Rising metal prices directly push up the cost of downstream manufacturing. Taking steel as an example, the price of domestic rebar has risen to 6200 yuan/ton, which has become the focus of attention in all aspects. In the same period, the executive meeting of the State Council has repeatedly studied the problem of ensuring supply and stabilizing prices of bulk commodities, demanding that we attach great importance to the adverse effects caused by rising prices, highlight key comprehensive policies and precise regulation, and curb its unreasonable rise. Therefore, today we select two key varieties, copper and iron ore, to analyze the historical price fluctuation law, and look at the new factors of this round of price increase through analysis.
Analysis of fluctuation law and trend of copper and iron ore prices
(A) the law of copper price fluctuations and the analysis and judgment of the current price
Judging from the historical price of copper in the past 20 years, the copper futures price on the London Metal Exchange includes three obvious price cycles, namely the first cycle from 2004 to 2008, the second cycle from 2009 to 2015 and the third cycle from 2016 to 2020 (see Figure 1).
Through comparison, it is found that the rising stage of the first three cycles has the following three characteristics:
First, the rising stage is about two years. The rising phase of the first three cycles lasted 24 months, 25 months and 24 months respectively.
Second, the price increases all exceeded 50%, with an average increase of 189%. The price increases in the first three cycles were 242%, 257% and 68% respectively.
Third, the price starting point of each cycle continues to rise. The initial prices of the first three cycles in the rising phase were USD 2513/ton (May 17, 2004), USD 2845/ton (December 24, 2008) and USD 4331/ton (January 15, 2016) respectively. At present, the international copper price is in the rising stage of the fourth cycle, with the starting price of $4,360/ton (March 23, 2020), which has risen for 16 months, with the largest increase of 126% and a record high. Its trend is similar to the rising stage of the second cycle, and the final high price may exceed expectations. As a big consumer country, China may face a more severe price situation.
(two) the fluctuation law of iron ore price and the analysis and judgment of the current price
Compared with copper futures prices with a history of more than 40 years, iron ore prices have only been priced by index since 2008. In the past ten years, Platts’ 62% grade iron ore price index has shown a "V" trend (see Figure 2).
Specifically:
The first stage is the decline stage from February 2011 to December 2015, which lasts for 4 years and 10 months, from $193 per ton to the historical low of $38.5, with a drop of 80%;
The second stage is the rising stage from December 2015 to the present, with a total of 5 years and 7 months. Among them, there are four high points on February 21st, 2017 (95.05 USD/ton), July 3rd, 2019 (126.35 USD/ton), December 21st, 2020 (176.90 USD/ton) and May 12th, 2021 (233.10 USD/ton), respectively.
Through the comprehensive analysis of the historical price and reasons of iron ore, we believe that the current iron ore price is at an irrational high level, the market speculation bubble is obvious, the financial premium is beyond the reasonable range, and the time interval between high points is greatly shortened due to the COVID-19 epidemic. It is expected that the price may fluctuate violently in the later period, and the market is at a higher risk stage.
The structural contradiction between supply and demand brought about by the COVID-19 epidemic is the main reason for pushing up metal prices.
In 2020, an COVID-19 epidemic swept the world, causing the global economy to fall into a historic recession, and the overall economic impact far exceeded the 2008 financial crisis. In particular, the intensification of ideological confrontation, the problem of virus traceability and the politicization of vaccine distribution have increased the trend of "anti-globalization". The global commodity supply chain is affected by more non-supply and demand fundamental factors, and the output of superimposed metal material producing countries has declined due to the epidemic, which has jointly aggravated the structural contradiction between supply and demand.
(1) The epidemic has brought significant changes to the global economy and the short-term supply and demand pattern of commodities.
Since 2020, the global spread of the COVID-19 epidemic has dealt a heavy blow to the economies of various countries, and the global economy has declined by 3.3%. After the United States began to vaccinate in early 2021, the economy recovered relatively steadily. In the first quarter of 2021, the United States achieved economic growth of 0.4%, while China achieved rapid growth of 18.3%. As the two most important economies in the global economy, the economic growth of the United States and China, especially the rapid economic growth of China, has led to a sharp rise in commodity prices. At the same time, in many developing countries, especially those that rely on resource export, the epidemic situation is weak, the vaccination rate is low, the virus mutation is complex, and they have to continue to adopt "sealing off the country" measures to deal with it. Due to the blockade measures of resource exporting countries, the supply side of bulk commodities appears short-term mismatch, insufficient supply or poor transportation, which leads to the price increase of most bulk commodities.
