Summary: Chinese's hot-rolled coil futures are about to enter their tenth year on the market. In the past decade, hot-rolled coil futures have been widely recognized by the market and are becoming an important basis for pricing reference in the spot market. Judging from the current market operation, the price fluctuations of hot-rolled coils are mainly affected by the supply and demand pattern, cost constraints, market expectations and macro factors. In addition, since the listing of hot-rolled coil futures, the steel industry's ability to use futures for risk management has gradually increased, and the hedging model has been continuously innovated, which has greatly maximized the effectiveness of hot-rolled coil futures in serving the steel industry. In order to promote the further performance of the hot-rolled coil futures service industry, this article further puts forward relevant suggestions such as increasing market cultivation, activating non-main contracts and accelerating the listing of options contracts.


1. Operation status of hot-rolled coil market
Hot-rolled coils are steel plates that are heated and rolled by rough rolling and finishing rolling mills using slabs as raw materials. The hot steel strip coming out of the last rolling mill of finishing rolling is cooled to the set temperature through laminar flow, and is rolled into steel strip coils by the coiler. The cooled steel strip coils are processed by different finishing lines (leveling, straightening, cross-cutting or longitudinal cutting, inspection, weighing, packaging and marking, etc.) according to the different needs of users. Because hot-rolled coils have excellent properties such as high strength, good toughness, easy processing and shaping, and good weldability, they are widely used in manufacturing industries such as ships, automobiles, bridges, construction, machinery, and pressure vessels. Hot-rolled coils can be divided into: ordinary carbon structural steel, low alloy steel, and alloy steel according to their different materials and properties. According to its different uses, it can be divided into: cold forming steel, structural steel, automobile structural steel, corrosion-resistant structural steel, mechanical structural steel, welded gas cylinder and pressure vessel steel, pipeline steel, etc.
Hot-rolled coils are currently one of the important steel varieties China . In terms of production capacity, according to statistics from www.lgmi.com, there are 96 hot-rolled coil production lines in 56 steel plants across the country in 2022, and the total hot-rolled coil production capacity was 312.91 million tons. In terms of subdivision, among the 96 hot-rolled coil rolling lines in China, the 1780-1880mm rolling line dominates, with a total production capacity of 109.23 million tons, followed by the 2050mm-2300mm rolling line with a total production capacity of 75.34 million tons. In addition, there are a total of 7 ESP production lines with a total production capacity of 15.5 million tons, mainly distributed in East China, but also in North China and South China. In terms of new production capacity, according to statistics from www.lgmi.com, a total of 19 million tons of new production capacity were released last year, concentrated in South China, North China and Central China. In terms of regions, the hot-rolled coil and plate rolling line production capacity in North China ranks first with 106.15 million tons. The production capacity of steel plants such as Zongheng, Ganglu, and Tangshan Iron and Steel in the region ranks first; the production capacity of East China ranks second, with a total production capacity of 75.6 million tons. the production capacity of Baosteel, Shagang, Rizhao Steel, Maanshan Iron and Steel, and Meishan Iron and Steel is relatively concentrated; the production capacity of the hot-rolled coil and plate rolling line in Central China ranks third, with a total production capacity of 40.16 million tons, and the production capacity of Wuhan Iron and Steel and Baosteel Qingshan ranks first. In addition, the hot-rolled coil production capacity of steel plants in other regions also accounts for a certain proportion.
In terms of the futures market, it has been nearly 10 years since hot-rolled coil futures were launched in March 2014. As an important product in China’s futures market, the listing of hot-rolled coil futures has not only enriched the trading varieties of the futures market, but also It also provided more hedging opportunities for the steel industry. With the gradual increase in corporate participation, the influence of hot-rolled coil futures is gradually increasing. It has the characteristics of good liquidity and strong trend, and is increasingly favored by industry and capital. According to public information, there are thousands of industrial companies that have participated in hot rolled coil futures trading, including hundreds of steel mills and thousands of companies. Traders, major domestic steel production enterprises and domestic and foreign mainstream traders have continued to participate in hot-rolled coil futures trading for many years. Futures prices are also becoming the main reference factor for pricing by upstream and downstream parties.


