There is a consensus that iron and steel enterprises embrace derivatives for better profitability.

Steel companies that broke out from capacity loss, deleveraging and "double carbon" continued to improve in 2021, and the steel industry reached its best level in history by the end of November 2021. With the improvement of profits, steel companies that have experienced hardship begin to attach importance to risk control and increase investment in futures hedging.

Some people in the iron and steel industry said: "in 2021, the coverage of futures varieties that iron and steel enterprises participate in has increased significantly, and the number of enterprises that rely on the transformation of futures tools to increase efficiency has also increased significantly."

Surge in demand-- active participation of industrial customers

In 2021, in the context of global monetary easing, commodity prices rebounded sharply, and the prices of black goods were no exception. For steel mills, 2021 is not only a challenging year, but also a year of opportunities.

"the difficulties encountered in the operation of steel mills in 2021 are the problem of high cost under high steel prices, as well as large fluctuations in costs and profits, which are difficult to be well controlled; the problems of power and production restrictions brought about by the double control of energy consumption in the energy crisis in the middle of the year; and the policy at the end of the year to maintain the stability of steel prices and stabilize them, and the problem that raw fuel prices take the lead to rebound." Cai Yongzheng, director of Jiangsu Fushi data Research Institute and chief analyst of Jinmao Gangbao of Nanjing Iron and Steel Co., Ltd., told Futures Daily.

This year, the futures derivatives market has played a positive role in helping iron and steel enterprises to predict the trend, lock in procurement costs and sales profits, reduce capital occupation, ensure the quality of raw materials, improve product brand value, and improve credit status. Iron and steel enterprises use hedging to strengthen risk hedging.

The recognition of the futures market by iron and steel enterprises is also fully reflected in the degree of futures participation, and the trading volume of rebar and hot coil futures is obvious. In addition, the delivery volume of black commodity futures has also increased almost exponentially, with rebar futures delivery volume of 391800 tons in 2021, a substantial increase of about 115% over 2020, and hot-rolled coil futures delivery volume of 675600 tons, a sharp increase of about 91% over 2020.

The impact of the policy on the steel market and iron and steel enterprises in 2021 is particularly prominent. Under the background of long-term carbon peak and carbon neutralization, the dual control task of reducing crude steel production and energy consumption runs through all the time. During this period, accompanied by the air quality control measures of the heating season and the Winter Olympic Games, multiple management and control of steel enterprises are carried out simultaneously, the production restrictions of steel enterprises are relatively strict, and the elimination and replacement of backward production capacity have achieved good results. The prices of the black industry chain have been adjusted to varying degrees.

"under this background, the risk awareness of iron and steel enterprises has increased significantly, the enthusiasm to participate in the futures market has increased significantly, the demand for the application of futures derivatives has increased, and the demand for consultation and training on the use of futures for risk management has been significantly improved. the number of training and hedging programs related to the combination of futures and risk management has increased significantly." Qiu Yihong, a senior researcher in the black department of Haitong Futures, said.

In addition, from the point of view of iron and steel enterprises, iron and steel enterprises will face different characteristics of risk exposure in the process of operation and management, such as price risk, inventory risk, capital risk and so on. Iron and steel enterprises most often face the raw material purchase price and inventory impairment risk at the cost end, as well as the sales price and inventory impairment risk for the sales end, enterprise working capital turnover and other risks. On the other hand, derivatives can help enterprises operate steadily in the two dimensions of risk aversion and efficiency, reduce risks and smooth performance fluctuations through derivatives, so as to obtain stable production capacity, expand the supply capacity of enterprises, and enhance their competitive advantage. in order to provide more, more valuable and more in-depth services to its customers.

Qiu Yihong believes that compared with coking plants and mines, the advantage of iron and steel enterprises in participating in the futures market is relatively more obvious. Coal coke ore futures can be used to hedge the fluctuation of raw material costs and smooth the procurement cost curve. Steel price risks can also be managed by rebar and hot-rolled coil futures, and a closed loop of risk management from raw materials to finished products can be realized. In recent years, with the enhancement of the financial attribute of black commodities and the wide application of the combination of future and present, more and more iron and steel enterprises have strengthened the use of futures tools in their daily purchasing and sales activities, and the guiding role of futures disk has been enhanced. the price discovery function of the futures market is playing an important reference from the practical application of enterprise procurement and sales decision-making.

