Since last year, the prices of bulk commodities have fluctuated sharply, and the prices of some varieties have soared and plummeted, which has brought risks to the production and operation of enterprises in the industrial chain. Especially for copper, which has both metallic and commodity attributes, its price fluctuations are not only affected by production costs and supply-demand relations, but also by financial and other factors, which also makes copper prices more volatile than other varieties. Affected by the epidemic, in 2020, Shanghai copper fell to an 11-year low of 35,300 yuan/ton in March, a drop of more than 30%, and then copper prices rebounded from the low level, out of a wave of rising prices, with a fluctuation range of more than 70% throughout the year. Since the beginning of this year, Shanghai Copper has remained strong, once rising to 78270 yuan/ton, a new high since May 2006, and a cumulative increase of over 120% from the low point in March 2020. Subsequently, since May of this year, due to multiple factors such as policy adjustments, copper has declined in stages, and Shanghai copper is currently consolidating around 69,000 yuan/ton.
The huge fluctuations in the prices of upstream raw materials have magnified the price risks of physical enterprises. The demand for enterprise risk management has increased rapidly. More and more enterprises are aware of the importance of hedging, especially some midstream and downstream enterprises that use bulk commodities as raw materials. . In the course of this round of price fluctuations, companies that use futures markets and derivative instruments for hedging have increased significantly, and some companies that can combine the futures and spot markets and use hedging tools flexibly have not only succeeded in “scaling”. “The risk of rising prices of raw materials has ensured stable production and operation and successfully locked in profits.
Back-to-back hedging strategy
Facilitate the steady operation of enterprises
Essex Furukawa Magnet Wire (Suzhou) Co., Ltd. (hereinafter referred to as “Essex Furukawa Suzhou”) is such an enterprise. A few days ago, in an interview with reporters, Li Dong, the senior purchasing manager of the company, shared the “secret” of the company’s stable production and operation under the volatility of copper prices.
Essex Furukawa is the world’s leading magnet wire manufacturer and distributor, with factories in seven countries and across three continents. It is a magnet wire manufacturer that can provide high-quality products and achieve rapid global delivery business. Essex Furukawa Suzhou is a subsidiary of Essex Furukawa in China.
The main raw materials for the production of magnet wires are copper and PVC, of which copper accounts for more than 90% of its production costs. The huge fluctuations in copper prices will obviously have a great impact on the management of Essex Guhe Suzhou. But Li Dong told reporters that the company has not been greatly affected by this round of copper fluctuations. Speaking of its magic weapon for stabilizing production and operation, Li Dong attributed it to the business philosophy of “only earning processing fees, not the copper spread” and the “back-to-back” hedging strategy.
“We don’t want to profit from the fluctuation of copper prices, but we want to get due profits through products and services.” Li Dong said. Under the guidance of this concept, since its establishment, Essex Guhe Suzhou has followed the hedging policy formulated by the headquarters, and has made corresponding improvements and optimizations for the specific conditions in China to control the volatile commodity prices. Risk, stable production and operation, and focus more energy on improving its competitiveness through product and technology research and development and service improvement.
At the same time, in terms of specific operation strategies, Essex Furukawa Suzhou uses a “back-to-back” operation strategy to lock in the risk of raw material price fluctuations. “Our sales department will share our hedging strategy with customers when they are in contact with customers, and the customer will propose a target price, and we will assist the customer to lock in the price.” He said. When assisting customers to lock prices, the hedging department of Essex Furukawa Suzhou uses spot locks (with upstream suppliers, accounting for most of the hedging volume) or futures locks (through Shanghai Futures Exchange and London Metal Trading). So) completed. In the event that a small number of customers are unable to commit to price locking or other abnormal situations, Essex Furukawa Suzhou will also use the copper futures of the Shanghai Futures Exchange to hedge and hedge.
Tang Yun, deputy general manager of East Asia Futures, also said that for top global companies like Essex Furukawa to maintain market leadership, price locking has become part of the daily management model. Only in this way can companies have stable operating capabilities, provide services and support to strategic customers, and accelerate R&D progress.
It is precisely based on this concept and operating strategy that Essex Furukawa Suzhou has successfully withstood the risk of large price fluctuations. Even if there are unexpected situations such as contract changes, it has successfully hedged the risks with derivatives. “In early February last year, due to the epidemic, copper prices dropped sharply, logistics was stagnant, and production could not be continued. Some customers made requests for delayed delivery or cancellation of orders.” Li Dong recalled that in the face of this unexpected situation, the company After the discussion, the customer was suggested to delay delivery and hedging. After the customer agreed, he would sell the hedging in the futures market, and the position was closed at a suitable price, produced and shipped to the customer , Successfully avoided the greater possible risks brought by both parties due to future copper price fluctuations and inventory changes.
“After this round of large fluctuations in copper prices, we have a deeper understanding that using futures markets and financial derivatives to hedge is a very effective way to protect not only ourselves, but also our customers and suppliers. “Li Dong said.
Derivatives escort industry companies gradually become a consensus
In order to cope with the fluctuations in commodity prices, more and more companies are using derivatives as a tool for stable operations, beginning to use futures tools to cope with risks, and reduce the adverse impact of raw material price fluctuations on the company’s production and operations through hedging and other methods. Production and operation.
In April this year, CATL stated in an announcement that in order to reduce the adverse impact of the large fluctuations in the prices of raw materials related to production and operation on the company’s operations, CATL plans to carry out commodity hedging business to effectively manage the risk of large price fluctuations and strengthen The stability and sustainability of the company’s operating performance. According to the company’s operations and business needs, CATL intends to hedge some of the metal raw materials required for the next five years, and the maximum amount of margin required for the above-mentioned business shall not exceed RMB 10 billion. The trading varieties are options, futures, forwards and other derivative contracts of metals such as nickel, aluminum and copper.
