The ups and downs of steel prices are eager to solve the plight of steel traders.

Since the beginning of this year, affected by the epidemic and national macro policies, steel prices have fluctuated, making many steel trading enterprises unable to extricate themselves from debt. Especially since November, the loss of steel trading has intensified, the systemic crisis is gradually approaching, and steel trading seems to have reached the brink of a cliff. In the face of such a situation, how should future steel traders deal with and resolve it?

Looking back on history as a mirror to know the rise and fall

From the 1990s to 2000, this was the start-up stage of the steel trade industry, and many steel traders went to sea to operate steel products.

From 2000 to 2005, the steel trade industry entered a golden era of development. Steel traders can make money as long as they have goods in their hands, and they can sell steel even if they are "fools".

From 2006 to 2008, although the steel market has its ups and downs, steel traders can still make a profit as long as they grasp the market. Although it encountered the global financial crisis in 2008, driven by the state investment of 4 trillion yuan, the domestic steel market is still running smoothly, coupled with certain subsidies given by steel mills, steel traders still have a certain profit space.

From 2011 to 2014, steel trading enterprises really entered a period of small profits, making little money, difficult to make money, or even losses, which made steel trading enterprises seek a way out through transformation, while some steel trading companies closed down and even ran away due to improper transformation.

From 2014 to 2016, the "long March for Steel Trade" began. After the outbreak of systemic risk, many businesses quit. During the same period, the rise of e-commerce platform, the phenomenon of robbing resources and customers is not uncommon, the steel traders left behind can only become more down-to-earth and diligent in confusion, and begin to think about where the future lies.

From 2016 to 2020, supply-side reform, environmental protection measures and other factors pushed steel prices up all the way, investment pulled to protect effective demand, well-known steel e-commerce listed to promote the return of capital to rationality, changes in the external environment gave steel traders a chance to rise again. Many steel traders focus on services and reduce costs and increase efficiency, laying the foundation for further expansion and strength.

From 2021 to the future, the steel trade industry will usher in the Spring and Autumn period. The steel trade is a trillion-dollar market, and the trading scale of construction steel alone has reached 5 trillion. The steel traders left behind in the future must have core competitiveness and keep pace with the times.

The reporter found that the current steel trade has the following business models.

The steel mill agency mode is the traditional way for the development of steel trading enterprises. starting from the fact that the steel industry is in short supply, obtaining steel mill agents is not only the main way to make profits, but also the embodiment of the company's strength. Almost all large companies start to grow from acting as steel mills. The advantage of the steel mill agency model is that the resources are stable and the continuous supply can be guaranteed, which is favorable for opening up downstream customers and affecting the market; the disadvantage is that the ordering policy is unilaterally designated by the steel mill, and the agent has no right to speak, so it is in a passive position.

Huang Kun, general manager of Shanghai Kaijing Color Steel Co., Ltd., told reporters that the period from 2003 to 2005 was a period of great expansion of production capacity in the iron and steel industry, which was also one of the root causes of the collapse in steel prices in 2005. As a result, steel mills have entered a strong period, and their policies on agents have become more and more stringent, resulting in great changes in agents since 2007. Some large companies withdraw from the steel mill agreement households and enter the spot field to compete with short-term futures resources, which aggravates the degree of competition in the industry.

Bind terminal mode. There are many enterprises in the steel trade industry, and some of them specialize in serving large terminal enterprises, signing tripartite agreements to maintain continuous business operations. This model often has a variety of bundled cooperation conditions in terms of capital and business. For example, Hubei Huitong to Chery Automobile, Hangzhou Xintai to the southeast of Zhejiang and so on.

"the advantage of the binding terminal model is that large customers have stable and sustained demand, which can ensure steady growth in sales and profits; the disadvantage is that a single customer accounts for a large proportion of the company's business, and once there is a change in the customer side, it will have a huge impact on the company's business, resulting in a sudden decrease in sales and profits." A steel trader in East China told reporters.

