The authoritative official media, Henan Daily, publicized and reported on Tongzhou Cotton
In recent years, affected by multiple pressures, the operating conditions of enterprises in China's textile industry chain have faced significant challenges, and the need to avoid risks is becoming increasingly urgent. During this process, a group of companies have emerged that actively utilize futures tools to effectively hedge against price fluctuation risks, effectively ensuring the stable operation of their companies. Henan Tongzhou Cotton Industry Co., Ltd. (hereinafter referred to as Tongzhou Cotton) and Weishi Textile Co., Ltd. (hereinafter referred to as Weishi Textile) are among the leaders in this field.
Deep Participation in Futures Market for Refined Risk Management
Tongzhou Cotton is one of the largest cotton-related enterprises in China. It is an integrated international enterprise combining industry and trade, encompassing cotton acquisition, processing, cotton textile and garment production, and cotton import and export trade. It handles over 450,000 tons of cotton and cotton yarn annually, with sales revenue reaching 8 billion yuan.
The reporter found that Tongzhou Cotton not only has a large scale in spot trading but also has high participation in the futures market. Currently, over 80% of Tongzhou Cotton's spot trades are conducted in conjunction with futures and options tools, involving basis trading, inter-month arbitrage, domestic and international futures arbitrage, covered call strategies, options hedging, and arbitrage between cotton and cotton yarn futures.
Fu Ru Jian, the person in charge of relevant business at Tongzhou Cotton, said that the company adopts flexible hedging strategies based on market conditions, referring to changes in inter-month spreads, variety spreads, and domestic and international cotton price spreads. They flexibly choose hedging positions, near-month or far-month contracts, cotton or cotton yarn, domestic or international markets, and whether to use futures or options as hedging tools to achieve better hedging effects.
It is worth noting that the premise of Tongzhou Cotton's use of derivatives to hedge risks is strict risk control management. Fu Ru Jian stated that both hedging and arbitrage require corresponding positions. If there are open positions, it is equivalent to using part of the positions for speculative operations. Once the market moves in an unfavorable direction, open positions face losses, with larger losses incurred for larger open positions. In the event of extreme market conditions, this can bring huge risks to the company. Therefore, the company continuously strengthens its risk awareness and strictly manages risk control.
Weishi Textile, as one of the first designated delivery warehouses for cotton yarn on Zhengzhou Commodity Exchange, also pays close attention to using futures to manage risks and has established a dedicated business team. According to the reporter's understanding, Weishi Textile assigns a vice president in charge of production and operations to oversee overall futures operations, establishes a dedicated futures department responsible for analysis, trading, and delivery, and subjects futures trading activities to strict institutional constraints and regulations to prevent potential human error risks. It also assigns dedicated risk control personnel to monitor futures trading in real time. Upon detecting risks, predetermined risk control solutions are implemented promptly, and relevant information is reported to management.
Integration into Routine Operations, Derivatives Tools Demonstrate Effectiveness
According to the reporter's understanding, selling for hedging is a standard practice for Weishi Textile to protect finished product spot positions. On the one hand, it serves as inventory management, hedging against market price declines, and on the other hand, it can also be used as a sales channel for delivery at an opportune moment. In early March 2021, cotton yarn futures reached a high point of 25,220 yuan/ton, the highest in over a year, and spot prices also reached a five-year high. Weishi Textile was concerned about losses from price corrections and decided to sell 500 tons in the futures market to protect its spot position.
In early March 2021, Weishi Textile sold 100 lots in the cotton yarn 2105 contract at a price of 24,250 yuan/ton. A significant correction followed, and in April, prices in both spot and futures markets rose, with the downstream market improving and orders overflowing, leading to tight spot supplies. Weishi Textile closed its hedge, closing its futures positions at a price of 22,160 yuan/ton, resulting in a profit of 1.045 million yuan in the futures market and hedging against the risk of one-sided spot market holdings.
From mid-April to mid-May 2021, cotton futures prices continued to rise. To avoid risks from falling spot prices, Tongzhou Cotton used futures hedging. From May 12 to 13, 2021, Tongzhou Cotton hedged 3,000 tons of spot positions in the CF2109 contract at around 16,150 yuan/ton and gradually switched to basis trading for sales from mid-May to the end of May. This not only avoided losses on spot positions due to price declines through futures hedging but also achieved profits through basis trading.
“From May to July 2021, the CF2109 contract price remained volatile. One of our spinning mill customers, to align with production and operation plans, had already locked in some of our basis resources through basis trading but had not yet found a suitable futures pricing point. The customer believed that the market was in a period of low volatility with limited downside potential. To achieve the customer's ideal pricing at below-market prices, our company assisted the customer in conducting transactions with options embedded.” said Fu Ru Jian.
The reporter learned in the interview that Tongzhou Cotton and the yarn mill customer signed a basis sales contract of CF2109+300. At that time, the CF2109 contract price was 16,000 yuan/ton, and the customer hoped to settle at 15,700 yuan/ton. However, cotton prices remained in a narrow range, and the customer believed that the decline was limited, and the price might not reach 15,700 yuan/ton in the short term.