(2) The epidemic situation has aggravated the structural imbalance between supply and demand of copper mines.
The epidemic situation has further aggravated the tight supply of copper. Chile and Peru are the top two copper producers in the world. China imports copper for smelting and is the largest refined copper producer in the world. According to the data of World Bureau of Metals Statistics (WBMS), from 2017 to 2019, the copper production in Chile and Peru accounted for 27.7% and 11.9% respectively, totaling 39.8%, and the refined copper production in China accounted for 38.6% in the world.
The epidemic situation in Chile has been repeated, and copper mining enterprises have been forced to close down in stages, which has affected the transportation of copper mines. For example, in June 2020, Chile’s largest national copper company closed its smelter and refinery in Chukikamata, the second largest copper mine; In April 2021, the Chilean government announced the closure of the border for one month. Although the Chilean Ministry of Energy and Mines said that the closure of the border will not affect the normal operation of maritime transportation and mining enterprises, the market’s concerns about copper supply are still driving the price of copper to rise.
In another producing country, Peru, in order to curb the spread of the COVID-19 epidemic, from March to June, 2020, the country implemented nationwide compulsory quarantine. After the quarantine measures were lifted in some parts of Peru in July, the number of newly confirmed cases in COVID-19 rose rapidly, and it was forced to implement compulsory quarantine again on January 31, 2021, and continued until the end of June. According to the statistics of relevant departments, the epidemic situation and blockade measures have led to a significant decline in Peru’s copper production.
(3) The epidemic situation has intensified concerns about the global iron ore supply.
There has been an oligopoly pattern in the global iron ore market for a long time. Compared with copper, the market is more fragile and more sensitive to the political situation and epidemic situation of relevant countries. China’s iron ore imports are highly concentrated in Australia and Brazil, accounting for about 60% and 20% of the total imports respectively, accounting for about 80% of the total imports. At present, the four major miners (BHP Billiton in Australia, Rio Tinto in Britain, Vale in Brazil and FMG in Australia) have achieved a high degree of monopoly on global high-quality iron ore resources, and their total iron ore output is close to half of the global output.
In early 2020, when the COVID-19 epidemic struck, the price of iron ore rose sharply in the first place, even though most of the global commodity prices were still falling. The COVID-19 epidemic caused the output of international mining giants to fall short of expectations. For example, the iron ore production and transportation of Vale and Rio Tinto were affected by the epidemic, and the supply was insufficient. Especially since the second half of 2020, the Australian government has politicized the issue of virus traceability, which has led to the deterioration of Sino-Australian relations and triggered market concerns about iron ore supply. Because China’s high-grade iron ore mainly comes from Australia, speculative funds have been greatly speculated, and the price of iron ore has risen irrationally, resulting in obvious political and epidemic premium.
Excess liquidity magnifies the contradiction between supply and demand and the price increase.
In response to the impact of the epidemic, the world’s major economies have adopted a series of monetary and fiscal stimulus policies, with excessive liquidity, a lower dollar and a sharp rise in financial markets and commodity prices. Liquidity provides speculators with sufficient ammunition for speculation, while the structural contradiction between supply and demand caused by the epidemic, the unsynchronized epidemic prevention and control in major countries, the unfair distribution of vaccines, and the staged differences in the economic restart of major economies have provided the market with a broad speculation theme, which has stimulated and amplified the price increase.
Global liquidity has increased dramatically. In order to get rid of the epidemic situation, countries mainly adopt increasing liquidity to stimulate the economy. In the United States, for example, the assets of the Federal Reserve have increased by $4.0 trillion since 2020, an increase of ninety-seven percent. Among them, from March to May 2020, it increased by 2.9 trillion US dollars, an increase of 69%. At the same time, the M2 of the United States increased by 4.8 trillion US dollars, with an increase rate of 31%.
The commodity market is located in the upstream of the industrial chain and is the "preference" target of venture capital. Funds are moving closer to the commodity market with low risks and clear returns in the economic restart, and continue to accumulate long-term power, which has become an important driver of price increases.
The increase in liquidity directly leads to the depreciation of the US dollar, which is another important factor for the rise in international commodity prices. The depreciation of the dollar has two driving forces:
On the one hand, there is a clear negative correlation between the dollar and commodity prices. Commodities are denominated in dollars. When they depreciate, their prices will rise, and vice versa.
