MARKET & PRICE TREND OF TUNGSTEN CHINA, 2021

PART I of VII

Macro Environmental Factors Affect China's Tungsten Market

Last Friday, June 25, 2021, when COVID-19 was spreading over the year of global hardship, the market for tungsten products also seemed to be in a stewed pot surrounded by high prices of surrounding products, and the heat and pressure gradually gathered. Manufacturers ceased their quotations and waited for the outbreak of tungsten products market.

Since 2021, compared with the rising market price of molybdenum products, the market and price of tungsten products has been tepid for a long time; At the same time, in addition to the relatively high share prices of China Tungsten Hightech Materials and Xiamen Tungsten because they have good tungsten mineral resources and new energy products, the share prices of listed companies such as Guangdong Rising Nonferrous Metals, Chongyi Zhangyuan Tungsten and Guangdong Xianglu Tungsten have been running at a low level for a long time in the first half of the year.

“One Belt, One Road”, and the other, we should take a look at the current situation of the tungsten industry. We should make a brief analysis of the impact of various factors on the current market of tungsten products, such as inflation, market factors, seasonal factors, epidemic factors, American and/or Euro’s infrastructure plan in the future and G7’s "one belt and one road" as it said, exchange rate of RMB, carbon neutral and carbon tax, Sino-US trade relationship and so on at least eight aspects.

Our basic judgment is that the market will basically remain at a high level in the second half of 2021. We only provide some ideas on how the future market of tungsten products will change, but it is still difficult to judge the rise range and the duration of market high.

1. Inflation Factors

On June 24, the August light crude oil futures price on the New York Stock Exchange closed at US $73.30 per barrel; In August, Brent crude oil futures closed at US $75.56 per barrel, and the two cities have recovered the land lost since last year's negative oil price. The rise in international oil prices has also increased domestic concerns about imported inflationary pressure.

The main pressure of imported inflation comes from the increasing huge bail-out printing and bottomless quantitative easing in the United States since the epidemic in 2020. Although the hawkish interest rate hike of the Federal Reserve is released, it is still difficult for the market to get out of the shadow of huge US bonds.

The impact of imported inflation on China is mainly reflected in the price of industrial products. According to statistics, by April, China's PPI had increased by 0.3%, 1.7%, 4.4% and 6.8% respectively year-on-year, and showed a rising trend. In May, affected by the sharp rise in the prices of international commodities such as crude oil, iron ore and non-ferrous metals, PPI increased by 9.0% year-on-year, an increase of 2.2 percentage points over the previous month, reaching a new high in recent 13 years.

In this regard, "market players have two concerns: one is whether the imported inflation pressure will continue to push up the rise of domestic PPI and then transmit it to CPI; the other is whether the poor transmission of PPI to CPI will lead to the increase of operating costs of the middle and lower reaches of manufacturing industry and squeeze the benefits of the industry."

From the perspective of PPI transmission to CPI, the prices of gasoline and diesel increased by 22.0% and 24.2% respectively year-on-year, which is bound to bring great upward pressure on the production cost of high energy consumption in the smelting and processing of tungsten products in China; At the same time, the price of raw materials and gas for the smelting of downstream industrial consumer goods based on crude oil, such as plastics, industrial acid-base salts and other tungsten products, rose under the pressure of cost transmission.

Recently, the national Standing Committee has repeatedly pointed out the problem of commodity price rise, focusing on comprehensive measures to ensure commodity supply, curb its unreasonable price rise, and prevent transmission to consumer prices. A series of measures also confirm that the pressure and urgency of imported inflation are indeed great.

Compared with tungsten products, the price of molybdenum products has reached new highs, and even the CIF price of molybdenum ore has changed three times a day, which is the best example of imported inflation. Taking Luoyang molybdenum industry and other index large molybdenum smelting enterprises as an example, under the condition of insufficient supply of molybdenum concentrate in China, a large number of imported products are imported, and the prices of imported products are inevitably rising like iron ore and other large imported industrial products under the situation of rising costs in US dollars such as international mining, processing and freight.

Tungsten ore resources are mainly concentrated in China. Although China's imported tungsten concentrate continues to increase in 2021, it only accounts for a small part of the market. Therefore, unlike molybdenum products, tungsten products are less and are directly affected by imported inflation for a period of time, that is, they benefit from (1) imported inflation accounts for a relatively small proportion in the tungsten products industry chain, (2) Imported inflation is transmitted slowly in the tungsten products industry chain, which is the main reason why tungsten products have not been greatly affected by imported inflation for a period of time.

2. Market Factors

The price of goods is not only the response of money supply and liquidity, but also the direct feedback of the relationship between supply and demand in the local market.