It is understood that the current futures trading model of customers in the iron and steel industry is more mature and can effectively control risks through the combination of futures and cash transactions. Under the guidance of futures companies, after years of exploration, industrial customers have gradually formed a futures trading model suitable for their main business, under the premise of following the basic principles of hedging, according to the specific risk exposure of procurement, inventory and sales links, combined with the judgment of the market and the prospect of the future price trend, scientifically formulate and implement trading strategies.

"in 2021, the coverage of futures varieties participated by iron and steel enterprises has been significantly increased, and the number of enterprises that rely on the transformation of futures tools to increase efficiency has also increased significantly, further promoting the futures market to better play its role in the allocation of resources, and the market structure will be more perfect and sound." Cai Yongzheng said.

Fu Xiaoguang, marketing director of Huarong Rongda Futures Investment and Operations Department, told reporters that since rebar futures and hot coil futures were listed for many years, steel mills have basically participated in futures hedging, and most traders in the middle reaches have participated in futures. And at present, the market prices of steel trade across the country refer to futures prices, which really form a unified national reference price. With traders' gradual in-depth understanding of futures, From the beginning of speculative thinking gradually turned to the use of futures for inventory management and risk management. For example, rebar in 2021 in the process of falling, large inventories of traders to short protection, to avoid a great risk of depreciation of goods, and some large and medium traders even through the basis to reduce losses, especially at the end of October 2021 futures below the spot nearly 900 yuan, spot inventory replacement for futures virtual inventory, a month after the basis to return to 200tel 300 yuan / ton, reducing the loss of about 500 yuan per ton. This kind of operation and consciousness is gradually accepted by industrial customers in the iron and steel industry, and steel industry customers in the central and western regions also gradually learn the ideas of eastern coastal enterprises, and begin to use futures to manage inventory to ensure operational stability. And the use of on-site and over-the-counter options for further risk management.

The function is prominent-- the stable development of the combination of the present and the future.

In retrospect, the stabilizer role of the futures market is becoming more and more obvious.

The reporter noted that in 2021, the Ministry of Industry and Information Technology repeatedly suggested that downstream timber enterprises participate in futures hedging, lock in the cost of raw materials, and reduce enterprise risk. Since last year, steel has risen for more time, downstream both manufacturing enterprises and construction enterprises are increasingly involved in futures to lock in procurement costs.

Cai Yongzheng told reporters that the current steel price fell sharply after the National Day in 2021. In retrospect, it was mainly the market impact brought about by the downstream real estate dollar debt crisis and the expected off-season in the fourth quarter. The futures market reacted quickly and the price adjustment was large. The price response of spot steel mills lags behind, after all, the high-priced inventory of steel mills has not yet been fully digested. At the end of September and the beginning of October, the profits of rebar and hot coil futures were about 2205 virtual steel mills with profits of nearly 1500 yuan or more. At this stage, steel mills can actually consider locking in disk profits in advance to prevent the possible decline in steel prices in the fourth quarter and the unfavorable situation of rising raw fuel prices.

"We also gave our customers such advice at the end of September and early October, shorting the 2205 contract profits of rebar and hot coil futures, locking the profits at 1600 yuan / ton, and then the steel mill profits went all the way. at the end of the year, it reached a level of less than 1000 yuan / ton, and recently reached a level of about 700 yuan / ton. From an annual point of view, the current profits of steel mills from July to September every year will be in a relatively good stage of the year, and this stage should be an opportunity for steel mills to focus on risk aversion. " Cai Yongzheng said.

According to the reporter's understanding, at a meeting held by the political Bureau of the CPC Central Committee on July 30, 2021, it was proposed that "carbon peak and carbon neutralization work should be done in an overall and orderly manner, and an action plan for carbon peak before 2030 should be issued as soon as possible, adhere to a national game of chess, correct sports-style 'carbon reduction', establish first and then break, and resolutely curb the blind development of the 'two high' projects." This means that the steel industry to reduce production in the way of "carbon reduction" is expected to be curbed. For steel, supply has rebounded, but demand is still off-season and the market is at risk of falling prices.