2. Main factors affecting the price of hot rolled coils
(1) Supply and demand determine the long-term trend of prices
Supply and demand are the most important factors in determining long-term price trends. Before 2008, domestic demand for hot-rolled coils was strong. At the same time, hot-rolled coils had higher requirements for production technology. At that time, only a few large steel mills were capable of production, the number of production lines was also small, and the market supply capacity was very limited. Therefore, The market price of hot-rolled coil plates is generally higher than the price of construction steel materials such as rebar and wire rod.
With the rapid growth of domestic hot-rolled coil production and the easing of the contradiction between supply and demand, the price difference between market prices and other steel products has gradually narrowed. Especially after the financial crisis in 2008, China's large-scale investment drove the growth of demand for rebar and wire rods, and the average price of rebar began to be higher than the average price of hot-rolled coils. However, after experiencing rapid growth, the market has basically become balanced. The current contradiction between supply and demand in the market is not obvious, and prices have gradually stabilized.
(2) The high and low points of upstream and downstream cost constraint prices
The relationship between supply and demand determines the price trend, and cost determines the upper and lower limits of steel prices. The upper limit of steel mill prices is basically determined by the costs of downstream industries. When the costs of downstream industries can no longer bear the increase in steel prices and losses occur, steel prices often turn from rising to falling. On the contrary, the average production cost of the steel industry determines the lower limit of steel prices. When steel mills generally suffer losses, there is little room for steel prices to continue to fall. It can be seen from this that the cost of the industry has become an important factor in restricting the high and low points of prices.
(3) Market capital supply and demand affect steel price levels
When market funds are relatively abundant, it often corresponds to high prices, and when funds are relatively tight, it often corresponds to low prices. Taking 2011-2012 as an example, as banks tended to be cautious in lending to the "two highs and one capital" industry, funds in the steel industry were generally tight, which became one of the influencing factors for the low operation of steel prices. Due to the epidemic in the past few years, market funds have been relatively loose. Driven by funds, steel prices have also seen a wave of continuous increases. The looseness and tightness of funds have also affected the absolute price level of steel prices.
(4) The adjustment of ex-factory prices by large steel mills has a greater impact on the market
The sales radius of hot-rolled coils is relatively large, and the product concentration is higher than that of construction steel. In addition to paying attention to the price policies of local leading steel mills, market parties will also pay attention to the adjustment policies of ex-factory prices of large steel mills. For example, Shagang's sales area is mainly in East China and it is the leading steel plant in the region. However, the region is also concerned about the ex-factory price adjustment policies of Baosteel, Anshan Iron and Steel, Wuhan Iron and Steel, and Hebei Iron and Steel. Large steel plants have a very obvious guiding role in market prices.
(5) Market expectations play a boosting role in price increases and decreases
Changes in market expectations contribute to the rise and fall of market prices by changing supply and demand and market capital. If the market's expectations for future price trends rise, traders and downstream companies will often be more active in placing orders and increasing inventory, stimulating further rises in market prices. On the contrary, when expectations are falsified by the market, the market will begin to fluctuate in the opposite direction. The back-and-forth between expectation and expectation differences magnifies the price range, which plays a certain role in promoting the rise and fall of prices.
(6) The impact of financial markets on steel prices
Since the listing of hot-rolled coil futures, the financial attributes of its products have gradually emerged. The futures market and the spot market have become increasingly closely linked, with prices influencing each other. In other words, the spot market reflects changes in the current market situation, and the futures market reflects future expectations, forming mutual constraints with the spot market. Futures prices have also become an important reference factor for steel mill pricing.

3. Main modes of hedging by using hot-rolled coil futures
In the past ten years, with the gradual development of the hot-rolled coil futures market, the ability of steel companies to use futures for hedging has gradually improved, and various hedging models have gradually become more mature. Overall, the main hedging models of companies are as follows:
(1) Selling hedging successfully avoids price downside risks
Around the Spring Festival this year, due to factors such as the end of the epidemic and the relaxation of market speculation and real estate, steel futures prices continued to skyrocket. However, actual spot transactions were weak, and downstream enthusiasm for taking goods was not high. A steel production company actively built positions through futures, and on March 10, 100,000 tons of futures contracts were sold daily as a hedging position. At that time, the spot price was 4,400 yuan/ton and the futures price was 4,400 yuan/ton.