Under the correct epidemic prevention measures and economic stability maintenance policies of the Chinese government, although the main demand indicators of China's economy as a whole have not yet new_ed to the pre epidemic level, from the perspective of supply and demand fundamentals, due to the good domestic infrastructure, the stable and orderly operation of all links, the rapid growth of production and supply, and the high level of capacity utilization of tungsten products processing enterprises, In a short time, tungsten products market is different from other non-ferrous metals, and there are no major factors in supply and demand fundamentals to support the sharp rise in prices.

Copper, Aluminum, Lead and Zinc are mainly consumed in the domestic market, and some are processed into finished products at home and then exported to the international market. Due to the stable and well controlled domestic epidemic situation, the industrial and commercial operation rate has new_ed to the pre-epidemic level, and the people's livelihood consumption is basically not affected by the epidemic situation. In addition, the epidemic situation in Southeast Asian countries has affected the production and supply chain, most of the products that have been transferred out of China have to be transferred to Chinese suppliers, such as epidemic prevention materials, 3C, textile and other civil and biological resources. In this way, other non-ferrous metal products are faced with (1) imported inflation in the international market, with raw materials entering the processing end of the domestic market, (2) at the same time, the domestic and international market demand is increasing, (3) due to the reduction of waste recycling supply due to China's strict environmental protection and other measures, the result of US dollar water release is constantly amplified, The price rise of foreign raw materials combined with the demand brought by China's unique economic growth has led to the continuous price rise of large raw materials such as steel and non-ferrous metals.

In addition to the impact of import and inflation on the tungsten products market, unlike other non-ferrous metal industries, the raw materials of tungsten products mainly come from China, and the consumer side also accounts for a large proportion in the international market, that is, in addition to domestic consumption, tungsten products are mainly supplied to the international market. Under the macroeconomic environment of no flood of domestic monetary policy and low inflation, there is no inflation output, so the supply of tungsten products to Chinese processors is less affected by the epidemic and lasts a short time. There is no danger of supply, so the price of tungsten products in the international market has not increased significantly.

3. Seasonal Factors

As the northern hemisphere enters summer, the number of people driving around the world has increased sharply, which has also brought certain seasonal incentives to the rising consumer prices of oil and other commodities. The northern hemisphere concentrates the world's major population and developed industrial countries, so the summer and autumn season in the northern hemisphere is the main season for people's consumption. Although the current "core shortage" is serious, the demand for new energy vehicles and 3C products will also bring a significant increase in the market demand for tungsten products.

Seasonal factors mainly affect tungsten products in several aspects: (1) the increase of air conditioning consumption in summer will inevitably lead to peak valley adjustment of power use in high energy consuming enterprises and pressure to reduce power cost; (2) Tungsten mining, which is mainly concentrated in the south of China, is affected by rainy, typhoon and debris flow in summer to varying degrees.

4. Epidemic Factors

COVID-19's influence on tungsten products market has two contradictory sides.

First of all, with the gradual launch of the vaccine and the beginning of the summer holiday, the western economic powers dominated by G7 will gradually unseal, the economy will gradually recover, and the market demand will grow rapidly. However, on the other hand, the "delta" variant virus that has seriously affected countries all over the world recently has re closed many countries, and industrial production and consumption will be adversely affected. According to our customer survey, many customers in western countries have not fully new_ed to work since the epidemic, and production has been greatly affected.

On the other hand, the international logistics and industrial supply chain disrupted by the epidemic has not been restored, and the logistics price and transportation time have more or less affected the international supply and demand of tungsten products. Therefore, the impact of the epidemic on the international market of tungsten products is complex and multifaceted.

5. American Infrastructure, and G7’s So-Called "One Belt, One Road"

Last Thursday (June 24), U.S. President Biden reached a preliminary agreement with a group of democratic and Republican senators on a $579 billion infrastructure spending plan, enhancing investors' optimism that the economic recovery has a firm foothold. Although Biden did not reach the trillions of dollars of infrastructure budget, based on the past practice of the United States, American infrastructure is estimated to be protracted and the cost is rising. However, the trillions of Yuan of infrastructure is very good news for the future market of cemented carbide tools.

China's "One Belt, One Road initiative" has been thrown out during the trip to Europe, which is not long ago. Biden's "active new_ to the better world, meeting the needs of the low-income countries and huge infrastructure needs" is called B3W. The plan aims to meet the infrastructure needs of developing countries, and the pool is expected to reach as much as 40 trillion dollars. The United States and its Western allies have drawn such a big cake. When to implement it and how much it can invest are still the moon in the water. However, no matter how they are implemented and how effective they are, it is a long-term positive factor for China's tungsten products as a major supplier.

"One Belt, One Road" and infrastructure boom, which we harbor evil designs in China, Europe and India, should gradually increase the price of products with superior industries. We can not stop others from building new and old infrastructure, but we can take a ride on the banner of demand and sell a good price. Take advantage of our first mover advantage in infrastructure construction and make more money. Such as steel, cement and other key raw materials, tungsten, molybdenum, rare earth infrastructure and new energy must be "Teeth" and "Monosodium Glutamate".

