Renminbi Clearing in the Context of Commodity Hedging

Renminbi Clearing in the Context of Commodity Hed...

The hedging of price risks arising from the procurement of commodities has been a critical issue for industrial and trading companies for many years. In times of tighter margins, the professional management of commodity and energy price risks can make all the difference between a profitable and loss-making order.

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The rapid decline in nickel prices this autumn, as past experience shows, is likely to have led to a number of stainless-steel processing companies suffering some losses due to falling sales prices. While the steel industry's risk management has been using LME contracts as the main liquid hedging instrument for nickel for many years, there is no way of effectively reducing price risks for standard steel grades using derivatives. The success, meanwhile, of LME's steel contract does not currently provide sufficient liquidity for hedging relevant volumes.

The past few weeks were marked by two milestones for global trade. On the one hand, cooperation between the stock exchanges in Hong Kong and Shanghai was announced with the creation of Shanghai-Hong Kong Stock Connect. This enables investors to invest in China directly without requiring domestic cooperation partners and allows Chinese investors to operate more freely outside their own country. On the other hand, an additional significant obstacle to trade was also removed by the establishment of Renminbi clearing in Frankfurt, among others,

on November 17, 2014.

Furthermore, the Shanghai Futures Exchange, as a globally-important commodity exchange, has been offering attractive hedging instruments for base metals for some time now. All futures that are traded on this exchange are quoted and settled in Renminbi and, as a result, were not attractive to globally-active companies until now because handling margin calls in Renminbi was a complex matter and hedging instruments were not readily available for the currency components included in securing raw materials.

Futures for hot rolled coils, rebar and wire rod provide hedging instruments for the (stainless) steel industry via the Shanghai Futures Exchange. Experts expect that the partnership established between the stock exchanges in Hong Kong and Shanghai will also have a positive impact on turnover at the Shanghai Futures Exchange. Improved market access to the Chinese foreign exchange markets is likely to reinforce this effect. At any rate, it may offer export-oriented companies in Europe with an interesting opportunity to actively manage price risks for steel products and thus to defend themselves against frequently low margins in the industry.

Author: Bardia Nadjmabadi, Senior Manager,

© 2016 KPMG AG Wirtschaftsprüfungsgesellschaft, ein Mitglied des KPMG-Netzwerks unabhängiger Mitgliedsfirmen, die KPMG International Cooperative (“KPMG International”), einer juristischen Person schweizerischen Rechts, angeschlossen sind. Alle Rechte vorbehalten.

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