As the spot goods are gradually sold out, the futures contracts are gradually closed. By April 10, when all positions were closed, the futures price was 4,130 yuan/ton and the spot price was 4,220 yuan/ton. In the end, the profits from futures hedging covered the losses in the spot market, achieving the expected purpose of hedging.
(2) Trading companies buy hedging to optimize inventory costs
A steel trader in the Tangshan area has a certain amount of circulating inventory on a daily basis, with a daily inventory of about 100,000 tons. However, at the end of 2022, as the end of the year was approaching, the company's funds began to become tight, and a certain amount of inventory needed to be sold to return cash flow. However, the market was in a slightly rising stage at that time, and the company was worried about losing profits after the spot goods were shipped out of the warehouse, so the trader made some inventory optimization through hedging, that is, selling 60,000 tons of hot-rolled coils in daily inventory for spot sales, and at the same time buying 60,000 tons of futures hot-rolled coil 2301 contracts in the futures market to establish futures inventory.
On December 1, the spot price of hot-rolled coils was 3,900 yuan/ton, and the futures price was 3,750 yuan/ton. As of the end of settlement on December 30, the spot price of hot-rolled coils was 4,180 yuan/ton, and the futures price was 4,140 yuan/ton. In this way, futures hedging not only reduces the holding cost of inventory, but also does not lose the profits brought by price increases.
(3) Downstream enterprises buy hedging to lock in procurement costs
At the beginning of last year, due to the continuous increase in prices of upstream raw materials, the pressure on steel costs was increasing. Steel prices have been showing signs of rising. A certain downstream procurement department was worried that the price increase of coils caused by the price increase of raw materials would increase the company's procurement costs, so it adopted futures buying hedge to avoid the increase in procurement costs caused by price increases. The company completed the hedging position establishment on January 4 at the beginning of the year. At that time, the spot price of hot-rolled coils was 4,890 yuan/ton and the futures price was 4,390 yuan/ton.
By the end of the first quarter, the hedging position was closed, the spot price of hot-rolled coils was 5,180 yuan/ton, and the futures price was 5,090 yuan/ton. Hedging through futures buying not only reduces the company's raw material procurement costs, but also avoids the operating risks caused by rising spot prices.

4. Some suggestions for the development of hot-rolled coil futures market
The listing of hot-rolled coil futures has provided a good hedging tool for China's steel industry. Over the past decade, hot-rolled coil futures contracts and delivery rules have been continuously optimized and improved, and industry participation has become higher and higher. This has also raised requirements about the development of the futures market. Based on the current communication situation with mainstream enterprises in the industry, we put forward the following suggestions:
(1) Increase marketing efforts.
As the main commodity trading product in China, hot-rolled coils have a broad social foundation. However, there are still many deficiencies in the industry's participation in futures, especially for some small manufacturing companies and trading companies. There are still many problems to be solved in terms of corporate futures system construction, organizational structure adjustment, and business thinking changes. Institutions or industry associations should strengthen training and learning on futures system construction, and try to organize some meetings and discussions to exchange ideas as far as possible to fully enable futures to be used by enterprises in the entire industry. This can not only increase market liquidity, but also continuously attract enterprise participation and form a positive cycle, and finally play a real service function for the industry.
(2) Further activate non-main contracts to provide better liquidity for hedging.
At present, the main active contracts of hot-rolled coil futures are still concentrated in January, May and September, and the liquidity of other contracts is still insufficient. There are still certain restrictions on the continuous hedging of enterprises under certain conditions. It is later suggested that under the guidance of the exchange, the role of each market maker can be fully utilized, more liquidity can be introduced, and non-main contracts can be further activated to facilitate flexible selection of hedging cycles, basis spreads, and forward pricing.
(3) Accelerate the listing of hot-rolled coil options contracts to provide enterprises with more abundant risk management tools.
At present, rebar option contracts have been launched, and spot companies use option tools to achieve more personalized hedging needs. Subsequently, it is recommended that the exchange speed up the listing of hot-rolled coil options to further enrich the hedging tools in the steel industry and also meet the more personalized hedging needs of various enterprises. At the same time, the comprehensive utilization of futures and options can help companies find investment portfolios that are more suitable for their ability to resist risks, and further enrich the ability of the derivatives market to serve the real economy.