The reporter found that the combination of future and present mode is also more common in the steel trade circle, the prerequisite of this model is that traders have been holding a large number of spot, the main varieties are hot coil, rebar, wire rod. "when a large number of resources in the spot market cannot meet the company's sales requirements, customers will hedge in the futures market. The advantage of this approach is to lock in risks, avoid unpredictable situations, and maintain the continuity of daily business; the disadvantage is that it is often shipped ahead of time when prices rise, resulting in excess profit losses caused by market changes. " Huang Kun said.

Go through several joys and sorrows

Since the beginning of this year, the trend of the rebar market can be divided into three stages: the first stage is from the beginning of the year to May 12, when the main contract rose from 4300 yuan / ton to 6200 yuan / ton. the main logic is the pull of steel demand by the global economic recovery, especially the significant increase in manufacturing demand and exports. During this period, the price spread shows a trend of convergence, including the current basis spread and intertemporal spread are at a low level, futures show a rhythmic upsurge, and the profit per ton of steel is up to 1400 yuan.

The second stage is from May 13 to October 11, when the main contract peaked and fell on May 12, fluctuating in the range of 4800mur5800 yuan / ton. The market transaction logic is a game between supply-side production reduction and demand-side decline. During this period, the futures are stronger than the spot, the distant month is stronger than the recent month, and the profit per ton of steel shows a V-shaped trend. From May to June, due to the increase in global crude steel production, iron ore prices were stronger than those of finished products, and the decline in finished steel prices aggravated the contraction of profits per ton of steel, and rebar profits were once at a loss. After mid-July, iron ore prices weakened due to the production reduction of domestic steel mills, the profits of steel mills turned from losses to profits, and the profits increased again to 1200 yuan / ton.

The third stage is from October 12 to now, steel prices have a high trend of decline, from 5800 yuan / ton to 4300 yuan / ton. The main logic is that peak season demand is falsified. During this period, the current price spread widens, the futures discount is spot, and the distant month is discounted in recent months. The profit per ton of steel tends to decline, and due to the fall in the price of raw materials, the profit per ton of steel has recently been repaired to 500 yuan.

Steel companies make considerable profits, on the contrary, steel traders appear to be somewhat sad. According to Huang Kun, from January to April this year, most steel traders in East China operated capital preservation; from May to June, the gross profit per ton of steel in East China was about 300 yuan; from July to August, the gross profit per ton of steel was about 80 yuan; from September to November, steel traders in East China suffered losses of varying degrees, with losses of 300 yuan per ton of steel and 1300 yuan per ton of steel; in December, the loss per ton of steel narrowed to about 200 yuan.

Buy up do not buy down, steel traders are also the same. In mid-April this year, with the strengthening of environmental protection policies and the transformation of steel companies to survive, a rare scene occurred. Some steel mills stop production, billets are in emergency, and steel traders ask for goods in a low profile.

Mr. Li, a steel trader in Tangshan, told reporters that he obviously felt the strength of the other side when purchasing from steel mills in April. For the billet with the most shortage and the biggest price increase in April, the company has thousands of tons of inventory, but it is basically locked up. Even after a period of rise, billet prices are not cheap, but still accept everything downstream.

When interviewing other steel traders, the reporter learned that many steel traders have made some gains in this market since last year. "since the fourth quarter of last year, excluding capital costs and operating expenses, the rate of return is about 20%." Mr. Zheng, a steel trader in Zhengzhou, said that this is not high in the industry, and the costs are mainly concentrated in capital and labor, as well as warehousing, transportation, rent and so on. However, the company outsourced warehousing and transportation.

