With the gradual maturity of the thermal coal futures market, the active participation of industrial companies, and the increasing awareness of risk management, many companies flexibly use futures tools for hedging and inventory management based on their own needs, effectively meeting the needs of companies to reduce costs and increase efficiency.

Flexible hedging of coal power companies reduces costs and increases efficiency

Hedging the risks in the spot market through hedging is the main way for many entities to participate in the futures market. In the past 7 years since the listing of thermal coal futures, coal power companies have gradually established the concept of risk management, and at the same time they have accumulated a lot of hedging experience based on their own actual conditions, which has played a great role in reducing costs and increasing efficiency of coal power companies.

Coal fuel costs account for about 70% of the cost of thermal power generation companies, and reducing coal procurement costs is a key measure for power generation companies to improve their overall benefits. Take a power plant in Jiangsu as an example. In the fourth quarter of 2016, coal spot prices rose rapidly, reaching a maximum of 730 yuan/ton. At the same time, affected by the insurance supply policy and the expected increase in production, the company researched and judged that the thermal coal futures price fluctuated below 650 yuan/ton for a long time. In order to lock in the cost of coal, the power plant and Jinying Capital launched a cooperative hedging, purchased and maintained value through the 1701 thermal coal futures contract, and finally realized a profit of 9.5 million yuan, which reduced the purchase cost of the company by more than 80 yuan/ton, and achieved cost reduction and increase The main purpose of effectiveness.

Under the background of responding to the national policy to guarantee long-term coal supply, state-owned coal production enterprises, as the pioneers in fulfilling their social responsibilities, urgently need risk management tools to deal with coal price fluctuations and lock in profits.

Yuntianhua Group is a comprehensive state-owned holding company and one of the earliest domestic companies involved in thermal coal futures. Since the coal supply-side reform in 2016, when coal spot prices fluctuated, the company used futures tools to hedge its spot positions and achieved good results. The relevant person in charge of the company told a reporter from the Futures Daily that when the coal spot price is at a high level, the company will use the current price difference as a reference to adjust the pace of spot purchases and lock the spot purchase price through the futures market. The monthly spot price difference has converged, and the company avoids the risk of spot price fluctuations through timely liquidation or delivery.

In March 2017, the spot price of thermal coal was about 650 yuan/ton. With the end of the heating season, the thermal coal market has entered the traditional off-season for demand, and the market expects coal prices to fall. A large state-owned coal production company in Shaanxi sold 2,000 lots (equivalent to 200,000 tons of spot) through the 1705 thermal coal futures contract. At the beginning of May, the spot price fell to 610 yuan/ton and the futures price fell to 510 yuan/ton. The company chose to liquidate its position and realized a futures profit of about 16 million yuan, which was still profitable after making up for the spot loss. Through innovative business models, the company not only achieved the expected goal of maintaining value, but also increased sales profits and achieved stable operations.

Dynamically adjust and use futures to manage inventory

Enterprises have many practical needs for inventory management. When the prices of inventory goods fluctuate greatly, enterprises need to avoid price risks to ensure stable production and operation; they need to reduce inventory management costs when prices are stable. Therefore, the use of the futures market for inventory management has become a useful attempt in the daily inventory management of coal power companies.

In the summer and winter peak seasons, the demand for thermal coal is strong, and the inventory declines rapidly. The centralized purchase of power plants will cause the price of coal to rise rapidly. To this end, relevant ministries and commissions have issued relevant documents requiring power companies to increase their inventory levels and maintain high inventory levels before the peak of coal consumption. Problems such as capital pressure, inventory quality concerns, and price risks for power companies are particularly prominent at this time.

Take Zheneng Group as an example. In the first quarter of 2018, the inventory of Zheneng Group's power plants was rapidly consumed, falling from 4.2 million tons to 2.63 million tons. To this end, Zheneng Group has taken decisive measures. By buying thermal coal futures 1805 contract, the final delivery of 1.46 million tons, the average price of opening a warehouse is about 50 yuan/ton lower than the spot price of the same period, which can quickly fill the supply gap and ensure inventory safety. At the margin, problems such as the shortage of market resources and the large increase in coal prices caused by large-scale centralized procurement of spot materials have been avoided.

Coal companies use futures tools to flexibly adjust their inventory to protect their business operations while guaranteeing coal supply. During the Spring Festival of 2019, in order to ensure the supply of coal, Yitai Group selected the opportunity to establish a virtual inventory through the thermal coal futures 1901 contract while increasing the intensity of spot transportation. As the Spring Festival approached in January of that year, coal mines in the producing areas continued to shut down during holidays. The supply of pitheads was temporarily tight, and it was difficult for downstream power plants to purchase spot goods. In this context, the company chose to deliver and receive goods in the futures market, and directly supply all high-calorie, low-sulfur, high-quality thermal coal delivery products with a calorific value of nearly 5,500 kcal and a sulfur content of less than 0.5% to downstream power plant customers, not only realizing inventory Rotation, efficient completion of winter guarantee work, and also helped downstream customers to solve the urgent need of coal shortage.

Futures blessing business model is more diverse

With the deepening of the integration of coal and electricity industries in recent years, the proportion of long-term associations has increased rapidly, and the living space of coal traders has become relatively limited. In order to cope with the exposure risk in operation, Rui Maotong, the largest domestic coal trading company, has actively participated in the futures market since its listing. The futures position has been maintained at 10,000 lots (equivalent to 1 million tons of spot) for a long time, and reached the peak. 30,000 lots (equivalent to 3 million tons of spot), and the cumulative delivery and EFP volume is nearly 1 million tons.

“Rui Maotong participates in the futures market based on market conditions and its own conditions. The actual operation is mainly hedging. At the same time, it also carries out arbitrage trading, basis trading and physical delivery (including EFP) to help itself get out of trouble, stabilize operations, Realize profits, while also providing cooperative hedging transactions for industrial chain trading partners.” According to the relevant person in charge of Rui Maotong, under the escort of the futures business, Rui Maotong continues to grow bigger and stronger. The coal trade volume has increased from 2000 in 2013. 10,000 tons increased to 80 million tons in 2019.

It is understood that relying on the coal industry's operating experience and supply chain advantages, the company actively uses thermal coal futures to hedge trade risks brought about by fluctuations in spot prices, ensuring the company's rapid and healthy development of domestic and foreign businesses, and achieving consecutive years of profitability. At the same time, the company uses warehouse receipts or port inventory to complete direct financing through professional risk management companies and banks to provide financial support for the company.

The person in charge said that through long-term participation in thermal coal futures, Rui Maotong deeply understands that futures are an effective tool that can effectively serve the real economy and a "stabilizer" for the development of spot enterprises. It is helping enterprises to expand production and operation scale and stabilize And it plays a significant role in smoothing corporate operating profits.

Talking about the experience of participating in the futures market, the person in charge stated that the company should operate the futures business department as an important strategic department. If it is necessary to participate in the delivery, the decision-making level must mobilize the arrangements. The spot department actively cooperates and actively understands the specific delivery requirements. Cooperate with the operation of the futures department. Enterprises must always have a positive attitude towards using the futures market to help their own steady operations. On the one hand, they should learn futures operation mode, and on the other hand, they should pay attention to improving the ability to grasp opportunities. Only by taking a long-term perspective, can they use futures tools and achieve evergreen foundations.