On the other hand, the dollar is the main source of liquidity increase, and the flood of liquidity directly increases the speculative demand of international commodities. There is a statistically negative correlation between the US dollar index and the CRB index, which reflects the international commodity prices, and this negative correlation has become more clear since the epidemic. The US dollar index dropped from 102.817 points on March 20th, 2020 to 89.436 points on January 5th, 2021, with a decrease of 13%. The CRB index rose from 106.3 points on April 21, 2020 to 195.1 points on February 24, 2021, with an increase of 84%.
The epidemic situation once again shows that China’s influence on metal prices is insufficient.
China, as the first country to break through the new crown pneumonia epidemic, its special and unrepeatable anti-epidemic methods show strong institutional advantages and become the "backbone" and important engine of global economic recovery. However, the sharp rise in metal prices has dragged down the driving force of economic growth, once again highlighting the obvious shortcomings in China’s industrial chain and price influence.
(A) China metal industry position to further consolidate.
China is the world’s largest producer of iron and steel, has been the world’s largest consumer and importer of iron ore for many years, and is also a big importer of copper concentrate and a big producer of refined copper. The epidemic situation has further strengthened China’s position in the metal industry.
In terms of copper mines, according to the data of the International Copper Research Organization (ICSG) and the National Bureau of Statistics, the global refined copper output in 2020 was 24.437 million tons, up 1.65% year-on-year, and the refined copper output in China was 10.025 million tons, up 2.46% year-on-year, accounting for 40.70% of the global refined copper output in 2019 to 41.02% in 2020.
In terms of iron ore, according to the data of the General Administration of Customs, China imported 1.17 billion tons of iron ore and its concentrate in 2020, a year-on-year increase of 9.5%. According to the data of the World Iron and Steel Association, the global crude steel output reached 1.864 billion tons in 2020, down 0.9% year-on-year, while China’s crude steel output reached 1.053 billion tons, up 5.2% year-on-year, and its share of global crude steel output increased from 53.3% in 2019 to 56.5% in 2020.
(B) Western hype "China factor", once again reflects the weakness of China’s weak price influence.
For a long time, the status of China’s metal industry does not match the price influence, and the right to speak on the price is firmly in the hands of the seller. The rapid recovery of China’s economy from the epidemic has led to an obvious increase in the demand for metals. However, western institutions advocate a "super bull market" to speculate on the "China factor", attributing the price increase to China’s demand and making China "take the fall" for the price increase.
In early 2021, Goldman Sachs threw out the argument that "commodities are welcoming a bull market". In April, when it announced the closure of the border in Chile, it said that "copper can be bottomed out", released a research report on "copper is new oil" and raised the copper price target for the next 12 months to $11,000 per ton; Bank of America even shouted that copper prices may soar to $13,000 per ton in the next few months. From this, we can see that the prices of metal varieties such as copper and iron ore, which are necessary and relatively scarce for China’s economic development, have become the main targets of speculation, once again reflecting the shortcomings of China’s weak influence on metal prices. Even, China’s commitment to peak carbon dioxide emissions has become an excuse to maliciously speculate on the high price of metal raw materials.
(C) High metal prices are the main transmission direction of imported inflation at present.
China’s metal import prices have risen sharply. According to the data of the General Administration of Customs, the average price of imported iron ore and its concentrate in China has continuously increased from 87.4 USD/ton in May 2020 to 174.0 USD/ton in May 2021, with an increase of 99%. The average price of imported copper ore and its concentrate in China rose from $1,362/ton in June 2020 to $2,384/ton in May 2021, with an increase of 75%.
Due to the upward trend of metal prices, the material cost of downstream industries has been pushed up, which is the main transmission source of imported inflation. For example, due to the soaring steel price caused by the rising iron ore price, the cost of the downstream main steel industry has soared. According to preliminary calculations, the upward trend of iron ore prices since March 2020 alone has increased the cost of each car by more than 2,200 yuan, and the new cost per 100 million yuan of infrastructure investment has increased by more than 7.3 million yuan.
At present, some casting, forging or metalworking enterprises in the market have announced that they will stop production due to rising raw material prices. This rise in the price of metal raw materials will be transmitted to downstream industries in the future, and finally to consumer goods, and will affect the level of consumer prices.
At present, the scissors gap between PPI index and CPI index in China is constantly expanding, and there is a trend to break through the historical high. This short-term conduction block does not mean that it will be blocked for a long time, and some of it will be transmitted to the final consumer goods. If CPI and PPI rise at the same time and run at a high level in the future, it means that the coming of inflation will have an adverse impact on the industrial chain and even the overall economic growth, and measures need to be taken to prevent it in advance.