More than ten days after May Day, most steel varieties rose sharply and set a new historical record, with an average price of more than 6600 yuan per ton of steel for eight major varieties. On May 12, the State Council stressed the need to deal with the excessive rise in commodity prices and its associated effects. This signal immediately aroused a reaction in the market. Steel prices began to decline sharply, and the average prices of various varieties in the futures and spot markets fell by about 1,000 yuan. Basically fell back to the starting point before the surge. During the interview, a person from the steel mill told the reporter that compared with the daily shipments of nearly 10,000 tons during the price rise, shipments have dropped significantly recently, with a minimum of only 200 to 300 tons.

Steel traders did not wait for the "gold nine silver ten", steel prices began to fall rapidly. Huang Kun told reporters that the black futures market fell sharply since late October, and then there was no expected overfall rebound, but further downside. At the end of October and the beginning of November, some anti-hedging transactions were sold out of 400 RMB700 / ton. More than a dozen traders in the Tangshan market have already burst their positions, and the situation is similar in other distribution centers. Many forward spot delivery times are concentrated between November 15 and November 30. If the spread continues to widen before November 15, then most futures companies and traders will face the risk of huge losses or even burst positions, when the interests of the held-up parties are agreed. If the futures market can not be pulled up, then it can only be spot price reduction to promote the basis convergence.

An industry source told reporters that steel traders made a lot of money in the first half of this year, benefiting from policy dividends. Since October, some traders will lose some of the goods they took at high prices in the early stage, but they should make a little profit if they combine their annual profits. "at present, steel traders are generally faced with financing difficulties, high capital costs, settlement prices are not in place, upside down losses. Terminal manufacturers have a big say, there are requirements to reduce costs every year, raw materials rise, resulting in their heavy task of reducing costs and great pressure on rebates. " Huang Kun said.

Exploring forward transactions is risky

The reporter learned in the interview that at present, there are two main ways for steel traders and steel mills to take goods: one is to lock the price directly, or lock the price for short, negotiate the price, sign a contract, and after the steel trader has paid for the goods, the steel mill begins to arrange production. The general delivery period is about 45 days to 65 days, which is not much in large state-owned steel mills. Another is the current more post-settlement model, steel mills give a contract guidance price, generally higher than the spot price of the day's iron and steel market 600mur1000 yuan / ton, allowing steel traders to make payments.

Huang Kun told reporters, for example, that a steel factory in Northeast China accepted orders from steel traders from the 15th to 20th of each month. On the 16th of that month, 50 days later, the steel mill selected the spot market average price within half a month as the final settlement price, which is generally on the high side. If there is a sharp drop, the steel mill will recover the payment, which will be pressed for 3 to 6 months. For example, the lowest price of 1250 × C cold rolling in Shanghai market on October 16th is 6330 yuan / ton, the post-settlement price given by Benxi Iron and Steel Company is 6400 yuan / ton, the contract price of traders in August is about 6800 yuan / ton, and the steel mills catch up with 400 yuan / ton per ton. The risk of post-settlement model is that the prices of traders are completely passive, and the settlement prices of steel mills are generally on the high side. In many cases, after settlement, the market begins to fall. For example, on October 16, 2021, after the settlement, the price of cold rolling fell all the way to 5330 yuan per ton. taking into account the interest on funds for three months, steel traders will lose about 1220 yuan per ton if they are not sold out. Therefore, when steel traders transfer money to steel mills, the payment price stipulated by steel mills is too high, the occupation of funds is serious, the settlement price is not in place, upside down is the norm.

The reporter found that at present, many well-capitalized companies in the steel trade circle choose the forward trading mode. Huang Kun explained that the iron and steel futures prices set by some well-capitalized companies are much lower than the current spot prices, and they only need to pay a deposit of 15% and 20%. Many steel traders see that the forward prices are relatively low and have a fluke mentality. Actively participate in it, looking forward to a big rise in the future. After October 2021, more traders participated because there was no market in the spot price of steel at that time, the ordering cost of steel mills was too high, and the forward price was much lower, which was an ordering channel, resulting in a collapse that lasted for more than two months. these companies repeatedly cut the price of far-moon steel, resulting in heavy losses for steel traders.