A steel trading enterprise in central China is mainly engaged in HRB400E rebar, which combined with its own sales situation, the United Futures Company has developed a closed-loop hedging scheme. It is understood that the enterprise was on its way to 16000 tons in July, of which 15000 tons were settled later; in August, the long Association settled 6000 tons, with an average inventory cost of 5064 yuan / ton of 4360 tons of steel, an average cost of 4935 yuan / ton of steel of 1357 tons, an inventory cost of 5112 yuan / ton of steel 2508 tons, an inventory cost of 5200 yuan / ton of steel, and off-balance-sheet inventory of 1500 tons. In total, the post-settlement inventory is 21000 tons, and the lock-in inventory is about 11000 tons. The rapid rise in steel prices in July has made a lot of money for companies, which are worried about falling prices in the later period, devouring profits and are in urgent need of hedging through the futures market.

"for future price research, we believe that steel production has fallen sharply in mid-late June, and whether it is relaxed in the later period remains to be tracked continuously, but the range of accumulation in the off-season is limited. Infrastructure is likely to make efforts after the peak season, and the current low inventory pressure is expected to drive up steel prices in the peak season. On the whole, the current price falls first and then rises. In August, we expect the RB2110 contract to fall to 4,800 won 5000 yuan per ton, and the spot price to 4800 won 4900 yuan per tonne. During the peak season, futures 01 contract and spot prices are expected to rise to 5500 yuan per ton. " Jiang Lu, head of the industrial products team of CITIC Construction and Investment Research and Development Department, told reporters.

"according to the needs of enterprises, we suggest that enterprises should choose RB2110 contracts to sell hedging contracts, and the hedging ratio should be controlled at about 30 per cent." Jiang Lu said that the hedging amount was 6300 tons of post-settlement 21000 tons, 850tons of 2840 tons of inventory with a cost of more than 5100 yuan / ton, and 1000 tons of post-settlement 1000 tons and off-balance sheet inventory of 1500 tons. A total of 7900 tons of hedging were sold. The interval of Jiancang is 53505,550 yuan / ton, and the average cost of building warehouse is 5450 yuan / ton. The enterprise completed the construction of the position on August 12, considering that the hedging ratio is low, it is difficult to hedge the position according to the spot sales. Therefore, the closing strategy only presets the time and price. If the RB2110 contract price falls to around 5000 yuan / ton, the position can be closed by 1/3. Thereafter, the position will be closed by 1/3 for every 100 yuan / ton, until all positions will be closed. If the RB2110 contract price does not fall to the target level of 5000 yuan / ton, choose the opportunity to close all positions before the end of August. Because of the high speed of the market, the futures price reached 4900 yuan / ton in only one week, and the enterprise successfully closed the position at 5000 yuan / ton. The position was closed at 4900 yuan / ton, and the remaining position was closed at about 5050 yuan / ton, with a total profit of 3.555 million yuan.

In fact, rebar futures have provided a good risk transfer tool for price fluctuations for customers in the iron and steel industry chain since they were listed. In the process of the gradual growth of rebar futures trading volume, whether steel mills, traders, or downstream real estate enterprises can establish corresponding short or long positions in the futures market to iron out the risk of profit fluctuation in the process of operation, which provides an effective path for the sound operation of enterprises and enhances the anti-risk ability of entity enterprises.

"Futures companies, as intermediaries in the futures market, not only provide channel services for enterprises to participate in the futures market, but also further give full play to their professional ability to provide customized service programs for industrial customers to help enterprises avoid the risk of price fluctuations and inventory depreciation, so that enterprises entering this market for the first time do not take detours, let enterprises really enjoy the benefits of rebar futures, and make enterprises more relaxed in the face of adverse effects." Jiang Lu said.

Learned in the interview, many steel companies through the establishment of virtual inventory in the futures market, locked in low-price hot resources. In addition, by choosing futures tools, enterprises do not need to buy spot to occupy inventory, save inventory space and save inventory management costs, and because futures are margin transactions, the amount of capital occupied is far less than that of spot trading, which reduces the cost of capital for enterprises.

Future trend-embracing Derivatives and reaching a consensus

In the interview, it is found that in 2021, not a few iron and steel enterprises flexibly use futures tools to avoid operational risks to achieve stable operation, and now the whole industry has ushered in a new era of industrial and financial integration, embracing derivatives has become the consensus of the industry.

