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State firms' hedging deals under lens

By Wang Ying (China Daily)
Updated: 2009-10-21 08:26

State-owned firms looking to hedge their losses from rising crude oil prices will now be supervised more stringently.

The State-owned Assets Supervision and Administration Commission (SASAC) has required companies under its control to scrutinize hedging deals more closely while signing financial derivatives contracts.

The move follows rising book losses from hedging contracts suffered by such State-owned firms as China Eastern Airlines and Air China, who have only recently begun to narrow down such losses-on-paper from former hedging deals.

SASAC tightened the rules during a recent budget meeting convened by State-owned enterprises.

"The futures trading volume should not exceed 90 percent of the spot volume. And, the percentage for those who are inexperienced in such trades or those who have reported significant losses previously will be no higher than 50," said Shen Ying, director-general of the SASAC Statistics Evaluation Bureau, during the meeting.

SASAC also clarified that it would defend the legal interests of hedging firms through negotiations with investment institutions in case there are misleading clauses in previously signed deals.

Luo Zhuping, board secretary with China Eastern, however said that he was not aware of any such moves, and that fuel hedging deals were very much in practice.

Last year, China Eastern posted a book loss of 6.4 billion yuan in fuel hedging bets, while Air China lost nearly 7.47 billion yuan.

The two carriers signed hedging contracts with international investment institutions last year, which are due for delivery between 2009 and 2011.

China Eastern said it has stopped signing new hedging contracts with foreign investment banks after SASAC's order. Currently, the Shanghai-based carrier has less than 35 percent of its total fuel demand covered under hedging deals, said an official who asked not to be named.

Huang Bin, board secretary with Air China, had said earlier that the airline had made adjustments to its contracts starting from the end of 2008 and clarified that it had not signed any new hedging contract ever since.

NYMEX crude oil for December 2009 delivery climbed to over $80 per barrel yesterday, the ninth consecutive day that it has increased, doubling from last December's record low of $40 per barrel.

Related readings:  China cuts jet fuel price 4% as crude oil cost falls  China's crude oil output hits 93.49M tons in H1  China refines record 31m tons of crude oil in May  Why crude oil prices keep rising

The higher crude oil prices over the past months have helped the two domestic carriers to report net profits. China Eastern reported a 2.79-billion-yuan gain and Air China posted a 1.45-billion-yuan profit.

The Civil Aviation Administration of China (CAAC) said domestic carriers realized a profit of 8 billion yuan as of middle-September, its own data showed. CAAC has forecast that domestic carriers will handle a throughput of over 200 million passengers this year, and thanks to the recovered domestic economy, the aviation market will see robust growth this year.