The reporter found that after the steel suffered a precipice drop on October 12 this year, the rebar 2201 contract reached a minimum of 4026 yuan / ton on November 10 and a maximum of 5870 yuan / ton on October 11. Many companies with forward futures contracts began to take measures to notify traders to add contract margin if they did not deliver, and traders who could not add margin immediately confiscated margin and steel futures that had not yet been produced.

A steel trader in East China told reporters that about 40% of domestic steel traders are using forward trading, and when steel prices continue to fall, their losses are greater. Many people will question what is forward trading. What is the difference between futures and forwards?

People in the industry say bluntly that the difference between futures and forwards lies in: first, the trading venues are different. Futures contracts are traded on the exchange and are open, while forward contracts are traded over the counter. Second, the standardization of the contract is different. A futures contract is a standardized contract. In addition to the price, there are unified provisions on the variety, specification, quality, place of delivery, settlement method and other contents of the contract. All the matters of the forward contract have to be decided through negotiation between the two parties. The negotiation is complicated, but the adaptability is strong. Third, the transaction risk is different. The settlement of futures contracts through a special clearing company, which is independent of the buyer and seller of the third party, investors do not have to be responsible for each other, there is no credit risk, but only the risk of price changes. The forward contract must expire before delivery in kind, and the payment has long been agreed not to change, so there is no price risk, and its risk comes from whether the other party will really come to perform the contract and whether he will be able to pay after delivery, that is, there is credit risk. Fourth, the margin system is different. Both parties to the futures contract transaction pay the margin according to the prescribed proportion, while the forward contract has credit risk because it is not standardized. Fifth, the responsibility for performing the contract is different. The futures contract has a hedging mechanism, large room for manoeuvre in performance, the proportion of physical delivery is very low, and the trading price is limited by the minimum price change unit and the daily trading amplitude. If a forward contract is to be cancelled midway, both parties must agree that it is impossible to cancel the contract with any unilateral wish. in fact, the proportion of delivery is very high.

Looking forward to the combination of present and present to contribute to development

Compared with spot trade, futures trading has the advantages of low capital occupation, good liquidity, transparent rules, low default rate and so on. However, in terms of practical application effect, many steel-related spot trading enterprises have encountered a lot of practical problems in the process of trying futures hedging. Most enterprises first involved in the futures market operate futures according to the traditional theory of "the same month but the opposite direction" of hedging, but why can't they achieve better hedging results?

Qiu Yihong, a researcher in the black department of Haitong Futures, told reporters that from the point of view of the risk exposure faced by steel traders, trading enterprises as an intermediate link of spot circulation, most of the purchasing and selling ends of enterprises will follow the trend of the spot market. with the increasing development of the futures market, the trend of the futures market often interferes with spot prices, magnifying the risk of price fluctuations faced by traders. The risk exposure of enterprises mainly comes from the part that has no hedging in the face of price fluctuations. For traders and enterprises, the ultimate risk will come from the risk of rising prices faced by enterprises purchasing steel, the risk of falling prices after purchasing steel products, and the risk of falling prices faced by standing inventory. Therefore, strictly speaking, the exposure of trader enterprises is constantly changing. in order to be more in line with the actual situation of the enterprise, it is necessary to calculate the exposure frequently according to procurement, sales and inventory, which may also lead to a change in the direction of hedging in stages.

"in the actual hedging process, some steel and trading enterprises reflect that in the process of combining futures and cash, they have also encountered problems in terms of market matching. For example, at present, black futures contracts such as rebar, coking coal and coke are not continuous active contracts, and the main contracts often start to change positions more than a month in advance, while most of the main contracts after the move are four months later, and the trend logic is complete futures thinking. The recent trend of the main contracts at this time can not cover the short-term fluctuations of the spot, and different cycles often mean that the hedging effect is easy to go in the opposite direction. It has brought certain obstacles to the expansion of the scale of continuous hedging and the combination of futures and cash. " Chen Jie, senior researcher of Jintai Futures, said.

