After repeated expectations and disappointments, China's steel futures are finally to see the light of day in 2009. According to the latest indications, the Shanghai Futures Exchange will work out the detailed schedule and preparation procedures for the launch of steel futures after the Chinese New Year, and the official launch date will be sometime in March or April.
Currently, there are over 10 e-business markets for forward contracts which have basically adopted the trading rules of futures. The only difference between forward contracts and futures is the amount of the deposit involved; the deposit in the former case is 20 percent, double that for futures. However, the e-business markets for forward contracts are usually set up by medium-sized private sector corporations, and do not guarantee the security of customers' deposits. In addition, the e-business markets in question are not transparent. For these reasons, only local traders will participate in such markets. However, despite the many disadvantages involved in the e-business markets for forward contracts, huge profits can still be made from the high trading volumes. Taking www.ssec-steel.com as an example; on September 11, 2007, nearly 600,000 mt of dominant contracts and a total of 1 million mt of all contracts were concluded in the space of a single day.
Obviously, the huge profits and strong trading volumes are of great interest to the trading exchanges. In this context, Shanghai Futures Exchange has been doing its best to advance the cause of steel futures.
With the sharp increase of iron ore prices over the three years before the current downturn, together with the greater role of Chinese mills in determining global steel prices, the CISA (China Iron and Steel Association) has been changing its attitude towards steel futures. Another reason for the change of heart on the part of the CISA is that many foreign locations such as India, Japan, Dubai and London are issuing various kinds of steel futures. In this context, the CISA finally changed its mind. Last August, Luo Bingsheng, executive vice-secretary general of the CISA stated that steel futures would be launched in China at some time after the Olympic Games and before the end of 2008. However, the global financial crisis delayed the introduction of steel futures. Nevertheless, preparations are now fully underway for steel futures in China as the Chinese authorities are determined to use the financial markets to promote the development of the real economy.
Varied opinions are heard in China on the issue of steel futures. Some people focus on its advantages such as hedging, while others consider it a bad thing because many businessmen have suffered significant losses in the futures market.
The futures market is a tool which can bring either benefits or losses depending on how it is used. All depends on the approach of the operator. For a rationally-minded producer, the futures market can act as an aid in controlling his profits and risks. Many have incurred losses in futures trading because of their indulgence in excessive speculation, rather than in just hedging activities. For instance, at a time when China's State Reserve Bureau (SRB) took part in an LME copper futures transaction, one trader built up a massive short position on copper at the LME during an uptrend, with the contract tonnage far exceeding the trader's own supply quantity. However, as the contract expired, he had to deliver in full when the price reached record highs, causing great losses. Thus, the volume involved in a short position should be in line with the quantity the traders is able to supply; the worst-case scenario will be simply lower revenues.
Futures exchanges tend to issue more and more traded products and suck in more and more participants who hope to maximize their profits. Market players seek to make profits by taking advantage of market fluctuations, and so it could be said that the argument of stabilization of the market via futures transactions is either naïve thinking or else an intentional fraud. It may be instructive to take a look at the oil markets where the fluctuation of the crude oil price is in direct proportion to the number of dealers.
Some countries have already launched steel futures contracts, while others countries are now in the planning or preparatory stages. In the majority of cases the principle of providing producers and traders with hedging possibilities through futures transactions is still adhered to; meanwhile, others have commenced cash payments, and some have even designed contracts with the steel price index as the trading item, indicating an evident speculation suspicion. These have again proved that steel futures are just a tool of capital players.