“On July 1st, the customer entrusted us to act as an agent for a trigger operation with a cumulative purchase option combination, in the range of 15,700-16,300 yuan/ton, for 20 business days, with a daily settlement of 40 tons (one batch of cotton spot), zero premium cost, and the need to pay a margin.” Fu Ru Jian said that the settlement has three possibilities: First, if the futures price is below 15,700 yuan/ton at maturity, Tongzhou Cotton will settle with the customer at 15,700+300=16,000 yuan/ton for two units (40*2=80 tons). Second, if the futures price is within the range of 15,700-16,300 yuan/ton (inclusive) at maturity, Tongzhou Cotton will settle with the yarn mill at 15,700+300=16,000 yuan/ton for one unit (40 tons). Third, if the futures price is above 16,300 yuan/ton at maturity, there will be no settlement that day.
Fu Ru Jian told the reporter that on July 1st and 2nd after the structure was triggered, the daily closing price was within the range of 15,700-16,300 yuan/ton (inclusive), and this structure finally allowed the customer to price two batches (80 tons) of spot at 15,700 yuan/ton. Through the operation of the cumulative purchase option combination, when the market does not reach the customer's expected order price, a relatively low purchasing cost can be partially achieved through the option combination.
“We have used cotton futures innovation to develop an option embedded trading model for spot trading, fully combining futures and options tools with spot trading to further reduce business risks and stabilize profits,” said Fu Ru Jian.
It is understood that option embedded trading is a new type of trading model that combines derivatives with spot trading. It can convert options and option combinations into spot pricing methods, and reflect them in spot purchase and sales contracts, helping companies manage price risks.
When talking about experience and insights in using derivatives, Fu Ru Jian told the reporter that Tongzhou Cotton, by adopting a strategy that combines spot and futures trading and flexible domestic and international hedging, seizing the rhythm, has avoided price fluctuation risks, stabilized the company's operations, and enhanced customer loyalty by offering concessions to customers, achieving a win-win cooperation philosophy.
According to the person in charge of relevant textile businesses in Weishi County, before using the futures market for hedging and arbitrage operations, it is necessary to judge the price range of cotton and cotton yarn from multiple perspectives, including policies and the market. For example, before government cotton reserves are released, one can enter short positions in cotton at high prices, and after the release, one can enter long positions in cotton at low prices; during the peak season for cotton yarn sales, one can enter short positions in cotton yarn, and when downstream inventory builds up, one can enter long positions at low points. "The key is to establish a complete internal futures hedging management system and a strict risk management mechanism."
Henan Daily link: https://app-api.henandaily.cn/mobile/view/news/52566754529902592226455
Leaders from Xiamen C&D Group visited Tongzhou for investigation and guidance
On March 3, Wang Yongqing, Vice President of Xiamen CNOOC Group, visited Tongzhou Group for investigation and guidance. Wei Gangmin, Chairman of our company; Huang Hongyu, President; Li Tao, Vice President; and Zhang Zhiyan, Director of the General Office, met with and participated in a symposium.
Tongzhou Cotton Market Brief, Week 1 of March 2025
1) This week's National People's Congress and the Chinese People's Political Consultative Conference (NPC & CPPCC) in China boosted market expectations for steady growth. In February, the Purchasing Managers' Index (PMI) for manufacturing stood at 50.2%, up 1.1 percentage points from the previous month, indicating a significant improvement in the manufacturing sector.
In 2024, China's dyeing industry saw rapid export growth to ASEAN and RCEP member countries, exceeding the overall export growth rate. However, this growth was accompanied by a decline in prices. From January to December, China's exports of eight major dyeing products to ASEAN totaled 7.908 billion meters, a year-on-year increase of 12.14%, 4.61 percentage points higher than the overall export growth rate, accounting for 23.58% of total exports. The average export price was US\$1.19 per meter, a year-on-year decrease of 2.75%, 0.64 percentage points lower than the overall decline. Exports to RCEP member countries totaled 8.431 billion meters, a year-on-year increase of 11.35%, 3.82 percentage points higher than the overall export growth rate. The average export price was US\$1.17 per meter, a year-on-year decrease of 2.79%, 0.60 percentage points lower than the overall decline.
On February 28, Mr. Huang Hongyu, President of our company, was invited to attend the 2025 Zhangjiagang Cotton Industry Development Conference and, as a guest speaker at the "Xiangshan Roundtable," shared his views on the cotton market and trading opportunities.
Henan Tongzhou Cotton Industry Co., Ltd.
Contact
Henan Tongzhou Cotton Industry Co., Ltd.
Address: 10th Floor, Henan Nongxin Building, No. 19 Commercial Outer Ring Road, Zhengdong New District,Zhengzhou, China
Tel：86037165836206
Email：tongzhou@tongzhoucotton.com
Mobile
CopyRight © 2025 Henan Tongzhou Cotton Industry Co., Ltd.