6. The Factor of Exchange Rate of RMB

In the pattern of international trade, China's tungsten products are mainly exported, and only a small amount of primary raw materials and tungsten alloy waste are imported. The export price priced in non RMB is affected by the exchange rate of RMB against the US dollar, especially when the exchange rate fluctuates greatly.

Last Thursday (June 24), the US dollar index was 91.8177, with little change, and the US dollar remained basically stable. On the other hand, Comex Gold futures in August fell 0.4% to US $1776.70/oz. Market analysts said that the gold price was taking a breather after the US Federal Reserve took a hawkish position last week, but concerns about possible interest rate hikes and the US Federal Reserve's reduction of asset purchase plan still weighed on gold market sentiment, The US dollar index is expected to remain relatively stable.

In view of China's effective epidemic prevention and control, the rapid recovery of domestic production, the substantial increase and rising trend of exports of various products, which has formed a more favorable situation for China's exports than before the epidemic, China's central bank did not release water synchronously with the US dollar to offset the impact of the passive appreciation of US dollar printing, but on the one hand, controlled the amount of RMB, We maintained a moderately loose monetary policy.

On the other hand, we relaxed the restrictions on the RMB exchange rate and tolerated the appreciation of the RMB to a large extent. Therefore, the RMB appreciated sharply in the past year. The exchange rate appreciated all the way from about 7.00 to about 6.40 at the beginning of this month, during which it appreciated by almost 10%. Such a huge appreciation did not seriously affect the overall situation of China's exports, However, China's export of tungsten products has brought great adverse effects, mainly because China's tungsten products are not necessary for epidemic prevention and control and people's livelihood, the demand in the international market will not increase significantly due to the epidemic, and the demand will be relatively reduced due to the global closure and shrinking production.

Moreover, the demand side of tungsten products is mostly fixed customers, The price of tungsten products implemented by many customers for a long time is relatively stable, so the price of tungsten products has not been fully reflected with the appreciation of RMB, and even decreased in some periods. Therefore, the exchange rate factor is difficult to have an upward impact on the price of tungsten products in the short term, but in the long term, the profit of export enterprises has become a large operating cost due to the reduction of exchange loss, it will eventually be reflected in the sales price.

In the long run, for large head enterprises with capital position ability, foreign exchange hedging ability and flexible use of diversified pricing capabilities such as RMB and euro according to market regions and characteristics, foreign exchange rate fluctuations have little impact on market vitality, but for many surrounding enterprises in the tungsten products industry chain, exchange rate changes, especially RMB appreciation, They have to bear external effects, weaken some of their existing competitiveness, and expose their undetected weaknesses in operation and management.

7. Carbon Neutralization & Carbon Tax

With the promulgation of various carbon emission regulations and the establishment of China's carbon emission exchange, carbon neutralization has gradually come from the concept and entered the real cost of industry and commerce. For high energy consuming industries such as tungsten, molybdenum and rare earth, carbon tax has also become an unavoidable problem. The EU is also planning to introduce carbon tax norms and relevant regulations to the world. Therefore, China's tungsten industry may soon face the problems of carbon tax risk and how to shorten the carbon footprint and avoid high carbon tax in Europe and other international markets.

Carbon neutralization is not only an environmental issue, but also a common responsibility of business ethics and mankind. Countries all over the world are gradually converging on this consensus. The gradual implementation of carbon tax will not only push up the consumption price of tungsten products, but also become the cost of production and processing of tungsten products. All production and processing links of tungsten products will be upgraded to reduce carbon emissions and purchase carbon emission rights as much as possible.

China is a big country in water resources utilization, solar energy utilization and new energy development, utilization and production, and China is a big country in tungsten products resources. Over the years, China has accumulated superimposed advantages such as production and processing technology and experience, which may also give us higher production and smelting technology and moral and legal barriers to carbon neutralization in the field of tungsten smelting and processing, it has become one of the advantages of China's tungsten products industry.

The impact of carbon neutralization on the tungsten products industry is one of the important future uncertainties that we need to observe closely.

8. Sino-US Trade Relationship

The trade disputes between China and the United States, the trade disputes between China and the western countries represented by G7, and the mutual import and export encouragement and restriction measures may also bring uncertainty risks to the future tungsten products market, and then affect the uneconomical fluctuations of tungsten products supply and demand and price in the domestic and foreign markets.

END OF THE PART I OF VII OF THIS PAPER.

THE 2^ND PART OF THIS PAPER WILL ANALYZE THE FACTORE THAT DIRECTLY AND DEEPLY AFFECT THE OF TUGNSTEN PRODUCTS.

(to be continued)

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