Summary: On May 10, bulk commodities collectively soared! Faced with the fierce rally in the futures market, the three domestic commodity exchanges, after the close that day, issued reminder letters notifying requirements to raise trading margins and same-day trading fees for hot trading products.
On May 10, bulk commodities collectively soared! Faced with the fierce rally in the futures market, the three domestic commodity exchanges, after the close that day, issued reminder letters notifying requirements to raise trading margins and same-day trading fees for hot trading products.
During the night trading session that day, black commodities opened sharply higher and continued to set new highs. By the close of the night session at CZCE and DCE, most products fell, with coke down over 4%, bitumen down over 3%, fuel oil and rubber down over 2%, PTA and PP down over 1%, palm oil and corn slightly lower; glass up about 3%, coking coal up over 1%, Zheng coal up slightly; at SHFE, hot-rolled coil rose over 4% in the night session and rebar rose over 2%. At the close of daytime trading on the 10th, main contracts for rebar, hot-rolled coil, iron ore and coking coal all hit the limit up.
Spot price increases became the biggest driver of the futures market. On May 10, Baosteel announced upward revisions to base prices across all product categories. That day, Tangshan billet ex-factory price was raised by 150 yuan/ton to 5,650 yuan/ton, again hitting a record high. A steel trader in Tangshan told a Securities China reporter, "Many steel mills and traders are suspending offers and holding back supplies; they are no longer shipping goods." It is worth noting that although domestic steel prices have risen sharply, they still remain among the world's lowest price levels, and steel price increases are also lower than the global level over the same period. At present, US hot-rolled coil prices have reached 1,588 USD/ton, a record high, making export profits for domestic companies substantial.
Behind the strong competitiveness of China's steel industry, domestic cost advantages have become the core key. In particular, the absolute price and increases of domestic iron ore futures have long been lower than port spot prices and overseas indexes and derivatives, with the discount remaining at 200-400 yuan/ton. To a certain extent, this has curbed the excessively rapid rise in domestic spot prices and contributed greatly to keeping domestic steel at the world's lowest prices.
Facing this situation, industry insiders cautioned, "China's steel market's industrial-financial advantages need to be further brought into play. We should guard against overseas markets taking advantage of the situation, and further strengthen policy guidance to encourage enterprises to conduct futures hedging transactions domestically." Data show that in the first four months of this year, average daily single-sided trading volume of domestic iron ore futures fell 58% year-on-year, while the overseas SGX iron ore market rose 26%.
Steel and nonferrous metal prices soared across the board, prompting the three commodity exchanges to take moves to cool down. On May 10, during the night trading session, black commodities opened sharply higher. As of 9:30 p.m., nonferrous prices had pulled back, but ferrous prices continued to push higher.
Among them, rebar futures opened at 6,113 yuan/ton, hitting another record high; iron ore futures set an intraday high of 1,346.5 yuan/ton. During the night session, nonferrous metals retreated somewhat. After breaking a nearly 16-year high during daytime trading, SHFE copper pulled back, while SHFE aluminum remained strong.
Earlier, during daytime trading on the 10th, main contracts for rebar and hot-rolled coil both rose 6% and locked at the limit up, while the iron ore main contract hit the 10% limit up, the coke main contract rose more than 4%, and the coking coal main contract touched the 8% limit up.
That day, the NDRC and MIIT issued a notice on carrying out the 2021 "look-back" inspection of steel overcapacity reduction, which also became a trigger for market conditions. The notice said the inspection focus includes the situation of eliminated production capacity, project construction, implementation of rectification from previous inspections, and the 2021 crude steel output reduction work. Based on self-inspection and self-correction, all regions should submit the "look-back" self-inspection and self-correction report to the Office of the Inter-Ministerial Joint Conference before May 30. On-site inspection stage: from June 1 to the end of July, members of the Inter-Ministerial Joint Conference will each lead several on-site inspection teams to carry out field inspections.