Qiu Yihong believes that from the perspective of the process of enterprises participating in hedging, because traders are in a critical link, in addition to their basic understanding and understanding of the futures and spot markets, every link of each process has its own importance. first, to determine the direction and cycle of hedging, hedging is different from short-term speculation and does not pay too much attention to daily market fluctuations. Combined with enterprise positioning, risk exposure, cyclical law of price operation and supply and demand situation, the comprehensive consideration should be based on the long-term trend of the market. In general, the hedging activities of traders and enterprises can be unified as the risk management activities of inventory, but if the enterprise inventory is low, or the downstream order has locked in the price, it is also necessary to hedge the risk through buying hedging. The second is to determine the hedging ratio and the number of hands, which needs to be flexibly adjusted in the light of the enterprise's risk exposure, the supply and demand situation and inventory risk estimation, as well as the planning of available funds, so as to ensure that it can not only meet the optimization of risk exposure, but also ensure that it will not be passive in the futures market. In addition, as the daily production and marketing of trading enterprises may not be balanced, there are usually differences in daily exposure, so hedging positions need to be adjusted on a regular basis. The third is to choose a hedging contract, in which spot delivery, liquidity and month change should be considered. In addition, because the operation logic of futures price is not unique, there is often a game between reality and expectation, or even logic switching, and there are often differences in performance in the near and far months. Therefore, when choosing hedging contracts, it is also very important to analyze the strength of the futures market and the operation of futures contracts, and the amount of risk exposure can be flexibly dispersed to different futures contracts according to the situation of different stages. The fourth is to estimate the occupation of funds in hedging, combined with the volatility of the futures market, fully reserve part of the funds, as far as possible to avoid the interference of abnormal market fluctuations to the hedging process. Fifth, in terms of the choice of hedging time, we can judge whether it is the best time for hedging according to the level of purchase and product inventory, as well as the degree of sales smoothness or the cycle of off-peak season of product sales. according to the seasonal law of steel price or whether there is systemic risk, hedging can also be estimated or selected to keep a certain margin of safety to intervene in hedging according to the seasonal law of steel price or whether there is systemic risk. Combined with the basis analysis, build the position within the appropriate basis range, avoid the basis risk from the probability, ensure the coverage performance of the risk exposure, the basis risk is more common, so the analysis of the basis risk is more important. In addition, in the way of building positions, we can not only build positions at a single price at one time, but also build positions in batches in stages, reduce risks through different points, and retain some opportunities to replenish positions.

Chen Jie reminded that in terms of transaction details, the hedging ratio can be flexibly adjusted according to the enterprise's spot profits and inventory situation. In the stage of low spot profits and low inventory management strategy, futures hedging positions can be appropriately reduced and the occupation of hedging funds can be reduced. By the same token, in the stage of relatively rich spot profits and clear market trends, we can appropriately increase the number of hedging and open positions and lock in part of the spot profits in advance. In principle, the maximum opening volume of a single month contract can not exceed the monthly spot trade volume (output). At the same time, in view of short-term market fluctuations, hedging funds should be reasonably arranged and part of the margin should be reserved in advance to deal with the extreme market. For the standing periodic hedging position, we should make a good market plan according to the historical basis and the change of the price trend of the period and spot. When the extreme market and the basis are in the right position, we can complete the conversion of the period ahead of time and stop profit and loss.

In the view of the above-mentioned people, in the process of hedging, the analysis of the market is the basis, and it is necessary to study and judge the market from multiple dimensions, such as enterprise situation, market supply and demand, national policy, international environment, speculative sentiment, technical analysis, and so on. This requires solid analysis and research capabilities. But the more important point still lies in the concept of the enterprise, the enterprise must achieve the combination of the future and the present, run through the concept of risk aversion, and not be disturbed by the speculative idea in order to make a profit on either side.