It is necessary to grasp the node that opens every profit window and rationally arrange the positions that need to be hedged.
A profit structure and risk characteristics of smelting enterprises
The profit of copper smelting enterprises can be deduced by the following formula: profit = selling copper price-copper concentrate cost-smelting and processing cost = selling copper price-(purchasing copper price-smelting and processing cost)-smelting and processing cost = (selling copper price-purchasing copper price)+(smelting and processing cost-smelting and processing cost), in which the difference between smelting and processing cost is the core profit of copper smelting enterprises, which depends on the smelting technology, equipment and production management level of enterprises. The fluctuation of selling copper price and purchasing copper price is the external market risk faced by enterprises. If it is not managed or poorly managed, it will greatly infringe on the processing profits of enterprises. Therefore, smelting enterprises and traders above designated size often hedge their prices and lock in profits through the futures market.
China’s copper resources are scarce, and the dependence of smelting enterprises on the import of raw materials is as high as 70%, while the finished electrolytic copper is basically sold domestically. Therefore, it is necessary to synchronize hedging in the internal and external markets. The actual hedging plan needs to weigh the scale of production and sales of enterprises, the differences in pricing benchmarks, pricing methods and pricing timing at both ends of the purchase and sale, and at the same time, the fluctuations and changes of macroeconomics and exchange rates cannot be ignored.
The pricing of overseas purchased ore is based on LME price in London, and the pricing of domestic electrolytic copper is based on SHFE price in Shanghai Futures Exchange. The price changes of LME and SHFE are not completely synchronized, and the price difference exists for a long time and fluctuates violently. The calculation formula is "the current price of No.1 electrolytic copper in Yangtze River -(LME copper-swap fee+Yangshan copper premium) ×(1+ VAT rate )× exchange rate-miscellaneous fees".
Theoretically, only when the above-mentioned tax-free static spread is greater than zero, the profit can be locked when the LME market imports the spot price and simultaneously sells the hedging in SHFE.
Because the time node where the above price difference is positive is limited, usually there are only 3-4 opportunities throughout the year, it is very important for smelting enterprises to pay close attention to market dynamics and seize the right time to lock in the right amount of raw materials.
B hedging scale and structure
Before confirming the scale and structure of hedging, it is necessary to analyze the quantity and structure of raw materials and finished products of smelting enterprises. Because of the same pricing basis, the domestic purchased and sold parts can be hedged naturally, and only the purchased raw materials and the domestic finished products can be hedged. If the copper output of a smelter is 500,000 tons/year, and the monthly price of raw materials and finished products is 41,700 tons, of which 60% of raw materials depend on imports, then the specific structure of hedging.
Raw material part
The average monthly import of copper concentrate is 25,000 tons, based on the spot average price of LME market in QP month or the spot price before entering QP month; Purchasing 16,700 tons of copper concentrate in China every month is based on the monthly average price of copper in SHFE that month.
Finished product part
The ratio of long orders to zero orders for electrolytic copper sales in the industry is 7∶3, that is, the monthly sales volume of long orders is 29,200 tons, based on the average price of SHFE in that month; Sporadic sales of 12,500 tons, based on the timely copper price of SHFE in the current month (that is, the spot price), and referring to the spot price of Yangtze River Nonferrous Metals.
Natural hedging
In order to reduce the occupation of hedging funds, based on the same pricing basis, 16,700 tons of copper concentrate purchased in China and 16,700 tons of electrolytic copper sold in long orders can be naturally hedged.
Hedging scale and structure
In the product part, 12,500 tons of electrolytic copper sold in long-term orders and 12,500 tons of electrolytic copper sold in retail orders are hedged in SHFE market; The corresponding monthly import of 25,000 tons of raw materials, buy hedging in LME market.
Capital occupation
If an average of 25,000 tons of raw materials are hedged every month, 5,000 lots of copper contracts need to be sold in SHFE. At the current price of 48,000 yuan/ton, calculated according to the margin ratio of 10%, it needs to occupy the trading margin of 120 million yuan; In order to reduce the risk and ensure the safety of positions, the continuous margin should be appropriately increased.
C hedging strategy implementation of QP in different pricing periods
The so-called pricing period is the validity period of pricing agreed by buyers and sellers in international trade. For example, the pricing period of copper concentrate is the second month after transportation, and the time of transportation month is subject to the ocean bill of lading. With the increasing concentration of the global copper concentrate market, the international mining monopoly oligarchs will not distribute the annual agreed trade volume to each month in a balanced way. Even QP quantity is only of theoretical significance, and uneven QP quantity is the normal state of international trade.
