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Source: Zhongjin
Wen Guo Chaohui Wang Zhilu
abstract
Energy risks may increase in the fourth quarter
On August 17, the National Development and Reform Commission issued the Barometer of the Completion of Energy Consumption Dual Control Goals in Each Region in the First Half of 2021 to analyze and warn the situation of energy consumption dual control in each province [1]. In the first half of the year, the energy consumption intensity of nine provinces (regions) increased rather than decreased, which is a level I early warning, including many industrial provinces such as Jiangsu and Guangdong. We have seen that recently, local governments have become more strict in limiting power and production. The supply risk has outweighed the weak demand, and the prices of industrial products have stopped falling and rebounded. "Double limit" is also involved agriculture products Processing industry.
In terms of energy supply, after the energy demand increased more than expected this summer, it began to weaken seasonally, and the price of natural gas peaked and fell back. However, the expectation that "La Nina" may cause a cold winter has intensified the global concern about energy shortage this winter. Steam coal therefore showed a strong performance, leading the rise of bulk commodities.
Looking ahead, we expect that the cold winter may boost the demand for overseas natural gas and heating oil, while China may even face the situation of simultaneous growth of coal and natural gas. The cold winter is expected to offset the impact of "double restrictions" on coal demand to some extent. The peak energy consumption season is approaching in winter, and the "cold winter" may further exacerbate the energy shortage. The pressure on storage and supplement in winter as well as on maintaining supply in heating season may still be large. We still need to pay attention to the risk of high coal prices in the fourth quarter. According to our calculation, assuming that the peak output of domestic steam coal is restored, there may still be a risk of shortage in the fourth quarter when the economy is stable and the total amount of coal imports is flat, and the pressure on coal supply is high.
Under such circumstances, we believe that the "double limit" constraint in the fourth quarter of this year may be difficult to relax. "Double limit" superimposed with "cold winter", the commodity market in the fourth quarter of this year is likely to rise again, and the risk of inflation may increase, but the height and sustainability of price increases may be constrained by weak demand.
The supply of industrial products has exceeded the demand headwind
Recently, local production and power restrictions have become stricter [2]. Independent electric furnace plants and thread rolling lines in Jiangsu, Guangdong and other places are under control due to their high power consumption. As of September 24, the capacity utilization rate of the rebar rolling line has dropped to 59.4% from about 81% in May this year, of which the short process (electric furnace+billet) has dropped to 31.7%, and the rebar output has dropped to 2.71 million tons, which is the new low since April 2020.
The electrolytic aluminum industry in Guangxi, Yunnan and Ningxia is subject to power and production restrictions, and the resumption and production of electrolytic aluminum have high requirements for stable power supply, which may be difficult to realize under the current supply constraints; The production of stainless steel and ferronickel in Fujian has been affected; However, the zinc smelters in Yunnan and Guangxi were subject to power supply as early as May and July, respectively, with a small month on month reduction. Copper smelting is relatively less affected. The base metal processing end is also greatly affected. In the first half of this year, the output of copper and aluminum products in the nine provinces of the first level early warning accounted for 29% and 27% of the country respectively. Therefore, it is necessary to continuously track the interference of power rationing measures on the demand for replenishment of base metal downstream processing industries.
Agricultural product processing industry is also affected
Some agricultural products processing industries with high energy consumption, such as cotton textile, corn starch, soybean pressing and other industries, have also been affected by the "double restrictions". According to the weekly data of the cotton textile information network (TTEB), the start-up load of domestic cotton yarn mills was 55.1%, 8 percentage points lower than 63% at the beginning of September. At the same time, the start-up rate of downstream cotton cloth was only 51%, falling for 9 consecutive weeks. As of September 24, the operating rate of major corn starch enterprises nationwide was 50.52%, 8 percentage points lower than that of the previous month. The soybean crushing industry was also affected. As of September 17, the operating rate of major oil plants in China was 48.11%, down 4.62 percentage points month on month.
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Energy risks may increase in the fourth quarter
On August 17, the National Development and Reform Commission issued the Barometer of the Completion of the Dual Control Target of Energy Consumption in Each Region in the First Half of 2021 to analyze and warn the situation of dual control of energy consumption in each province. In the first half of the year, the energy consumption intensity of nine provinces (regions) increased rather than decreased, which is a level I early warning, including many industrial provinces such as Jiangsu and Guangdong. After the energy demand increased more than expected this summer, it began to weaken seasonally, and the natural gas price peaked and fell back. However, the expectation that "La Nina" may cause a cold winter has intensified the global concern about energy shortage this winter.
