Energy & Resources

Testing their mettle

The world’s first stainless steel futures are launched in Shanghai

Steel-w

Steel has often been a symbol of might in modern China. The country’s final liberation in the Second World War was marked by the recapture of the northeastern steel mills in Anshan and Benxi from Japanese rule in 1945. Under Mao Zedong’s Great Leap Forward, steel was again a major focus, with Mao urging his rural workforce to raise smelter capacity past British levels within 15 years (a directive that led to widespread famine).

Today steel still holds sway in large parts of China’s economy, supporting heavy industries and real estate booms. National production has risen from 158,000 tonnes a year in 1949 to a record 928 million last year, representing just over half the world’s output.

China wants to take its leadership further and it did so last week by launching the world’s first futures in stainless steel – a steel alloy that is rolled into sheets, plates, bars, wire and tubes.

The move points towards a determination to establish stronger pricing power over the material, of which China is both the largest producer and the largest consumer.

Last Wednesday marked the debut trading day for the futures with gross transaction values of Rmb7.59 billion. All eight contracts closed below the listing price of Rmb15,585 per tonne, with some falling over 2%, Shanghai Securities News reported.

Analysts tend to attribute these results to Indonesia’s recent decision to bring forward its ban on exports of nickel ore – a key component in steelmaking – to 2020. While the news caused prices of stainless steel to spike to an 11-month high last month, the restrictions also pose a threat to producers’ margins by adding cost. Meanwhile, the trade dispute between the US and China is weighing on stainless steel demand in general.

The newly launched futures are the 69th product to originate from China’s burgeoning commodities market – which saw volumes reach Rmb184.7 trillion ($25.83 trillion) last year, according to China Daily.

Of the three main trading hubs, Zhengzhou – which trades methanol, wheat and cotton – recorded the strongest growth last year, with a 79% increase in transaction value to Rmb38.22 trillion.

Dalian, which focuses on agricultural products such as soybeans, eggs and corn, as well as coal and iron, reported an increase of just 0.36% to Rmb52.2 trillion.

Shanghai, which trades rebar and other metal futures, saw its turnover skid 9% to Rmb81.54 trillion. However, it benefited from the trading of an additional Rmb12.7 trillion in yuan-denominated oil futures from last March (the stainless steel futures are also traded in Shanghai).

In the Maoist era the government frowned upon the buying and selling of commodity derivatives. A transaction in 1973 changed perceptions. CR Ng Fung, a food unit under state-owned China Resources, was tasked with buying 470,000 tonnes of raw sugar at a time of extremely scarce supply. Knowing that its bulk purchase was going to push up sugar prices globally, it asked a Hong Kong-based agent to buy 260,000 tonnes of sugar futures in London and New York on its behalf, priced at around £82 per tonne. Within two months, the spot price had shot up to £105 per tonne, giving CR Ng Fung and its agent a profit of £3 million.

This bonanza saw the Communist Party rethink its position, and prompted finance minister Chen Yun to petition for the development of a futures market in China.

Today, the country is still nurturing its commodities trading market, moving from a scenario where there was a fragmentation of bourses to one of relative concentration. All three bourses now want to introduce more products to spice up their returns. Shanghai, for instance, is planning to roll out new alumina and gold futures contracts this year, adding to other recently launched futures for red dates, urea, glutinuous rice; and options for cotton, corn and natural rubber.


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