On May 13, when answering questions from investors, Jingyi shares stated that the company’s copper processing and entrusted processing business mainly adopts the production and operation model of “production based on sales”, and adopts “electrolytic copper price + agreed processing fee” in product pricing. Pricing model. The pricing method between the company and its customers and the “back-to-back” management operation can transfer the risk of electrolytic copper price fluctuations to downstream companies. For example, the rapid changes in copper prices in the short term will have a greater impact on the company’s operating costs. In order to prevent and avoid the adverse impact of the large fluctuations in the price of raw materials (electrolytic copper) on the company’s production and operation, the company has carried out electrolytic copper hedging business in a timely manner.
On June 23, Beijing Cree issued an announcement stating that the main raw materials (such as copper) of the company’s main products, such as medium and low voltage switches and distribution transformers, accounted for a relatively high proportion of production costs. If only purchases are implemented in the traditional spot market, their prices will fluctuate. Risks will not be controlled, which will bring greater risks to the company’s production and operation, and the company’s continued profitability will also be greatly challenged. In order to avoid the uncertain risks of the company’s production and operation caused by the violent copper price fluctuations, control the company’s production costs, and ensure the company’s main business healthy and stable growth, the company reviewed and passed the “Proposal on Carrying out Commodity Futures Hedging Business” and agreed The company uses its own funds not more than 50 million yuan to carry out commodity futures hedging business, and the amount of hedging does not exceed 100% of the actual production quantity that needs to be purchased.
According to data from Eastern Fortune Choice, in the first half of this year, about 400 listed companies in A-shares issued more than 700 announcements on hedging, which is a significant increase compared to the more than 400 announcements last year. The atmosphere for listed companies to participate in hedging is becoming stronger.
Diversified innovation helps enterprise risk management
Although the number of companies that directly use hedging tools has begun to increase, there are still some companies, especially small and medium-sized downstream companies, that have not participated in hedging. Tang Yun pointed out that this type of company is mainly due to the lack of professional talents and is not familiar with the basis trading model. This also causes the midstream processing companies to be unable to pass on the risk of price fluctuations and can only leave the risk to themselves.
In response to the above situation, in recent years, risk management subsidiaries of futures companies and large trading companies have also made full use of their professional advantages to continuously innovate business models through new models such as basis arbitrage, personalized options, rights trading, and spot swap transactions. , To provide more refined risk management services for industrial enterprises. Through such a model, it is possible to realize that enterprises with risk entering the market do not enter the market, helping enterprises to carry out price risk management.
According to media reports, two years ago, in order to control costs, a real estate company in Guangxi signed an agreement with the steel trading company Relian Group to “lock in” steel prices for the next three years in advance. This also allowed the real estate company to get the spot price at 3,800 yuan per ton when the price of rebar once soared above 6,000 yuan per ton. With the help of futures tools, Relian Group provides real estate developers with long-term quotations for steel products until the end of 2022, enabling companies to avoid the risks caused by rising raw material prices.
In addition, in January 2020, Shanghai Urban Construction won the bid for the south extension project of Hangzhou Times Avenue as the general contractor. In order to avoid the risk of price fluctuations of the main raw material rebar and lock in reasonable profits, Shanghai Urban Construction assigned the task of locking the price of raw materials to the East Securities. Runhe (risk management subsidiary). According to the specific needs of urban construction, Dongzheng Runhe formulated corresponding raw material supply and price locking service plans. After the official opening of the project, Shanghai Urban Construction will purchase relatively stable prices from Topix Runhe according to the specifications and scale of the rebar required for each month specified in the winning contract. Topix Runhe will sell the spot side in futures. The market conducts corresponding hedging operations.
These innovations in business models and management tools provide companies with more ways and methods to control price fluctuation risks, and are expected to attract more companies to make good use of the futures market to reduce risks.
Optimize hedging concept
Escorting the steady development of the industrial chain
In recent years, the Shanghai Futures Exchange has continued to carry out investor education and has played a significant role. It has organized many online and offline trainings, allowing more companies to understand the concepts and methods of futures value preservation. “There are constant requests from companies to do internal training on corporate hedging.” Tang Yun said. But he also pointed out that there are currently some corporate hedging operating models and ideas that have not completely changed. They just want to avoid the risks of this wave of market conditions and have not established a complete hedging risk management system. In addition, companies do not have enough understanding of current futures market policies and derivatives instruments, and they still need time to accumulate.
In his view, the upstream and downstream enterprises of the industrial chain are closely related, and good hedging concepts should be promoted throughout the entire industrial chain, so that upstream, middle and downstream enterprises can avoid the risk of raw material price fluctuations, thereby promoting the entire industry Stable operation of the chain.
Li Dong also said that some of their customers have not hedged with their downstream customers. After the price of copper rises, they cannot transfer the risk. “We are also recommending that our customers hedge the risks of raw materials. We hope that more and more companies can use hedging to ensure the stability of the entire supply chain and realize a virtuous market cycle.”
Industry insiders also pointed out that with the increase in commodity price fluctuations, if companies cannot effectively control costs, any small fluctuations may cause problems for the survival of the company. Controlling risks and locking in profits are very important for companies to achieve long-term stable and sustainable development. Entity companies should regard risk control as the bottom line of their survival, establish correct risk management goals and concepts, establish a systematic hedging risk management system and system, and Only by embedding it in the whole process of the enterprise can we make good use of futures tools, cope with possible market fluctuation risks, and achieve stable operation, bigger and stronger.