lows to a rising market, fluctuating more than 70 per cent for the whole year. Since the beginning of this year, Shanghai copper has remained strong, rising to 78270 yuan per ton at one point, the highest level since May 2006 and up more than 120% from the low in March 2020. Subsequently, since May this year, due to multiple factors such as policy adjustment, copper has fallen back in stages. At present, copper in Shanghai has been consolidated around 69000 yuan / ton.
The huge fluctuation of upstream raw material price magnifies the price risk of entity enterprises, the demand for enterprise risk management is increasing rapidly, and more and more enterprises realize the importance of hedging, especially some enterprises in the middle and lower reaches which use commodities as raw materials. In the process of this round of price fluctuations, there has been a marked increase in the number of enterprises using futures markets and derivatives tools for hedging, while some enterprises that can combine futures and spot markets and use hedging tools flexibly have not only successfully "ironed" the risk of rising prices of raw materials, ensured stable production and operation, but also successfully locked in profits.
Back-to-back hedging strategy
Help enterprises to operate steadily
Essex ancient river electromagnetic wire (Suzhou) Co., Ltd. (hereinafter referred to as "Essex ancient river Suzhou") is such an enterprise. A few days ago, Li Dong, the company's senior purchasing manager, shared the "secret" of the company's stable production and operation under the sharp fluctuations in copper prices.
Essex River (Essex Furukawa) is the world's leading manufacturer and distributor of electromagnetic wires, with factories in seven countries and across three continents. It is an electromagnetic wire manufacturer that can provide high-quality products and achieve rapid delivery around the world. Essex River Suzhou is a subsidiary of Essex River in China.
The main raw materials of electromagnetic wire are copper and PVC, of which copper accounts for more than 90% of its production cost. The huge fluctuation of copper price will obviously have a great impact on the operation of Essex River Suzhou. But Li Dong told reporters that the company was not affected by the large fluctuations in this round of copper. Talking about the magic weapon of its stable production and operation, Li Dong attributed it to the business philosophy of "only earning processing fees, not earning copper price difference" and the "back-to-back" hedging strategy.
"We don't want to profit from fluctuations in copper prices, but we want to make profits through products and services." Li Dong said. Under the guidance of this concept, Suzhou has adopted the hedging policy formulated by the headquarters since its inception, and has made corresponding improvements and optimization according to the specific situation in China, in order to control the volatile commodity price risk, stabilize production and operation, and focus more energy on improving its competitiveness through product and technology research and development as well as service improvement.
At the same time, in the specific operation strategy, Essex River Suzhou locks the risk of raw material price fluctuations through the "back-to-back" operation strategy. "when our sales department is in contact with customers, we will share our hedging strategy with our customers, who propose the target price, and we help them lock in the price." He said. When assisting customers in price locking, the hedging department of Essex River Suzhou is done through spot locking (with upstream suppliers, accounting for the majority of the hedging volume) or futures locking (through the Shanghai Futures Exchange and London Metal Exchange). If a small number of customers are unable to promise price locking or other anomalies, Suzhou will also hedge through the copper futures of the Shanghai Futures Exchange.
Tang Yun, deputy general manager of East Asia Futures, also said that price locking has become part of the day-to-day management model for the world's top companies such as Essex River to maintain a leading position in the market. In this way, enterprises can have stable operating capacity, provide services and support for strategic customers, and accelerate the progress of research and development.
It is based on this concept and operational strategy that Suzhou has successfully resisted the risk of large price fluctuations and successfully hedged the risk by using derivatives tools even if there are unexpected circumstances such as contract changes. "in early February last year, due to the impact of the epidemic, copper prices fell sharply, logistics stagnated, production could not be continued, and individual customers made requests to postpone delivery or cancel orders." Li Dong recalled that in the face of this emergency, after discussion, the company put forward a suggestion for customers to postpone delivery and do hedging. After the client agreed, they made selling hedging in the futures market and closed their positions at the right price. Production and delivery to customers successfully avoided the greater possible risks caused by future copper price fluctuations and inventory changes.
"after this round of large fluctuations in copper prices, we have a deeper understanding that the use of futures markets, financial derivatives tools for hedging is a very effective way to protect not only ourselves, but also our customers and suppliers." Li Dong said.
Derivative escort industry enterprises gradually become a consensus
In order to cope with the fluctuation of commodity prices, more and more enterprises regard derivatives as a sharp weapon for stable operation, and begin to use futures tools to deal with risks. through hedging and other ways to reduce the adverse impact of raw material price fluctuations on the company's production and operation, and stabilize production and operation.
In April this year, Ningde Times issued an announcement saying that in order to reduce the adverse impact of sharp fluctuations in raw material prices related to production and operation on the company's operations, Ningde Times plans to carry out commodity hedging business to effectively manage the risk of large price fluctuations and enhance the stability and sustainability of the company's operating performance. According to the company's operation and business demand, Ningde Times intends to hedge some of the metal raw materials needed in the next five years, and the maximum amount of margin required for the above business shall not exceed RMB 10 billion yuan. Trading for nickel, aluminum, copper and other metals options, futures, forwards and other derivatives contracts.