Hedging strategy under QP uniformity
At this time, the quantity of copper concentrate imported every month is 1/12 of the annual agreed quantity. The importing enterprises must seize every opportunity that the tax-free price difference is beneficial to import, and lock in the processing fee income through the operation of selling and buying at the same time in the domestic and foreign futures markets. Usually, there are three or four import hedging opportunities periodically every year, and the number of active months of SHFE copper contracts is also three to four months, which can basically meet the demand of imported enterprises for uniform hedging in domestic and foreign futures markets throughout the year, and the hedging operation is relatively simple.
Hedging strategy under the condition of uneven QP
Copper concentrate suppliers will take advantage of the strong market position and deliberately increase the QP in the traditional peak consumption season, so as to increase the copper price in LME market after entering this month, thus indirectly increasing the sales price of copper concentrate. At this time, it is only through the combination of positive cross-market and inter-period arbitrage that the imported enterprises can achieve the expected hedging effect.
In January, May and June, 2019, there were hedging opportunities in which the tax-free spread was greater than zero. For example, on January 16th and 17th, the import profits were all around 400 yuan/ton, which was worth operating. If the refinery contract situation is that the amount of QP in February, March and April is small, totaling 34,000 tons, while the amount of QP in May is as high as 41,000 tons, then the total amount of QP in February, March and April should be bought into the LME3 March contract; Corresponding to China, SHFE2 contracts in February, March and April should sell 11,300 tons. If LME’s May date price (the third Wednesday of each month) and SHFE contract also have hedging opportunities, we can buy all or part of the May QP in LME market, and at the same time, we can choose to sell the same amount of goods on the contract with tax-free spread greater than zero in SHFE market, with the equivalent month or the active distant month as the top choice, and then adjust the monthly contract quantity evenly when the SHFE contract structure is suitable for short positions, thus solving the problem of "uneven import QP quantity". When the spot price is higher than the contract price of the month with the largest short position, the spot can be oversold and the contract of the month can be closed first, and the contract of the month can be suspended.
It should be noted that the profit should be locked in advance by buying LME and throwing SHFE copper before QP month. Because after entering QP month, buying raw materials can only be priced according to the average settlement price of LME market spot month, it is difficult to grasp the timing of selling hedging positions in China at this time. Back to the above case, if the amount of QP in February exceeds the average, and the amount of QP in March, April and May is less, the extra amount of QP in February should be dealt with when there is an arbitrage opportunity without tax spread in January. In addition, we need to pay attention to the influence of the market structure of internal and external markets on the hedging effect.
The fluctuation of exchange rate is of great significance to importing enterprises, and the fluctuation of RMB against the US dollar will greatly affect the profits of enterprises. Therefore, while locking the price comparison during the import profit window, we should lock the exchange rate at the same time to hedge the risk of RMB depreciation. Specific operation can choose to buy RMB/USD futures (CUS) of HKEx or RMB/USD futures (UC) of SGX, and the contract month corresponds to the domestic SHFE copper contract month.
Let’s take the above example. For example, on January 16th, 34,000 tons of copper were bought at the LME market for $5,900/ton, with a total market value of $ 34,000× 59,000 = 2,006 million. The first-hand RMB futures of SGX were $100,000, so it was necessary to buy 2,006 lots of RMB futures, with a margin of about 2.5% and a capital of about $50 million.
D factors affecting import profit and loss
Judging from the formula of tax-free spread, it is easy to find that the profit and loss of imports depend on the following factors:
First, the linkage and differentiation of the relative trend of the internal and external disk. For copper, due to the existence of a large number of cross-market hedging arbitrage positions, it is difficult for the two cities to get out of the differentiated market, and more is just the different ups and downs. Generally speaking, the trading time of Luntong copper is long, and the market leads Shanghai copper to move towards and ahead of Shanghai copper, and the fluctuation range often exceeds Shanghai copper. In this regard, we can intuitively observe with the ratio of the inner disk to the outer disk, and the increase in the ratio indicates that the increase in the inner disk is higher than that in the outer disk, and vice versa.