Faced with the intense market rally, the three domestic commodity exchanges issued reminder letters after the close that day, notifying requirements to raise trading margins and same-day trading fees for hot trading products: SHFE required that the intraday same-day close fee for rebar contract Rb2110 be adjusted to one ten-thousandth of the transaction amount, and the intraday same-day close fee for hot-rolled coil contract Hc2110 be adjusted to one ten-thousandth of the transaction amount.
CZCE required that, from the settlement on May 13, 2021, the trading margin standard for thermal coal futures contracts be adjusted to 12% and the price limit to 8%; among them, contracts 2106, 2107 and 2108 have margin standard adjusted to 15% and price limit to 10%.
DCE issued a risk alert letter stating that recently there are many uncertain factors in market operations, and commodity prices, especially coking coal, coke and iron ore, have fluctuated greatly. All market participants are requested to participate rationally and in compliance, prevent and control risks, and ensure smooth market operation. At the same time, according to relevant measures, the trading margin level for iron ore related contracts will be raised to 15% from the 11th, and the price limit will be raised to 13%.
Fang Xinghai, Vice Chairman of the China Securities Regulatory Commission, stressed at the "14th Meeting of the Fifth Council of the China Futures Association" on May 8 that the futures industry should strengthen in-depth research on commodity prices, give full play to the functions of the futures market, and better serve the high-quality development of the national economy. At the same time, the futures industry should firmly grasp new development opportunities, accelerate the internationalization process, and enhance China's global pricing influence in commodity markets. Regulators should actively create conditions to promote the high-quality development of the futures market and better serve the real economy.
It is worth noting that steel mills' further increases of ex-factory prices on May 10 became an important driving force for the rise in futures prices. On May 10, Baosteel announced upward adjustments to base prices across all product categories, with astonishing increases. During the trading session, rumors spread online that hot-rolled prices were raised by 1,000 yuan/ton and heavy plate base prices by 1,000 yuan/ton. However, in the evening, Baosteel officially announced increases of 300 yuan/ton and 400 yuan/ton respectively, triggering outside speculation. According to Baosteel's first-quarter report at the end of April, net profit attributable to shareholders of the listed company was as high as 5.359 billion yuan, a year-on-year increase of 247.76%.
That day, Tangshan billet ex-factory price was raised again by 150 yuan/ton to 5,650 yuan/ton, setting yet another record high. After the May Day holiday, the steel market entered a crazy rally mode. From May 1 to date, the cumulative increase in Tangshan billet ex-factory price has been 660 yuan/ton. In the Tangshan strip steel market, the mainstream 145mm series hot-rolled strip has accumulated an increase of 640 yuan/ton in nine days.
Also in the scrap steel market, the rises were equally dramatic. According to incomplete statistics, on May 8, 95 steel mills including Tianjin Tiangang and Jiangsu Xugang Group raised scrap steel purchase prices, with increases ranging from 10 yuan/ton to 200 yuan/ton. On the same day, 19 construction steel producers raised ex-factory prices, with increases ranging from 50 yuan/ton to 230 yuan/ton.
"Many steel mills and traders have suspended quotations and stopped shipping." A steel distributor in the Tangshan area told a Securities Times China reporter that spot prices have gone wild. Rebar spot prices in most markets rose 300-400 yuan within two days, and distributors in hot regions have started to suspend quotations one after another and stop shipping.
Qiu Yuecheng, director of ferrous research at Everbright Futures, believes that at the macro level, the inflation logic triggered by last year's global "massive liquidity injection" is still playing out, and commodity prices across all major sectors have risen substantially. At the industry level, the output-reduction narrative for the nonferrous and steel industries has continued to strengthen. The capacity-reduction review and crude steel output reduction efforts, together with tensions in China-Australia relations and uncertainties over imports of related raw materials, have all pushed the market higher.
