Research results | From the Lun Nickel incident, the risk management of the futures market market in my country

As Chinese companies have gradually improved their positions in the global commodity supply chain, the importance and complexity of enterprises in the global financial derivative market risk management is becoming more and more prominent. In March 2022, under the influence of the "Black Swan" of Russia and Ukraine, a rare futures price war in history surrounded the non -ferrous metal -nickel eruption. While sensational the global financial market, it has also pushed the main short -term global stainless steel industry leader and Chinese private enterprise Qingshan Holdings Group, which has always been low -key. Recently, the China Financial Case Center of the Wudaokou Finance College of Tsinghua University officially included the teaching case "2022lme Nickel Futures Situation Storm", which interpreted the incident in detail.

1. The main reason for the outbreak of the incident

The main reason for the soaring nickel price of LME in this round is the supply side. In the case of low nickel inventory and continued decline, the Russian -Ukraine conflict broke out. The possibility of reducing production of nickel overseas refinery and the suspension of logistics has exacerbated the risk of nickel spot liquidity, and created conditions for the significant increase in nickel prices. At the same time, the deficiencies of the LME nickel futures trading system have also increased the possibility of the market's impact.

1. LME nickel inventory continues to decline.

Since 2021, LME nickel inventory has shown a monthly decline. In January 2021, the LME nickel inventory was 249,000 tons, and after that, it fell almost the previous month. By March 14, 2022, LME nickel inventory fell to 75,300 tons again. In the case of low nickel inventory and continued decline, the Russian -Ukraine conflict broke out. The possibility of reducing production of nickel overseas refinery and the suspension of logistics has exacerbated the risk of nickel spot liquidity, and created conditions for the significant increase in nickel prices. Although in recent years, Russia's nickel production has gradually decreased in global share, but from the perspective of electrolytic nickels in the futures market, Norilsk ("Russia Nickel") in Russia occupies about the global electrolytic nickel output) 15%.

Historically, the United States had economic sanctions on Russia in April 2018 and was later canceled in early 2019. The news of sanctions once stimulated the rise in aluminum prices in the world, and the price of LME three months of aluminum futures rose 24%within half a month. After the Russian -Ukraine conflict, the United States and Western sanctions against Russia, if Russia is excluded from the delivery of the Lun Nickel Futures, it will inevitably cause a significant reduction in LME to deliver nickels, exacerbating market panic and LME extrusion risks. In fact, Russia's nickel has not been excluded from LME delivery products, and LME has been paying close attention to the development of the situation and updating the information that may affect LME.

2. The defects of LME nickel futures trading system leads to increased possibility of impact

Established in December 1876, LME is a metal exchange with a history of 146 years. Its metal futures and option contract transactions account for 80%of global metal futures transactions, and are the world's largest non -ferrous metal exchange. However, this time Lun Nickel's soaring incident has also exposed LME's lack of transaction settlement and risk control system.

First, the risk control system such as rising and falling stops is missing

The rising and falling system (also known as the daily price maximum fluctuation restriction system) has become a means of preventing transaction prices from surge in transaction prices and suppress excessive speculation. In the futures market, the combination of the rising and falling system is combined with the margin system to create necessary conditions for the daily risk control of exchanges, members and customers. effect.

LME, who has always pursued the concept of "market freedom", has a limited means of market supervision and risk control. Although it was acquired by the Hong Kong Stock Exchange in 2013, LME's institutional framework has not changed greatly. Before the Lun Nickel surge incident, LME did not hold the risk control system such as positioning limit, rising and falling stops. This has led to a prone to surge and plunge in extreme circumstances. Traders who are in an unfavorable position are likely to face huge amounts of funds with insufficient margin in a short time.

After suspension of nickel transactions on March 14, LME urgently introduced the membership of members' position reports and the duration of the rising and falling. Lun Nickel's market has gradually returned to smooth rationality. LME is too passive and lagging on risk response, providing conditions for this risk to a certain extent.

Second, the selection of the bottom -level assets of the futures contract

Providing opportunities for hedging price risks for physical enterprises is one of the basic functions of the futures market. However, if the scope of futures contract delivery is too narrow and disconnect with the product form in the actual industrial chain, it will inevitably lead to the incompatibility of the spot supply and the futures preservation demand for futures, making the market more likely to suffer extreme fluctuations.