For example, from the end of 2017 to the beginning of 2018, Luntong continued to rise in December, hitting a new high of $7,312.5/ton on the 28th. As shown in the figure below, the ratio of the main contract of the internal market to the closing price of LME3 at 3 pm in March shows a gradual downward trend in the first box, which means that Shanghai copper is gradually weakening relative to Luntong. During this period, the average import loss was around 600 yuan/ton. Subsequently, on January 23, 2018, Luntong fell by 2.49%, but the decline of Shanghai Copper did not follow. On the 22nd, the ratio of Shanghai Copper was 7.64, and on the 23rd, it rose sharply to 7.80, and the import profit on that day exceeded 1000 yuan/ton.
The second is the impact of CNH exchange rate changes. Of course, the influence of Shanghai-Shanghai ratio on import profit is not absolute. From the opening in mid-June to mid-July, 2018, the import window was always closed. Judging from the basis difference between the internal and external disks at that time, they were all in a positive structure and were in a spot discount state. Yangshan copper premium remained at a high level of about $80/ton. However, from March 27th to August 15th of that year, the offshore RMB CNH depreciated from 6.2355 to 6.9583. As can be seen from the second box in the figure below, the exchange rate trend wears the Shanghai-Lun ratio, which means that the exchange rate decline far exceeds the increase of the Shanghai-Lun ratio. This factor alone can determine the state of import profit and loss, which shows the importance of exchange rate management.
The picture shows the closing price of the March contract between SHFE main force and LME.
The picture shows LME inventory and spot discount.
The third is the influence of the different basis structure of the inner and outer disks. On August 13-22 and August 31-September 11, 2018, two long-lasting profit windows were opened, and the highest import profit was almost equal to 1000 yuan/ton. At that time, LME went to stock by canceling warehouse receipts. On August 13th, the cancellation of warehouse receipts accounted for less than 10%, and LME’s cash-3s was greatly discounted at about $30/ton. With the opening of the import profit window, the profit-driven inventory moved to Asian warehouses. On August 31st, the proportion of cancelled warehouse receipts rose rapidly to 53%, and LME’s cash-3s discount shrank to USD 7/ton. At the same time, CNH also cooperated with the withdrawal from a relatively high level and was in a state of slight appreciation. Domestic consumption entered the peak season, and the spot premium rose to about 200 yuan/ton. At this time, the internal and external disks echo each other, and the spot market is in a rare common heat.
Fourthly, the influence of spot copper premium in Yangshan foreign trade market. With the development of the breadth and depth of the market, the financial attribute of copper gradually fades, and the commodity attribute is increasingly enhanced. The import quantity basically reflects the rigid demand of the real economy. When the import profit expands, traders are profitable, and the import clearance volume is greatly increased, and the Yangshan copper premium rises. Therefore, the spot copper premium in foreign trade market is a dependent variable determined by the above three factors, and its own change has been difficult to affect the import profit window.
The picture shows the comparison between Yangshan copper premium and import profit and loss.
E market outlook and enterprise countermeasures
In 2019, the TCbenchmark was US$ 80.8/ton, while the spot TC of copper concentrate fell all the way to below US$ 60/ton, and the price of sulfuric acid continued to fall. Some small smelters with few long-term associations have fallen below the production cost. Although the output of electrolytic copper decreased by 50,000 tons in the first half of the year, it is estimated that the crude refining capacity will increase by 800,000 tons and the refining capacity will increase by 1 million tons during the year. At the same time, due to various unexpected disturbances, woodmackenzie has predicted the negative growth of copper concentrate output. As far as the industrial chain as a whole is concerned, it is obviously bad for smelting enterprises, so it is particularly important to maintain due profits.
At present, the global economic growth is slowing down and the trade friction is constant. On April 17th, the copper price of Luntong continued to drop from a high of 6,608.5 USD/ton to 5,740 USD/ton on June 7th. At present, with the staged achievements of the Sino-US trade agreement, Luntong has once again returned to the 6,000 USD/ton mark. From the perspective of terminal consumption, domestic automobile consumption may be in a state of bottoming out, air conditioning production is no longer strong, and cable orders are not optimistic. Superimposing the international political and economic environment that may be repeated, it is difficult for copper prices to get out of the trend of unilateral rise. The current rise is more about repairing the low volatility for a long time before.
During the observation period, the depreciation rate of the exchange rate was slightly larger than the price comparison between the internal and external markets. Due to the weakening of downstream consumption, Yangshan copper premium fell sharply, and the import profit window was opened from time to time, but it didn’t last long and the profit margin was limited. Therefore, for smelting enterprises, it is more important to grasp the nodes that the profit window opens every time and rationally arrange the positions that need to be preserved.
(Editor: Zhao Peng)