Take a rational view of price increases; domestic steel prices are still the lowest in the world. On May 10, Shougang Co., Ltd. announced that cumulative orders from January to May were 3.5 times that of the same period last year; orders for high-end non-oriented electrical steel continued to grow, exceeding capacity by 50%. At present, the supply-demand fundamentals in the steel market are in a tight balance, and it is highly likely that domestic steel prices will continue to fluctuate with an upward bias in the short term.
Not only is domestic demand strong; overseas demand has also picked up. By the end of March, China's steel price index had risen 37.37% year-on-year, while the international steel price index had risen 58.9% year-on-year. International steel price increases were clearly larger than those in China. Meanwhile, the price of No. 1 heavy melting scrap in the United States rose from $300/ton at the beginning of the year to $440/ton, an increase of as much as 47%.
"US hot-rolled coil prices have now reached $1,588/ton, a record high." Liu Mengluan, an analyst at Guosen Securities, believes that with the recovery of overseas manufacturing, demand for flat products has grown significantly, while supply recovery has been relatively slower than the explosive growth in demand. Under this supply-demand mismatch, steel prices have accelerated upward, and US HRC prices have now reached $1,588/ton. The huge price gap between domestic and overseas steel has opened up room for imagination for domestic steel price increases, and has also made the impact of the export tax rebate cancellation policy on the current market limited.
"Domestic steel prices are still the lowest in the world, and iron ore futures prices are also lower than overseas markets." The ferrous and building materials research team of Huatai Futures Research Institute believes that while seeing sharp price increases, we also need to treat the market rationally.
Cost is an important factor supporting steel prices. In particular, iron ore is a global resource, with overseas and domestic markets fully connected, so the sharp rise in the Platts price has spread to the domestic market. On May 7, the Platts iron ore index reached $212.75/ton, breaking through $200/ton for the first time in history. Data show that from $164.50/ton at the beginning of the year to $212.75/ton, the rise was 29%. In the same period, domestic port spot prices rose 32% from the beginning of the year, while iron ore futures rose 21% over the same period.
An iron ore negotiation expert from a large domestic steel enterprise said that indefinite stockpiling and ore blending at domestic ports have directly given mining producers in an oligopolistic position a huge advantage. Their production has changed from rigid to completely flexible. When the flexible production of mines meets the rigid demand of Chinese steel mills, how can prices not be manipulated?
Notably, on May 10, the main contracts of several domestic ferrous futures varieties, including iron ore, closed at their daily limit-up. Earlier, during the futures market closure from May 8 to 9, port iron ore spot prices rose sharply, with PB fines and Jimblebar fines at Qingdao Port both rising by more than 100 yuan/ton.
At 7:10 am on May 10, SGX iron ore futures opened earlier than the domestic futures market, and its main contract quickly rose by 10.57%. As of 5:00 pm that day, the SGX iron ore 2106 contract reached $222.4/ton (equivalent to about 1,704 yuan/ton when converted to the domestic futures standard product). Affected by the sharp rises in spot prices and SGX iron ore futures, domestic iron ore futures rose after the market opened at 9:00 am, with multiple contracts closing at the limit-up.
Zhu Shiwei, deputy director of the Beijing Research Institute of Yongan Futures, pointed out that after 2010, the four major miners have mainly used the Platts index for pricing. This index has structural flaws such as a non-transparent collection process and "a small sample determining a big market," and its defect of "rising easily but falling with difficulty" has long been controversial. However, compared with the concentrated pattern of the four major miners, China's steel industry is highly fragmented and at a disadvantage in bargaining power, so it passively follows overseas miners and adopts the overseas Platts index for pricing.
By comparison, the absolute price and increases of domestic iron ore futures have long been lower than those of domestic port spot prices and overseas indices and derivatives. The discount of iron ore futures to the above prices has remained at 200-400 yuan/ton. To a certain extent, this has curbed the excessively rapid rise in spot prices and indices and has made a great contribution to keeping domestic steel prices at the world's lowest level.
