What is the current status of steel traders' participation in futures trading? What problems exist? How do they participate?

In recent years, China's steel futures market has developed rapidly, exerting an increasing impact on steel trade, and a number of large steel enterprises and steel traders have entered the futures market. However, many small and medium-sized steel trading enterprises are still watching and waiting, with a low participation rate. What is the current status of steel traders' participation in futures trading? What problems exist? How do they participate? With these questions, reporters from China Metallurgical News and China Steel News Network interviewed industry insiders from the futures sector and some operators of steel trading enterprises.

Overall Not Ideal, Low Participation

Shi Tou, an analyst at Shenyin & Wanguo Futures Research Institute, has long been engaged in research on steel futures such as rebar and has acquainted with a number of steel traders. Before accepting an interview with reporters from China Metallurgical News and China Steel News Network, he conducted a special survey based on the reporter's interview outline. He introduced that currently few steel traders participate in futures trading, and their participation is not high. Even when they do participate, steel traders generally do not perform well. Many steel traders regard the futures market as a place to make big money; they start with hedging intentions but end up speculating. Some steel traders speculate in stocks when the stock market is good and in futures when the futures market is good; once they fail, they become disheartened and never dare to enter the futures market again.

Such situations are indeed common in the steel trade circulation industry. During the survey, reporters from China Metallurgical News and China Steel News Network learned that a steel trader took a short position in the futures market, eager to make big money, but due to misjudgment, he could not close his position and ultimately was forced to abscond.

Three Major Problems

According to Shi Tou, steel traders generally have the following three problems when participating in futures trading:

First, strong speculative awareness, turning hedging into speculation. Many steel traders nominally engage in hedging but focus too much on the profit and loss of their futures accounts, turning transactions into one-sided speculation detached from spot positions. Some steel traders even deviate from their main steel trade business and rashly participate in futures such as soybeans and rubber when they see good market conditions. They do not understand these commodities, and some inexperienced steel traders often like to bet on market trends, take heavy positions, trade excessively, and neglect risk control, resulting in severe losses.

Second, lack of continuity and long-term commitment. Some steel traders are eager for quick success and instant benefits; when the market is good, they enter and participate, and when the market is bad, they give up. They cannot calm down to study and research properly, resulting in misjudgment of the market and failed trades.

Third, lack of professionalism. The shortage of futures talent restricts steel trading enterprises' participation in futures trading. After all, for these steel traders accustomed to spot pricing and spot delivery, the futures market is unfamiliar. In addition, many steel traders lack financial knowledge and simply treat futures as spot, ignoring some special factors of the financial market, such as macroeconomic changes, market sentiment, and correlation with other varieties. If steel traders cannot effectively grasp price trends, seasonal patterns, and regional supply and demand characteristics, the hedging effect will be greatly reduced.

Due to the above problems, steel traders' enthusiasm for participating in futures trading is generally not high. Once bitten, twice shy; some steel traders withdraw after setbacks in futures trading, and therefore the current participation rate of steel traders in futures is low.

Avoid Risks, Should Hold the "Sharp Tool"

Steel traders should master the "sharp tool" to avoid market risks. Li Zhongshuang, general manager of Shanghai Ruikun Metal Materials Co., Ltd. (hereinafter referred to as Shanghai Ruikun), told reporters from China Metallurgical News and China Steel News Network that the hedging function of futures is a "sharp tool" to avoid market risks. Traders engaged in steel operations should master it, integrate spot trading with futures trading, and hedge to maximize the avoidance of market risks.

Li Zhongshuang introduced that Shanghai Ruikun, through analysis and judgment of market conditions, achieves interaction between futures and spot markets, uses hedging tools to avoid risks, and has achieved profitability.

Many steel traders also believe that in steel trading, one cannot ignore changes in the futures market. The market used to be demand-driven and spot-driven; now it is futures-driven. When futures prices fall, spot goods cannot be sold, and the correlation between the futures market and the spot market is becoming stronger.

Ren Qingping, vice president of the Shanghai Steel Trade Chamber of Commerce and chairman of Shanghai Wubo Steel Structure Materials Co., Ltd., said in an interview with reporters from China Metallurgical News and China Steel News Network that in the Internet era, with the rise of e-commerce and the development of the futures market, the traditional steel trade industry has been impacted. Steel traders should participate in the futures market and e-commerce, using futures as a tool for risk control, flexible sales, and investment arbitrage to achieve stable profits and business expansion.

Today, the market environment faced by steel traders remains severe, with procurement risks, inventory risks, and sales risks, and the hedging function of futures is the best "sharp tool" to avoid risks.

What Should Steel Traders Do?

In the interview, Shi Tou suggested that steel traders who are not very familiar with futures trading divide hedging into two stages: the first stage is to conduct a small amount of trial hedging operations; the second stage is to conduct comprehensive hedging operations according to the scale of operations.

Steel traders should be good at using steel futures to assist spot operations.

First, improve capital utilization efficiency—establish virtual inventory.

Steel trading enterprises can establish virtual inventory in the futures market according to their own procurement and sales plans, or sell spot inventory for hedging. Through futures trading, a small amount of capital can lock in forward spot goods, greatly reducing enterprise costs.

Second, expand business scale—avoid risks and lock in profits.

When steel resources are limited, steel traders "grabbing resources" becomes the norm, and at the same time, they face the risk of large price fluctuations. Therefore, the scale of steel purchases by steel traders is limited. At this time, steel traders can hedge through the futures market to lock in profits.

Third, participate in the delivery process—warehouse receipt circulation, expand sales radius, futures-to-spot conversion.

Since freight accounts for a large proportion of spot trading costs, rebar sales are highly regional. Traders can use the regional nature of futures delivery warehouses to transform their sales model and achieve the purpose of expanding the sales radius.

Shi Tou also introduced that it is generally believed that whatever risk exists in the spot market, an equal opposite position should be established in the futures market to avoid price risk. However, strategic hedging is not like this; it carefully selects hedging plans and spot positions to maximize the use of market changes under smaller price risks.

In this hedging scheme, spot positions and futures positions are not equal; this inequality is based on expected prices and changes in price relationships. The main purpose of hedgers operating in the futures market is not only to reduce operational risks but also to increase profits. Steel traders applying strategic hedging in procurement management and inventory management can, on the one hand, reduce procurement costs and, on the other hand, manage inventory risks.

In addition, steel traders should also pay attention to the degree of hedging.

The degree of hedging refers to the percentage of an enterprise's futures hedging volume in its inventory. The degree of hedging needs to be judged in conjunction with price trends. If steel prices are in an upward trend, strategies of no hedging, less hedging, or phased hedging as prices rise can be adopted; if prices are in a downward trend, the degree of hedging needs to be increased. Market judgment is the most important part of hedging for steel trading enterprises and the basis for achieving good hedging results. The direction of steel price trends determines the degree of hedging and the choice of price levels and timing as the best entry and exit points for hedging. Participating in hedging requires professional judgment and grasp of long-term trends and short-term movements.

Industry insiders believe that for steel trading enterprises to participate in hedging, they must first maintain a good attitude and abandon speculative psychology; establish and improve internal organizational structures, management systems, decision-making processes, work processes, and risk control mechanisms suitable for hedging to prevent huge losses. Steel traders should not only recognize investment opportunities in the futures market but also be aware of potential risks and appropriately reduce the speculative leverage ratio. Steel trading enterprises should also have an accurate positioning, treat the futures market as a platform for pre-sales, procurement, and futures-spot arbitrage, establish an effective risk monitoring system, and avoid falling into misunderstandings.