Influence Of Hedging On Profitability Of Base Metal Industries

After China joined WTO, with the fast development of the economy, base metal industry has been well developed. Yet, with the drastic change of global macro-economy, prices of base metal fluctuated in a more frequent pace than ever before. Smelters face difficulties in pursuing a sustainable performance, and the industry's profitability is challenged.This paper is trying to show the necessity of the smelters monitoring raw material price risk by hedging. The paper starts from introduction of the future markets LME and SHFE and their copper future contracts.In the following part, the paper analyzes the modal of raw material pricing and necessity of hedging of raw materials by using historical data of TC/RC, Cu Concentrates price and SHFE Cu price, according to the smelter's different business model.For a hedging strategy, the paper analyzes scenarios under hedge by future and hedge by option by historical data, and suggests a risk control basis strategy.A conclusion is drawn after comparing both the A stock listed smelters one of which has hedged its raw material while the other one has not, and a strong suggestion is provided to those smelters which has not yet built up hedging strategies.