Leading the way of glass futures trading

In the past decade, an array of important raw materials and industrial products like aluminum, zinc and steel have been listed on the Chinese futures market.

These futures have complete cash markets and industrial chains, laying a solid foundation for the futures market to play a role in guiding the market price.

Some analysts take a different stance, arguing that the trading of some futures products like coke futures is still confined to people engaged in the financial industry, without listed companies in the trade involved, which has a limited impact on the physical market.

The same is true of glass futures. Participation of intermediary financial institutions alone is far from enough to sustain the development of the glass futures because the price is not decided by the market but by speculators. However, listed glass enterprises still show little interest in futures trading.

Serving the real economy

The report from the China Futures Association stated, "Currently, China's economic development has entered an important stage of industrialization. Surges in demand for raw materials in combination with drastic price fluctuations are pressing entity enterprises to seek risk management, which requires us to allocate resources rationally and further strive for a louder voice in deciding the price of staple commodities."

Trading Volume In the first 10 months of 2012, the total futures trade volume was 135 trillion yuan ($21.67 trillion), up 18.84 percent year-on-year. In 2011, the total futures trade volume was 137.51 trillion yuan, down 11 percent year-on-year. In 2010, the total futures trade volume was 309.12 trillion yuan, up 136.95 percent year-on-year. In 2009, the total futures trade volume hit 130.51 trillion yuan, up 81.48 percent year-on-year. In 2008, the total futures trade volume was 71.91 trillion yuan, up 75.52 percent year-on-year. Source: China Futures Association

The Chinese Government hopes to push the development of the futures market in an innovative way in order to better serve the real economy. The intention grows more evident with the unveiling of glass futures.

Amid the global economic slowdown and waves of economic structural adjustments in various countries, China's futures market should constantly improve its innovation capacity, speed up the steps of internationalization and intensify price risk management in particular to help enterprises set up brand superiority.

There have been dozens of cases illustrating how the futures market successfully serves the physical market. Corn futures released by the Dalian Commodity Exchange in 2004 has significantly stabilized the market and promoted the futures' transaction size.

By now, corn futures have played an indispensable role in guiding farmers and agricultural enterprises to arrange production, adjust planting configuration, draw up marketing plans and secure expected profits. Many corn deep-processing and feedstuff enterprises manage to avoid price risks by participating in corn futures trades.

Since the Shanghai Futures Exchange launched copper futures in 1993, it has acted as an effective tool for enterprises to hedge price risks, bringing great changes to the pricing model in the cash market. Now, copper futures have evolved into the most mature and widely used category in China's commodity futures market.

Files from China Futures Association suggest that China's futures market has already opened up to overseas enterprises to engage in domestic futures trading.

In the future, China will undergo further domestic restructuring, continue its opening-up strategy and face fiercer competition for pricing powers. For this reason, China's futures market has to accelerate innovation in market supervision and promote institutional investment.

The government should release more agricultural commodity futures like crude oil, iron ore, rapeseed, egg, wood fiberboard and potato, which may better solve problems related to agriculture and push the development of the economy.

Moreover, deals can be reached without transporting glass products to third-party warehouses. As glass products are fragile and large in surface area, it's difficult to find glass warehouses.

Factory delivery can better meet the purchasers' needs. Since downstream glass firms always make purchases according to orders, factory warehouses can supply them with products of various specifications.

Files from the Zhengzhou Commodity Exchange also suggest the new trading pattern allows purchasers to take delivery of glass products directly from the factory, significantly cutting transportation and loading costs and avoiding possible damage to glass products.

Pricing power

China has ranked first place in plate glass output for 23 straight years. Will the first glass futures give China a leg up in gaining pricing power?

According to a study by Zhang Yumin, an analyst from Minmetals Futures, the top 10 glass manufacturers in China only account for 39 percent of the total, a relatively low rate of industrial concentration. The eastern regions control 86 percent of the total plate glass capacity, highlighting serious market segmentation.

Therefore, while China is the largest glass manufacturer in the world, segmentation has weakened its clout, hindering its ability to gain pricing power. The launch of glass futures will improve the pricing mechanism of glass products.