The profit of iron and steel enterprises is improving, which makes many steel enterprises begin to pay attention to risk control and increase hedging investment. "the enterprise has the demand, the hedging has the tool, the market gives the opportunity, let the steel enterprise have the qualitative development in the hedging, the steel factory hedging has ushered in the golden era, the whole industry has also ushered in the new era of industry-finance combination." Cai Yongzheng said.

As we all know, when enterprises participate in the futures market, they often pursue certainty and guard against uncertainty. The pursuit of certainty is generally through futures tools to lock in expected profits, such as enterprises to do more order profit management, that is, price locking, long delivery time order profit management.

Qiu Yihong told reporters that the essence of futures hedging in iron and steel enterprises is to manage the risk of price fluctuations of exposures. The greater the exposure and price fluctuations, the greater the risks. Although we cannot determine the price fluctuations, through the establishment of the direction of futures positions, the adjustment space of spot and total futures exposures can be controlled, and then the enterprise risk can be controlled. In general, if iron and steel enterprises have a large demand for purchasing raw materials, in order to avoid the fluctuation of raw material prices affecting their product prices and operating profits, they need to buy the futures contracts of this kind of raw materials in advance and lock in the price of raw materials by buying hedging. If iron and steel enterprises have greater pressure on the sale of finished products, in order to avoid shrinking profits caused by falling product prices, it is necessary to take short selling in the futures market to hedge the risk of falling prices of commodities or assets currently held or to be sold in the future. lock in the value of the product. In fact, futures hedging in iron and steel enterprises is ultimately the management and optimization of exposure. therefore, the threshold of inventory in iron and steel enterprises will be widened accordingly, which can not only make the inventory range after hedging exceed the maximum physical storage capacity. it is also possible to have "negative inventory".

It is worth noting that the current iron and steel enterprises' base price, sales forward orders and other future combination model is becoming more and more mature and the emergence of cash subsidiaries, the application of derivatives has deeply cultivated the spot industry, but also provides more risk management models for industrial enterprises.

For enterprises how to use derivatives to achieve stable operation, Cai Yongzheng believes: first, according to the characteristics of the industry chain, seek the entry point of hedging. For example, the cyclical characteristics of the industry, easy to be affected by policies, long industrial chain, a large number of upstream and downstream enterprises and low concentration, priority in order sales, raw material procurement cost control, inventory management to seek the cut-in point of the combination of future and present. The second is to use derivatives tools to solve the problem of business pain points. In 2014, Nanjing Iron and Steel Co., Ltd. used derivatives to solve the business pain point of price-locking long order management. For the forward orders with locked prices, the futures iron ore and coke contracts corresponding to the supply period are used for cost-side locking. The third is to gradually promote the construction of the system. The price system should be used first, and the hedging tools should be used later. Look at it before you do it, and be familiar with the futures market first. First establish a system within the enterprise, and then carry out business. The training of talents comes first, and the hedging business comes later. Research and analysis comes first, and business promotion comes later. Fourth, under the background of the gradual maturity of its own hedging system, the application of derivatives risk management is extended to the downstream customers of the industrial chain, and the risk of price fluctuation is transferred to the market from each other. form a sticky relationship in the industrial chain linked by derivatives and rights trade to ensure the stability of its own production and operation.

Zhou Guofeng, general manager of Linggang sales Company, believes that as a salesperson of iron and steel enterprises, one is to firmly believe that finance is the essence of service entities, and that integration of industry and finance is the only way for the development of enterprises. it is necessary to study the relationship between the futures market and the spot market with a positive attitude. Second, we should consciously identify the information in the market and play an active role in maintaining market stability. Third, we should actively learn and use financial tools such as futures and options to improve the operation effect of enterprises. Because the price changes in the current futures market directly affect the dynamics of the spot market, as salespeople, they can not only treat the futures market as a sales channel, but also make use of futures hedging. Lock-in costs and other traditional methods to do a good job, but also can use options to balance inventory, hedge risks and so on.

In the view of the above interviewees, as enterprises attach more importance to hedging business and the risk management role of the black futures market continues to highlight, the effectiveness of the futures market will continue to improve, and the confidence and enthusiasm of enterprises to participate in the futures market will continue to increase, helping iron and steel enterprises to protect the stability of production and operation, and help production profits, production turnover efficiency and operating efficiency to achieve good results.