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Two Months Since the Launch of Urea Futures: Are Physical Enterprises Motivated but Also Concerned? Author/Source: China Fertilizer Network Date: 10-16-2019 Clicks: 12 It has been two months since urea futures were introduced; what is the current situation regarding physical enterprises’ participation in futures trading? How’s it working? From October 10th to 11th, at the 2019 Nitrogen Fertilizer Marketing Conference, reporters learned on site that companies hope to find new opportunities for survival through urea futures, while simultaneously reducing the risks associated with price fluctuations in the spot market. However, due to concerns about the risks in the futures market, most companies are cautious; even those planning to get involved in the near future say they need to be fully prepared. Reporters learned on site that urea producers can get involved in futures through two methods. One option is to apply to become a urea delivery warehouse (plant). To date, 5 provinces including Shandong, Henan, Jiangsu, Hebei, and Anhui have designated 12 delivery plants and warehouses. By becoming a delivery warehouse, enterprises can charge warehouse management fees. It also helps to enhance brand awareness and boost spot sales. Henan Jinkai Chemical Investment Holding Group Co., Ltd. is one of the 12 urea delivery plants designated by the Zhengzhou Commodity Exchange. Wang Jing, the general sales manager, told reporters that the company has been preparing for the past two months, but has not gotten involved in the actual operations. At present, the company has established relevant departments and put in place systems for futures delivery, but its understanding of futures operations is not yet very deep. To move forward with the work, more professional guidance is needed. Another option is to become a brand eligible for inspection-free delivery. To become a brand eligible for exemption from inspection during delivery, it is essential to have superior product quality. Additionally, when a company’s products are used in physical deliveries, the corresponding inspection procedures can be waived. At present, 6 companies including Shanxi Tianze Coal Chemical Group Co., Ltd. have become brands eligible for exemption from inspection for urea futures. According to Duan Haijing, head of the sales department at Shanxi Tianze Coal Chemical Group Co., Ltd., the company has organized specialized teams for training to help them become familiar with futures. The next step is to advance futures operations, leveraging the functions of futures through price discovery and hedging to promote spot production and sales. He mentioned that most manufacturing enterprises are very cautious about getting involved in futures, and risk control is the biggest challenge. Urea trading companies hope to explore new sources of profit through futures trading, but they still have concerns about the current futures market. Zhang Yan, general manager of the nitrogen fertilizer department at Sichuan Agricultural Inputs and Fertilizers Co., Ltd., explained that the company established a research team at an early stage to collect and analyze factors affecting the market, build its own database, and conduct simulations. I hope to get ready as soon as possible to engage in futures trading and create new sources of profit for the company. However, in her observation, due to the insufficient inflow of industrial funds into the futures market, there is currently a lack of alignment between futures and spot markets. As industrial capital becomes more involved, the positive correlation between futures and spot prices will grow stronger, and futures prices will also serve as a reference for spot trading. Cong Lintao, General Manager of Tianhua (Tianjin) Fertilizer Trading Co., Ltd., believes that for urea manufacturers, a lack of knowledge about urea futures exposes them to greater risks. Drawing on the experience of many futures markets for industrial products, he believes that urea futures will gradually change the pricing mechanisms and sales structures in the spot market, thereby breaking the situation in which production companies hold control over pricing. He predicts that one day, urea will be traded at fixed prices, with buyers having the right to agree with manufacturers on the purchase price and delivery time based on futures prices. In the interviews, more companies said they were still waiting to see. Meng Lingxin, deputy general manager of Genlido Biotechnology Co., Ltd., told reporters that the company is not yet prepared to trade in futures. In his understanding, whether it is manufacturing companies, trading firms, or companies that purchase raw materials, the methods used to trade futures may vary, but the goal is always to reduce risks associated with physical goods. For most companies, in addition to experience in the spot market, it is necessary to thoroughly study technical analysis in the futures market. Data shows that as of October 9, after 38 trading days, urea futures saw 6 million contracts traded, resulting in a total trading volume of around 120 million tons – more than twice the annual production volume of physical urea.