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How to deal with the fall in non-ferrous metal prices?
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Recently, the prices of non-ferrous metals such as copper, aluminum, lead, and zinc have fallen sharply, which has been closely watched by the market. What impact will the price drop bring to enterprises in the non-ferrous metal industry, and how to deal with them?


Qi Ding, chief analyst of the non-ferrous metal industry of the CICC Research Department, believes that there are four reasons for the decline in non-ferrous metal prices. First, the current international situation has led to a shortage of energy supply and soaring prices, which has pushed up global inflation and greatly disrupted the recovery of overseas economies after the epidemic is lifted. Second, in order to cope with high inflation, the Fed accelerated the process of raising interest rates, not only suppressing metal prices by tightening liquidity, but also suppressing demand to a greater extent. Third, domestic demand has been repeatedly affected by the domestic epidemic, and downstream terminal enterprises have weakened their motivation to replenish inventories on dips. The operating rate is under pressure, and demand is not prosperous in peak seasons. Fourth, the supply shock caused by the conflict between Russia and Ukraine has gradually passed its peak, and with the gradual improvement of overseas epidemics, the factors that previously hindered the production and logistics of bulk commodities have gradually eased, and most bulk commodities have begun to show an obvious supply response. Non-ferrous metal prices "To make matters worse."


Experts said that the sharp drop in the price of non-ferrous metals has a broad impact on the upstream, middle and downstream enterprises in the industrial chain. In the upstream procurement and selection process, due to the relatively rigid cost side, falling prices will lead to a decline in corporate profits and cash flow, especially for companies with high financial leverage, which may lead to the risk of capital chain breakage. In the midstream smelting process, during the period of falling prices, enterprises will face the risk of falling prices of raw material inventories, especially those with high raw material inventories and inadequate hedging and risk control may be at greater risk. In the downstream deep processing link, the impact mainly comes from the risk of falling raw materials in the midstream smelting link, but the cost pressure and terminal price decline due to the falling raw material prices may be conducive to the recovery of the downstream industry's prosperity.


"For cyclical companies, risks and opportunities coexist when prices fall sharply." Zidding emphasized that if they can do a good job in price risk control, companies with strong operating and financial strength can not only maintain a stable situation in the face of sharp price declines , and is expected to seize the opportunity to expand production against the trend, seize the downstream market share, and even conduct mergers and acquisitions against the trend of some undervalued assets to achieve steady growth in the counter-cycle.


In order to deal with the adverse impact of price drop on enterprises in the non-ferrous metal industry, experts suggest that in the period of sharp price fluctuations, non-ferrous metal enterprises need to do a good job in price risk control and adjustment of business strategies of related enterprises. Qi Ding believes that the first is to do a good job of fundamental research and price trend research and judgment on the non-ferrous metal varieties related to the enterprise, so as to lay the foundation for enterprise risk control. The second is to do a good job of hedging. For upstream mining and selection enterprises, the hedging ratio can be appropriately increased; for mid- and downstream enterprises in the non-ferrous metal industry, it is necessary to strictly do full hedging. The third is to adjust the inventory and sales strategy. You can avoid the risk of falling prices by adopting methods such as buying on demand according to orders, accelerating inventory turnover, setting prices earlier or signing long orders.


According to Gu Fengda, director of the research and consulting department of Guosen Futures, in view of the current situation of high volatility of non-ferrous metals in the second half of the year, it is recommended that non-ferrous metal enterprises strengthen customized and targeted hedging plans and risk management services, and actively respond to the second half of the year. Industry opportunities and challenges brought about by market fluctuations.


Gu Fengda suggested that non-ferrous metal enterprises need to be alert to the increased risk of two-way price declines of some varieties in the short term, and processing enterprises should focus on profit-locking hedging, and pay attention to risk control and capital management.


For the specific hedging optimization strategy, Gu Fengda gave the company some advice. He believes that in the process of hedging, due to the existence of hedging costs and basis factors, it is difficult for hedging to achieve hedging, and mechanical hedging may also make the enterprise lose the opportunity to obtain risk benefits. This has resulted in many strategies for hedging optimization, including adjusting the spot operation mode according to the characteristics of futures, optimizing the hedging effect by using market characteristics or short-term trend changes, managing inventory and cross-hedging, etc., which requires futures companies to use futures risk management system services ".


Gu Fengda also emphasized that due to changes in the market environment and differences in the needs of enterprises, enterprises should do a good job of stress testing and price risk management. If there are circumstances such as the ability to bear, an emergency mechanism should be established in a timely manner, active response, timely stop loss, and proper handling. In addition, simulate and estimate the potential losses that may be caused by emergencies, formulate corresponding plans and make necessary procedural improvements.

Updated:2022-07-25 | Return
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