Shandong Hongchuang Aluminum Industry Holding Company Limited(002379) : feasibility analysis of the company and its subsidiaries to carry out commodity derivatives business

Feasibility analysis of the company and its subsidiaries to carry out commodity derivatives business

1、 Necessity of developing commodity derivatives business

The pricing mode of the company’s products is aluminum price + processing fee. The production and operation involves raw material procurement, product sales and other links, which are closely related to the aluminum price, and there is a certain cycle from product production to sales. The fluctuation of aluminum price has a great impact on semi-finished products and inventory metals, which determines the production cost and operating efficiency of the company to a great extent. The company and its subsidiaries carry out commodity derivatives business and control the company’s product sales price, raw material procurement cost and risk within an appropriate range, which can avoid the risk of market price fluctuation and achieve the goal of stable operation of the company.

2、 Development of commodity derivatives business

1. Capital scale

The company and its subsidiaries plan to invest no more than RMB 70 million in commodity derivatives business, which can be recycled within the hedging period.

2. Authorization and duration

The board of directors of the company authorizes the management of the company to implement the above commodity derivatives business within the limit. The authorization period is 12 months from the date of deliberation and approval by the board of directors of the company.

3. Source of funds

The company and its subsidiaries carry out commodity derivatives business with their own funds, not involving raised funds. 4. Commodity varieties to be invested

The varieties of commodity derivatives business conducted by the company and its subsidiaries shall be limited to aluminum products related to the production and operation of the company and its subsidiaries or aluminum ingots as raw materials.

3、 Risk analysis of commodity derivatives business

Carrying out commodity derivatives business by the company and its subsidiaries can partially avoid the impact of price fluctuations of aluminum and related varieties on the company’s production and operation, which is conducive to the company’s stable operation, but there may also be some risks:

1. Market risk: the risk of insufficient margin due to excessive price fluctuation in the futures market.

2. Liquidity risk: the risk that the position cannot be opened or closed at the market price due to unreasonable contract selection and inactive trading.

3. Credit risk: Although the company has established the system and procedures for selecting brokerage companies, and the selected brokerage companies operate normally and have good reputation, it does not rule out the possibility of credit risk.

4. Operational risk: when the company and its subsidiaries carry out derivatives trading business, if the operators fail to trade according to the scheme determined by the company, or fail to report and approve according to the specified procedures, or fail to accurately, timely and completely record the futures business information, it may lead to the loss of derivatives trading or loss of trading opportunities.

5. Legal risk: when the company and its subsidiaries carry out derivatives trading business, there are trading losses caused by the trading personnel’s failure to fully understand the terms of the trading contract and product information, resulting in business activities that do not comply with legal provisions or external legal events.

4、 Risk control measures for commodity derivatives business

1. The company and its subsidiaries carry out commodity derivatives business for the purpose of hedging and implement it in strict accordance with the formulated plan. The scale of hedging business is matched with the company’s business, and Futures and spot are matched to hedge the risk of price fluctuation.

2. The company has formulated the hedging business management system, which clearly stipulates the scope of the company’s commodity derivatives business, approval authority, internal business management and operation process, internal risk reporting system, etc., which can meet the needs of actual operation, and the risk control measures formulated are practical and effective.

3. When formulating the specific trading plan, reasonably select the hedging month according to the production and operation plan to avoid liquidity risk, calculate the capital, set the stop loss line, and conduct real-time monitoring to avoid the risk of insufficient margin.

4. The company has perfect brokerage company selection procedures. The selected brokerage company has standardized operation and good reputation, and the probability of credit risk is small. In addition, the company will strengthen fund management and reduce risk through sub warehouse trading in each brokerage company.

5. China Futures Exchange has established a perfect risk control system, and the Futures Exchange bears the responsibility of performance, so the possibility of credit risk is small. The company will strengthen the understanding and grasp of national policies and requirements of relevant management institutions to avoid relevant credit and legal risks.

5、 Accounting policies for carrying out commodity derivatives business

The company will carry out corresponding accounting treatment for commodity derivatives business in accordance with the accounting standards for Business Enterprises No. 22 – recognition and measurement of financial instruments, accounting standards for Business Enterprises No. 24 – hedge accounting, accounting standards for Business Enterprises No. 37 – presentation of financial instruments and other provisions to reflect the relevant items of the financial statements.

6、 Conclusion on the feasibility of carrying out commodity futures hedging business

The company and its subsidiaries carry out commodity futures hedging in strict accordance with the company’s business needs. At the same time, the company has established a complete business management system and internal control system. Therefore, it is feasible for the company and its subsidiaries to carry out commodity futures hedging business.

Shandong Hongchuang Aluminum Industry Holding Company Limited(002379) board of directors

February 25, 2022

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