Futures Daily : Provide accurate hedging tools for the steel industry

2021 is the first year of the "14th Five-Year Plan". The strategic plan of dual control of energy consumption and carbon peaking will have a profound impact on the steel industry. Under the premise that the valuation of iron ore has reached a historical high in recent years, due to the expected impact of the reduction target of crude steel, the long-term demand for iron ore will be greatly compressed, and the market uncertainty will increase. In this context, relevant industry chain enterprises have an increasingly urgent need to participate in the management of risks in the derivatives market. The iron ore on-site options in 2019 have the characteristics of relatively less capital occupation and rich and flexible hedging strategies, which are gradually favored by enterprises.

Option hedging benefits

Iron ore options provide steel companies and trading companies with new tools and strategies to manage risks. On the raw material side, the purchase of raw materials and inventory management of steel mills need to hedge against inventory risks and raw material price fluctuation risks. On the product and sales side, due to the mismatch in time between raw materials, production and sales, the procurement of raw materials is often ahead of schedule, while the sales of finished products lag behind, and risks need to be managed.

In 2021, under the background of intensified mineral price fluctuations and increased market uncertainties, the role of iron ore options in flexibly managing risk exposure and reducing hedging costs will be further reflected. An enterprise in Hebei has an annual steel output of about 3 million tons, and its parent company has a standing iron ore inventory. Under the expectation of production cuts, if the price of iron ore falls sharply, it will depreciate the stock of raw materials, thereby causing loss of profits.

"From the perspective of valuation, the mine price in 2020 has entered the high valuation range. With the implementation of the steel production restriction policies in various places, we are worried that the subsequent decline in the mine price will lead to the depreciation of the company's raw materials and bring losses to the company." The company related The person in charge told reporters in an interview.

Zhang Jing, director of the brokerage business management headquarters of Zhonghui Futures, told reporters that starting from the needs of enterprises, Zhonghui Futures recommends that enterprises build positions in batches near the main option contracts, and build positions in stages with different strike prices. Considering the liquidity problem, select the strike price near the at-the-money option with the main iron ore contract as the target and the option order volume is high to build positions in batches. If the price rises and the spot inventory appreciates, you only need to pay a certain premium cost; if the price falls, the loss of inventory value can be compensated for by closing the position or exercising the option.

In actual business, the company has opened positions on April 2, 2021, and has repeatedly purchased put options on a rolling basis to open positions and close positions in stages in August. During this period, the price of iron ore futures rose as a whole, but during the operation of the project, the price fell rapidly twice. The company made flexible and dynamic adjustments to the option positions based on the volatility of options, market research and judgment, and inventory shipments. Properly increase the put option position when the price is high and volatility is high, and close the position when the price pulls back to balance the hedging ratio. This process enables the option hedging to effectively cover the inventory risk and also achieve certain returns.

"When the market falls, the out-of-the-money options held by the company turn into real-value options. At this time, reducing the position can not only keep the hedging position back to the hedging ratio of the initial design of the project, but also generate a certain amount of income, which is suitable for the enterprise. Hedging costs are saved." said the person in charge of related projects of Zhonghui Futures.

In the end, the hedging was completed in August, the price of iron ore rose, the inventory increased, and the option side benefited about 8,000 yuan. Due to the adoption of a flexible option strategy, this hedging has achieved the purpose of risk hedging as a whole, especially when the short-term price fell from a high level, it played the role of inventory preservation. At the same time, on the basis of the same hedging spot, the advantage of option capital occupation is prominent, which is convenient for enterprises to use limited funds to reasonably enlarge the hedging scale. If futures hedging is adopted, based on the hedging margin ratio of 10% and the futures price of 1,000 yuan per ton, about 40 million yuan will be used as futures margin for 400,000 tons of hedging. With option hedging, the premium corresponding to a 400,000-ton hedging at-the-money option is only about 3 million yuan, and the hedging cost is relatively fixed, so there is no need to worry about additional futures margin, so that companies can complete the hedging in prepared expectations.

Industry participation requires "long-term efforts"

After trying derivatives hedging this time, the hedging team of the trading company has increased its understanding of financial instruments to avoid business risks of corporate entities. In the later stage, it will continue to improve the professionalism of the personnel in the futures department of the company, and increase the hedging model of futures and options portfolios. Learning and understanding can effectively avoid business risks in business management. "The 'Enterprise Wind Plan' project of DCE has provided a very convenient channel for us to participate in the derivatives market and helped us successfully take the first step in hedging." The person in charge of the above-mentioned enterprise said that the company was new to option hedging. Complicated portfolio hedging cannot be well adjusted according to market conditions. The main recommendation this time is an insurance-like strategy, buying out-of-the-money put options to protect the spot. In the future, the company will have a deeper understanding and participation in the options business.

By trying to develop derivatives business, many companies have gradually changed their risk management concepts, and have paid more and more attention to the role of options and other derivatives in managing risks. The relevant person in charge of Benxi Beiying Iron and Steel, who has also participated in the iron ore on-site option project of the “Enterprise Risk Management Plan of DCE”, said that iron ore options are an important supplement to the original futures tools and provide important risks for relevant industrial entities management tools. In the fierce wave of market competition in the new development stage, the company will continue to try, learn and flexibly use derivative instruments, from on-exchange futures hedging to basis trade, on-exchange options, and on the development path of combining futures and cash and hedging risks. reach far.