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Oil Futures Trading Back After 10-Year Break
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Trading in oil futures reopened on Wednesday at the Shanghai Futures Exchange, which set a benchmark price of 2,098 yuan (US$253.40) per ton for the seven contracts traded.

In China, the world's second-largest oil consumer and third-largest importer, oil futures have been a much-anticipated way to hedge risks.

China Securities Regulatory Commission Chairman Shang Fulin said the nation should speed up the establishment of an oil risk hedging mechanism, with fuel oil futures being just the start.

Fuel oil is the first futures product approved by the authority since 1994, when regulators essentially shut down the over-speculated futures market.

Experts point out that fuel oil is the most liberalized oil product, which makes it first to hit the board.

Shang said, "Fuel oil futures provide enterprises a platform to grasp the pricing information in the market while hedging risks."

He added that the experience gained in futures will help to create a more complete oil market mechanism.

China consumed around 43 million tons of fuel oil last year, mainly in the power generation, transportation and industrial manufacturing sectors. About half was imported.

Fuel oil production has declined sharply. Domestic output dropped 38.7 percent from 1990 to 2003, when it hit 20 million tons. In the same period, imports skyrocketed by a factor of 36 times, from 650,000 tons in 1990 to 23.8 million tons last year. About 80 percent of imports come from neighboring countries, including South Korea, Singapore and Russia.

Without fuel oil futures, domestic users can do little to hedge price volatility risks. The absence of a futures market also puts China at a disadvantage in terms of pricing.

Despite all the anticipation, the regulator and the exchange are taking a cautious approach to the new derivatives. Shang said that China's futures market is still in its infancy, and that it has a great deal of growing and changing to do.

"It takes a lot of cultivation and effort to bring a product to maturity after its launch. We need to understand this and prepare for potential problems," he said at the launching ceremony for the new product. He noted that stringent risk control is critical to the process.

Traders should have 8 percent reserves, higher than the normal 5 percent set for copper and aluminum. The fluctuation is set within 5 percent.

Meanwhile, investors are likely to climb a fairly steep learning curve.

"Many power plants and other oil consumers are interested in fuel oil futures," said Wang Jianguo, general manager of Tongbao Futures Brokerage. "But they are not clear about how to use the derivatives to hedge risks."

(China Daily August 26, 2004)
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