Posted on 07 Dec 2021
China is creating a market mechanism for its huge coal and coal-based economy to make a transition as per the 'dual carbon' policy, which will transform the entire fossil-based industrial infrastructure in the world's second largest economy.
The Secretary-General of China Futures Association announced at the 17th China (Shenzhen) International Futures Conference that the country is promoting the construction of the carbon futures market. Improvements in the upstream and downstream sectors will enable China's black industry achieve a green and low-carbon transformation.
Carbon goals & commodity prices
The 'dual carbon' goals and plans will inevitably have a profound impact on the prices of related products in the fossil fuel-dependant industries. It is necessary for companies to make full use of futures and other derivatives to manage their risks.
In the case of increased market volatility risks, it is recommended that entity companies maintain the original intention of risk management, scientifically and rationally use futures and derivative tools, manage the risks of the two markets, and do not blindly engage in speculative transactions.
Yajun said that in the past two years, due to the impact of the pandemic, the volatility of commodity prices has increased, and the demand for risk management using derivatives such as futures has risen significantly. The futures market has also ushered in a period of important opportunities for rapid development.
Price discovery in coal-based sector
By the end of the third quarter of the current calendar year, the futures market equity scale witnessed a year-on-year increase of 61.65%, and the market scale has steadily expanded. As an important industry in the development of the national economy, the coal-based industry, which collectively constitute the 'black industry' is also the main sector of the futures market.
This industry has also made considerable progress in recent years. As commodity price volatility increases and risk management requirements are on the rise, the price discovery and risk management functions of black-type futures such as thermal and metallurgical coal, iron ore, steel, etc. continue to play an important role.
With the in-depth development of multi-level derivatives markets such as forwards, rights, swaps, etc., the depth and breadth of risk management in the black industry has further improved, which has greatly promoted the optimisation and upgrading of the business philosophy and model of the entire carbon-based sector and supply chain.
Derivatives & 'dual carbon'
The production and sales pricing model, supply chain management, customer relationship management, and enrichment of operating methods have also been further deepened and improved. Futures companies and their risk management subsidiaries and other trading service agencies have gradually deepened the industry chain, and innovatively introduced new service models such as rights-containing trading and stable futures orders to better lead and serve the high-quality development of the industry chain.
The futures companies, as intermediary service agencies, should deepen their research on related listed futures varieties and industrial chains in light of the current new situation, experts have said. The futures industry will have to seize opportunities for green development, continue to innovate products and service models, and give full play to the advantages of financial expertise and risk management as well as promote and serve the black industry chain in the rational use of derivatives.
Futures companies are expected to make positive contributions to stabilise prices, help the industry achieve transformation and promote China's low-carbon transformation.
Source:SteelMint