From the perspective of the design of the Lun Nickel Futures Contract, only the I -class electrolytic nickel with a minimum of 99.8%of the standard metal can be used for the delivery of LME nickel futures contracts. However, in the industrial chain, there are many forms of nickel -nickel -based iron, nickel -iron -based nickel nickel, nickel salt mainly nickel sulfate -all these need to be hedge in LME, but they are not standards for standards Delivery. Aoyama Holdings Group, which is in the center of the storm, has a large amount of nickel production capacity in Indonesia, but it does not produce a standard level 1 electrolytic nickel in the nickel contract. Essence

Since 2012, the global category of Nickel refining projects has been limited. The main increase comes from the nickel iron iron production capacity produced by Indonesia, nickel ore, and the global nickel structure has continued to change. In 2012, category I nickel accounted for 51%, and 38%of category II nickel; 2021 accounted for 31.4%and 63.6%, respectively. The proportion of type I nickel products that could be used for futures delivery continued to decline. In other words, there are structural contradictions in the futures market and industry products. The existing nickel futures contract design cannot keep up with the huge changes in the global nickel industry. Insufficient contradictions have led to the disadvantages of Lun Nickel Futures that are susceptible to hype. Therefore, the LME contract is criticized as "lack of liquidity, not representative, easy to manipulate and volatility." If the underlying assets of a futures contract are gradually replaced by other forms of assets in the real industrial chain, the exchange generally considers the scope of delivery of new contracts or expanding the original contract. However, whether it can be successfully launched depends on the acceptance of many market entities such as exchanges, municipal merchants, and manufacturers, and need to be cautious to choose and discuss.

Third, off -site transactions are opaque

As a whole, the market improves transparency to enable all participants to obtain information equally and make participants confident in liquidity and price. LME transactions can be performed through three different places: Ring (Ring), electronic trading system (LMESELECT), and off-site markets (telephone markets between office, Inter-Office Telephone). Limited scale.

LME adopts membership grading management, contract hierarchical settlement and other systems. LME basic metal members include 7 categories, and the supervision of the exchange is more for liquidation members (first 3 categories). Non -liquidated members and customers have not included in the scope of information disclosure and supervision. Essence In the off -site market, the broker members can match the customer's bulls/short instructions, and incorporate the rolled outlet into the market trading in the field. This makes LME a large amount of transaction volume generated outside the field, and the transaction details are not announced. When the price fluctuates violently, LME cannot understand the position of the off -site traders, and it cannot make risk warning in advance.

In fact, LME has made efforts to improve transaction transparency many times, but has been opposed by many members. In January 2021, considering the principle of fairness and efficiency, LME focused on discussing the degree of digitalization of transparency and fairness in the "discussion documents on future market structures" released by released. It is intended to combine the flexibility of the telephone market between the office with the transparency of the electronic trading market, allowing members to conduct bilateral negotiations before the transaction execution, and then transaction at lower costs in the electronics market. But the discussion did not receive the support of members. In March 2022, LME CEO Matthew Chamberlain said in an interview with Bloomberg that Wall Street Bank was responsible for the Lun Nickel market with large -scale squeezing. Because these banks opposed LME's measures to increase the transparency of the metal market.

It should be pointed out that the off -site transaction itself is a personalized transaction between the market entities. Compared with the on -site transactions, it has greater flexibility and hidden secrets. transparency. However, the exchange formulates a clear set of rules to improve market transparency.

2. Enlightenment of my country's enterprise risk management

According to Aoyama Holdings, its high ice nickel project in Indonesia was put into production in December 2021, and 800,000 to 1 million tons of high -ice nickel production capacity was made each year. If Aoyama Holdings has an empty order in LME, it is equivalent to the annual capacity of 1/5-1/4 of the annual capacity. Although the nickels produced by Aoyama Holdings are non -delivery products, high -ice nickel pricing is also based on the official offer of LME nickel futures, plus a discount for liter water. Therefore, from the perspective of Qingshan Holdings, it is just to keep some of the production capacity in the market. Qingshan Group holds the empty order for risk management, but whether the size of the shortness is too large, whether it should be adjusted in time to be questionable.

