(Yicai Global) July 5 -- Small Chinese industrial companies are seeking ways to deal with the soaring commodity prices by raising their product prices and buying futures contracts to lock in certain raw material pricing.

Small and medium-sized companies in mid to downstream parts of the supply chain are worried about making losses if commodity prices keep on surging, they told Yicai Global upon visits.

Hiking product prices cannot completely make up for the profit gap caused by the rising raw materials prices but it can help companies remain operational, Zhou Yong, head of Xianglong Aluminum Wheel, said to Yicai Global. Still, big increases would be unbearable for clients, he added.

Normally, the firm which processes materials for car wheels used to maintain a 3 to 5 percent annual profit margin, Zhou added. The last time Xianglong suffered losses due to large price changes was during the financial crisis around 2008, he added.

Bridging a Gap With Derivatives

But sometimes it is too late for price hikes. Xianglong's production cycle is about 30 days to 40 days and customers usually ink deals two or three months in advance. Thus, profits can unexpectedly be squeezed before the delivery.

Many producers turn to futures trading. But SMEs have limited cash flow to splurge on hedging. Xianglong bought aluminum call options from Zhejiang province-based Yongan Capital Management. If prices of the nonferrous metal rise, the trading partner will compensate Xianglong for the increasing costs, said Zhou.

To stabilize raw material procurement costs, a company can buy call options, Yongan Futures explained to Yicai Global. However, when commodity prices fall -- which they usually do during a holiday season -- the company would lose money, the financial institution added.

Hedging is risky, said industry insiders. Firms that buy derivatives such as options can gain or deepen their losses so they should remain cautious and refrain from speculation, they added.

Editor: Emmi Laine, Xiao Yi