Looking at the actual market operation last year, if domestic steel enterprises refer to domestic futures prices, which have long been at a discount to Platts and spot prices, for pricing and use futures to hedge risks, this has continued to be an effective way to improve the iron ore pricing mechanism and safeguard the interests of the steel industry.
Beware of overseas markets "looting" while the fire is burning. On May 9, Luo Tiejun, vice chairman of the China Iron and Steel Association, said that the main reason for the high iron ore prices is the highly concentrated supply side, with the dominance in the hands of sellers. In addition, market expectations and speculation are significant factors. He called for the government to play a guiding role when market mechanisms fail, so as to effectively curb the sustained rise in iron ore prices.
Industry insiders said that from the perspective of market expectations and speculation, overseas Platts prices and the Singapore futures market have added fuel to the flames. In contrast, due to high margin levels and stricter trading limits in the domestic futures market, the trading scale and activity of domestic iron ore futures have declined considerably this year compared with last year. "We should be alert to overseas markets taking advantage of the situation to loot. Domestically, we should further strengthen policy guidance and encourage enterprises to conduct futures hedging transactions onshore."
A Securities Times China reporter learned that since last year, the DCE has focused on both market supervision and industrial services. On the one hand, through measures such as continuously strengthening supervision of iron ore futures trading, tightening trading limits and position limits, and raising trading margin ratios, it has effectively curbed the space for speculative trading and maintained smooth market operation. On the other hand, it has continued to increase the variety of deliverable brands and delivery warehouses and reduce industrial delivery costs. At present, it is actively promoting further optimization of iron ore contracts and the delivery system, and is researching the development of products such as recycled steel raw materials.
Statistics show that, under strict regulatory requirements, iron ore trading volume and open interest have declined significantly year on year. In the first four months of this year, the average daily single-sided trading volume and open interest of iron ore futures were 462,300 lots and 710,300 lots, respectively, down 58% and 22% from the same period last year. At the same time, the trading volume-to-open interest ratio, which reflects the degree of speculation, remained low. In the first four months, the iron ore trading volume-to-open interest ratio was at a low level of 0.65, significantly lower than the level of about 1.19 in the same period last year and below the level of above 1 for active products in the domestic market. In addition, corporate clients have participated actively. In the first four months, there were more than 7,000 corporate clients, with their open interest accounting for 51%, indicating a continuous improvement in the market structure.
While domestic regulators have strengthened oversight of iron ore futures and reduced trading heat and scale, the trading volume and open interest of iron ore swaps and futures on the Singapore Exchange (SGX) have grown rapidly in recent years. In the first four months of this year, the total average daily open interest of SGX iron ore swaps and futures was 782,600 lots, up 26% year on year, and up 54% compared with the same period in 2019. At present, its open interest scale has already surpassed that of domestic iron ore futures.
Industry experts in the iron ore trading sector said that, in addition to the futures market's own efforts, the performance of futures functions depends more on the synergy formed by the deep participation of the real economy. In this regard, at the end of last year, the MIIT released the "Guiding Opinions on Promoting the High-Quality Development of the Iron and Steel Industry", which clearly stated: "Enhance the pricing power of iron ore and study the establishment of a more open, fair and transparent iron ore pricing system," and "give play to the price discovery function of iron ore futures." On April 20 this year, the MIIT also stated that smelting and processing enterprises are encouraged to carry out futures hedging transactions.
Given the unbalanced supply-demand structure, high dependence on imports, and the Platts index being "prone to rise but difficult to fall," the steel industry should attach greater importance to futures functions and actively participate in the domestic futures market. Through deep industry-finance integration, it should give full play to the fundamental functions of futures in price discovery and hedging, jointly promote the establishment of an open and transparent market-based pricing mechanism, strive to change the passive situation in iron ore pricing, effectively hedge against price fluctuation risks, and maintain the high-quality and stable development of the steel industry.