On May 13, Jingyi shares said in response to questions from investors that the company's copper processing and commissioned processing business mainly adopted the production and operation model of "fixed production by sales", and adopted the pricing model of "electrolytic copper price + agreed processing fee" in product pricing. The pricing method between the company and customers and the "back-to-back" management operation can transfer the risk of electrolytic copper price fluctuation to the downstream enterprises. For example, rapid changes in copper prices in the short term have a greater impact on the company's operating costs. In order to prevent and avoid the adverse impact of large fluctuations in the price of raw materials (electrolytic copper) on the production and operation of the company, the company timely carried out the hedging business of electrolytic copper.
On June 23, Beijing Kerry announced that the main raw materials (such as copper) of the company's main products, such as medium and low voltage switches and distribution transformers, account for a high proportion of production costs, and if it is purchased solely in the traditional spot market, the risk of price fluctuations will not be controlled, which will bring greater risks to the company's production and operation, and the company's sustainable profitability will also be greatly challenged. In order to avoid the uncertain risks caused by the sharp fluctuations in copper prices to the company's production and operation, control the company's production costs, and ensure the healthy and stable growth of the company's main business, the company examined and passed the "Bill on developing Commodity Futures hedging Business". It is agreed that the company should use its own funds not more than 50 million yuan to carry out commodity futures hedging business, and the hedging quantity shall not exceed 100% of the quantity actually purchased.
According to Oriental Fortune Choice data, in the first half of this year, about 400 listed companies issued more than 700 hedging announcements, up from more than 400 last year. The atmosphere of listed companies participating in hedging is getting stronger and stronger.
Multiple Innovation helps Enterprise risk Management
Although the number of enterprises using hedging tools directly begins to increase, there are still some enterprises, especially small and medium-sized downstream enterprises, that do not participate in hedging. Tang Yun pointed out that this kind of enterprises are mainly due to the lack of professionals and are not familiar with the model of basis trading, which also causes mid-stream processing enterprises to be unable to pass on the risk of price fluctuations and can only keep the risk to themselves.
In view of the above situation, in recent years, risk management subsidiaries of futures companies and large trading enterprises have also made full use of their professional advantages to innovate new business models. Through new models such as basis arbitrage, personalized options, weighted trade, spot swap trading and other new models, to provide more refined risk management services for industrial enterprises. Through this model, we can achieve risk entry enterprises do not enter the market, and help enterprises to carry out price risk management.
According to media reports, two years ago, a real estate developer in Guangxi signed an agreement with steel trading company Hot Union Group to "lock" steel prices for the next three years in advance. This also makes this real estate developer can still get spot at the price of 3800 yuan per ton when the price of rebar once soared to more than 6000 yuan per ton. With the help of futures tools, Hot Union Group has provided real estate developers with forward quotations for steel until the end of 2022, enabling enterprises to avoid the risk of rising raw material prices.
In addition, in January 2020, Shanghai Urban Construction, as a general contractor, won the bid for the southern extension of Hangzhou Times Avenue. In order to avoid the risk of price fluctuations of the main raw materials rebar and lock in reasonable profits, Shanghai Urban Construction handed over the task of locking the price of raw materials to Dongzheng run he (risk management subsidiary). According to the specific needs of urban construction, Dongzheng Runhe has formulated the corresponding raw material supply and price locking service plan. After the official opening of the project, Shanghai Urban Construction will purchase relatively stable prices from Dongzheng run he according to the specifications, models and scale of rebar required each month in the winning contract, while Dongzheng run he will carry out corresponding hedging operations in the futures market for spot sales.
The innovation of these business models and management tools provides more ways and methods for enterprises to control the risk of price volatility, and is expected to attract more enterprises to make good use of the futures market to reduce risk.
Optimize the concept of hedging
Escort the steady development of the industrial chain
In recent years, the Shanghai Futures Exchange continues to carry out investor education has also played a significant effect, its organization of a number of online and offline training, so that more enterprises understand the concept and methods of futures hedging. "there are constant door-to-door requests for internal training in enterprise hedging." Tang Yun said. However, he also pointed out that at present, the operation mode and thinking of hedging of some enterprises have not been completely changed, just want to avoid the risk of this market, and have not established a perfect hedging risk management system. In addition, enterprises do not know enough about the current futures market policies and derivatives tools, and it still takes time to accumulate.
In his view, the upstream and downstream enterprises of the industrial chain are closely related, and the concept of good hedging should be extended to the whole industrial chain, so that the upstream, middle and downstream enterprises can avoid the risk of raw material price fluctuations, so as to promote the stable operation of the whole industrial chain.
Li Dong also said that some of their customers did not hedge with their downstream customers and could not transfer the risk after the copper price rose. "We are also advising our customers to hedge against raw materials, hoping that more and more enterprises can use hedging to ensure the stability of the entire supply chain and achieve a virtuous circle of the market."
Industry insiders also pointed out that with the increase of commodity price volatility, if enterprises can not effectively control costs, any small fluctuations may lead to the survival of enterprises. Controlling risks and locking profits are very important for enterprises to achieve long-term, stable and sustainable development. Entity enterprises should take risk control as the bottom line for enterprise survival and establish correct goals and concepts of risk management. establish a systematic hedging risk management system and system, and embed it into the whole process of the enterprise, in order to make good use of futures tools to deal with possible market volatility risks. To achieve sound operation, bigger and stronger.
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