China's steel industry association opens arms to futures, at last

“Seeing is believing”, which can’t be truer with the substantial attitude change of the China Iron and Steel Association over the past couple of years to be now fully supportive of steel and iron ore futures.

It was not so long ago, actually it could even be in 2014, when some CISA officials still blamed steel and iron ore futures for bringing too much price turbulence in these two physical markets.

Therefore, it is literally an “eye-opening” experience when CISA’s vice chairman Wang Liqun quoted some numbers in his PPT from Dalian Commodity Exchange and Shanghai Futures Exchange when sharing his understanding about how futures market could “serve” the physical market.

And, the speech was not given to a small group of people, but in the presence of over 500 steel market delegate when they attended CISA’s first-ever Steel Derivatives International Conference held in Shanghai on June 23-24.

“Steel-related financial products and futures are just around us with their influence towards the steel industry ever-growing, and greater participation will only help the whole industry to restructure and advance further,” Wang said.

We can only guess what has happened over the past two years for CISA to have such a dramatic U-turn, opening arms wide to welcome the financing and hedging tools into the Chinese steel and iron ore market.

But this may have been a change hard to come by, as Wang, in the middle of the presentation, admitted, “Steel and iron ore futures are already here, and their influence is real, there is no way to pretend otherwise or try to bypass.”

It is really interesting and refreshing when Wang was using the terms such as “trading lots”, “liquidity”, and “open interest” while at the same time humbly reminding the audience that such terms are new to him, as he is still in the middle of learning these vocabularies and understanding the definition of “hedging”.

For the whole speech, I liked Wang’s one particular comment the best, as it is so spot-on.

“I have learned during the whole learning curve that futures market is a special commodity market, and for futures contracts of one category, such as steel, there is only No.1, no No.2, which means there can’t be two successful steel futures contracts on one exchange, and SHFE’s rebar against wire rod and hot rolled coil is a typical example,” he said.

Indeed, SHFE’s rebar futures trading volume has been phenomenal, breaking records all the time. Its trading volume for March-April of 2016, for example, totaled 298.5 million lots, or being equivalent to 2.985 billion mt, which was over ten times more than the country’s whole 2015 rebar production at 204 million mt, Wang stated.

At the end of his speech, he reiterated his strong support for the steel producers to try out on the steel and iron ore futures to test the power of hedging themselves.

“I am not saying you have to, but I do know many of you have been closely watching the steel and iron ore futures market. However, watching is by no means sufficient for you to really understand the working of futures to your interests and advantages, you will need to participate to feel it for real,” he said.

DCE has noticed the growing interest of the domestic steel and iron ore market in its iron ore futures contract, as by June 17, 2016, 8,641 institutional investors have registered account for DCE’s iron ore trading, among which 680 are either Chinese steel mills, domestic miners or trading houses.

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