The goal of corporate risk management is to prevent the impact of external factors and ensure that the company can maintain the ability to make value -added investment. In the process, derivatives were designed and widely used. Although the original intention of designing derivatives is to prevent the losses caused by the price fluctuations of basic assets and make price risk transfer. However, as a transactionable securities, the price fluctuations of derivatives have their own characteristics and are generally affected by basic assets, macro factors, and market participants' behavior characteristics. In practice, derivatives often have high risk due to their characteristics, leverage trading, flexible design, and complex contracts. If the strategy is improper, it may lead to huge losses. Because of this, Warren E. Buffett once called "derivatives are large -scale lethal weapons in the financial field."

Performing the hedging through the futures market is an important part of the risk management of modern enterprises. As a financial derivative product, the futures have their own market operation rules. When participating in futures transactions, companies cannot rely on their advantages in their own market market. They ignore the risks of the futures market. Essence

First, futures transactions have high requirements for liquidity funds, and enterprises can use a variety of financial instruments for risk hedging. Although Aoyama Holdings is mainly a transaction with LME member banks at the off -site market, LME Member Bank members can use credit transactions for large customers, do not need to pay margin and maintain margin, risks, and exchanges and regulators generally do not interfere. However, LME member banks have the right to deposit the deposit to them at any time in cash or other forms to ensure that the other party performs contract obligations. If the customer fails to fulfill this obligation, member banks can immediately force liquidation, misappropriation of their deposits, and recover the arrears. Therefore, once the extreme price fluctuations are encountered, the pressure of the company's additional deposit to the member bank is still very large. It is the strict margin system and the marketing system of the futures market that makes futures transactions higher requirements for liquidity. In contrast, non -standardized financial derivatives such as long -term contracts and swap swaps have no requirements. In addition to futures, enterprises can also use derivatives such as long -term contracts, swaps, options, etc. for risk hedging.

Second, the futures investment strategy needs to be adjusted in a timely manner according to market conditions. LME has no limit on the limit of the limit, the narrowness and mismatch of the nickel contract delivery products, and the continuous decline in inventory are public information. In addition, the market panic caused by the Russian -Ukraine conflict is an important factor that leads to rising nickel prices. Enterprises need to pay close attention to the risk of futures market, and adjust the futures investment strategy in real time.

Third, fully consider the mismatch of the delivery product, and match the position on demand. The mismatch of futures delivery of futures delivery and the spot product that requires risk hedging is a common problem encountered by the hediders. The risks brought about by the price fluctuations between the preservation tool and the preserved goods are called "base difference risks". Basis is the difference between the spot transaction price and the futures of the exchange. The fluctuation of the basal difference brings an unavoidable risk to the hediders, which directly affects the value preservation effect, especially when the alternative variety is used for the hedging period. Therefore, it is necessary to fully consider this risk caused by the mismatch of the delivery, and configure the position on demand. Enterprises should formulate risk prevention measures, reserve liquidity supplementary solutions, and timely supplement funds in time when extreme markets appear, and disperse positioning or delivery to reduce risks to resolve risks.

In short, as an effective tool for corporate risk management, the company can neither "talk about tiger color changes", nor can we despise the risks in the process of participating in the derivative market. Treating derivatives should seize the essence of it as a risk management tool, and to follow it with it. Combining risks in enterprise operations, deeply understand the contract rules and trading systems of the trading market, pay attention to factors affecting futures prices, and adjust the investment strategy in a timely manner to truly escort the enterprise.

(The full text was published for the first time in the "Tsinghua Financial Review" May 2022 issue)

About the Author

Zhang Xiaoyan: Deputy Dean of Wudaokou Financial College of Tsinghua University and Professor Xinyuan Finance Chair Professor

Qi Zhiping: Senior Research Council of China Financial Case Center of Wudaokou Financial College of Tsinghua University

The China Financial Case Center is a professional research and teaching service institution that conducts financial case research, case development, and case library construction. At present, in the direction of regulatory policies, international finance, financial markets, corporate finance, fintech, and digital economy, multi -level case libraries such as teaching cases and business cases have been built. Case Library.

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