At the end of 2020, the price hikes of commodities such as steel, aluminum and copper caused a significant impact on the orders and profits of Chinese companies. The owner of a feeler factory in Kunshan City, Jiangsu Province, China, said factory orders have decreased by about 20% due to commodity price increases.
Commodity price increases compress corporate profits and reduce orders
Near the end of 202, the international market and China’s domestic market for raw materials appeared a round of price increases.
According to S&P Global Platts, iron ore prices surged 7.8% to $176.90 per ton on Monday (Dec. 21), the highest level since September 2011 and almost double the level at the beginning of the year.
Iron ore, the main raw material for steel, is one of the world’s most traded commodities and one of the best-performing assets in 2020. The current iron ore price is less than 10% off the record high of $193 per tonne touched in February 2011.
According to China Steel’s December 21 statistics, 41 steel mills recently raised prices, all steel prices have risen, by up to 500 yuan per ton.
In addition to steel price increases, non-ferrous metal price increases can not be ignored. The CPC National Bureau of Statistics in early December 2020 circulation of important production materials market price change data show that electrolytic copper (1 #), aluminum ingot (A00) are significant price increases, compared with late November price increases of 3.6%, 2.8%, respectively.
According to the “21st Century Business Herald” reported on December 23, Kunshan Tongshunmao mold Co., Ltd. boss Liu Song said that steel, aluminum and other bulk commodities raw materials, accounting for the plant’s costs ranging from 30% to 50%. And this round of commodity price increases, the plant orders reduced by about 20%.
Liu Song also said, “a while ago we can maintain orders, the recent price increases in materials lead to a shortage of orders. If orders can not keep up, it is estimated that the next half of the month we will enter a zero profit or even a loss.”
A construction machinery factory located in Shanghai, the boss also said that this time the price of raw materials, resulting in construction machinery factory rely on price competition to order pressure will become increasingly large.
The above-mentioned Shanghai construction machinery business owner said that the current order to April 2021 delivery date, has been basically full, gross profit control at about 20%.
As many small and medium-sized construction machinery plants in China to maintain gross profit of about 20%, in the impact of raw material price increases, there are only two options, or follow the price increase but the order shrinkage, or hold up not to increase prices but shrinking profits.
CITIC CITIC Futures steel and mining researcher Zhao Yongjun believes that construction machinery products with steel is relatively large, the cost of steel accounted for nearly 30% or so, with the price increase to further increase the cost ratio.
Zhao Yongjun said, “the round of iron ore rose, steel profits eroded, and different regions between the steel mill profit gap significantly widened. For example, Hebei region building materials prices rose by a small margin, profits are basically completely eroded, tons of steel loss in the range of 50-100 yuan / ton; and East China building materials prices are also relatively large, tons of steel profits of about 300-400 yuan / ton.”
Enterprise cash flow under pressure
Commodity price increases in addition to the impact on orders and profits, many construction machinery companies worry that price increases on corporate cash flow will cause impact.
Suzhou Aurella Precision Machinery Equipment Co., Ltd. manager Li said that the price of raw materials on the enterprise cash flow pressure increased.
He said, “the impact of raw material price increases on cash flow more than the profit side. Companies buy materials are now closed, this year would have been the pressure to pay back, the machinery industry are required to wait two or three months to pay back, plus processing time, plus to the settlement period customers then delayed, the continuous price increases in materials lead to cash flow tension.”
Manager Li said they are to automation companies and machine tool manufacturers to do supporting the order belongs to the urgent overnight to do, idle time on the wait, profits can also be controlled in about 20 percent, but this industry heavy assets, the return of funds is too slow, if the middle encounter which customer stuck delay, there will be operational difficulties.
He said, “I met two customers this year, serious delays, they do export equipment, payments to the end of the year has not been paid, when found wrong, we have taken hundreds of thousands of dollars into it.”
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