Chart 1: Barometer of the completion of energy consumption dual control targets in each region in the first half of 2021
Source: National Development and Reform Commission, CICC Research Department
Steam coal: focus on the risk of high coal price in the fourth quarter
Recently, steam coal has led the rise of bulk commodities. First, the current inventory has been continuously reduced, reaching a historical low. Second, the market expects that the tension of fundamentals in the fourth quarter will be difficult to ease.
Since this year, the supply of steam coal has grown significantly slower than the demand. In the first eight months, the output of raw coal has only increased by 4.4% year on year. By region, Inner Mongolia has been a major drag, which is the same as last year. Imports declined significantly, shrinking by 10.3% year on year. However, on the demand side, the thermal power generation in the first seven months of this year increased by about 15.8% year on year, indicating a significant gap between supply and demand. The number of days of coal inventory in key power plants announced by the National Development and Reform Commission has dropped to 11 in July this year, compared with 23 days in the same period last year.
Since this year, the number of approved projects for coal has increased, but security inspection and environmental protection still have large constraints on supply, and it is difficult to import large quantities. According to our calculation, assuming that the peak output of domestic steam coal is restored, we expect that the national coal output in the fourth quarter will rise by nearly 2% year-on-year under the condition of stable economy and flat total coal imports. The situation of domestic power shortage and steam coal shortage may be postponed with the release of coal production capacity and the industrial "double limit" measures, and the gap between supply and demand will converge slightly. However, the pressure on winter storage and replenishment as well as the supply guarantee in heating season may still be large, and the inventory may be difficult to repair significantly.
Figure 2: Year on year growth of ten day power generation
Source: CCTD, Research Department of CICC
Table 3: Steam coal end user inventory in eight coastal provinces
Source: CCTD, Research Department of CICC
Natural gas: seasonal weak demand, but difficult to repair inventory
The international natural gas market entered the slack season of demand, and the rising market since June came to an end, The price of NYMEX natural gas futures fell slightly after hitting a peak of 5.5 dollars/million British fever on September 16. However, due to the strengthening of the global cold winter forecast this year, the market's concern about energy shortage has increased. It can be seen that the price of natural gas in Asia is still rising. In the past two weeks, the JKM Japan South Korea natural gas swap price rose 43.9% to 26.8 dollars/million British hot, and its price difference relative to the NYMEX natural gas price also continued to expand to 58.9%. Looking ahead, we still believe that before this winter's peak gas season, it is difficult for the US natural gas inventory to recover to its five-year average level, and there is still some upward risk in winter gas prices (see our research report released on September 5, 2021 for details《 Natural gas in North America: supplement or shortage, tightening again in winter 》）。
Domestically, the natural gas market may tighten in winter, the import cost of overseas gas will rise, Asian LNG will still be at a premium, and the gas price in the fourth quarter may still be at an upward risk.
Chart 4: Available Natural Gas Stocks in the United States
Source: EIA, Research Department of CICC
Chart 5: China's Monthly Natural Gas Imports
Source: Wande Information, Research Department of CICC
Crude oil: the gap between supply and demand will converge, and the impact of cold winter may be small
For the international oil market, the cold winter will boost global fuel oil consumption, but it only accounts for about 5% of the total oil demand of OECD. Therefore, the improvement of crude oil demand may be limited. At the same time, the global crude oil supply is also continuing to recover. The crude oil production along the Gulf Coast of the United States is recovering from the hurricane. As of September 22, 83.82% of the crude oil has been recovered. In addition, OPEC+has continued to increase production since August. Looking ahead, the gap between crude oil supply and demand will continue to converge. Therefore, we believe that the cold winter may have little impact on the oil market. Domestically, the power restriction in Shandong may affect the local refining production, which may turn the margin of the domestic refining market to a tight balance. Shandong is a three-level early warning. Therefore, in terms of sustainability, we believe that the reduction of local refining production may not reverse the balance of the domestic refined oil market.
Chart 6: US Crude Oil Inventory
Source: EIA, Research Department of CICC
Figure 7: Recovery of crude oil production in the United States
Source: BSEE, Research Department of CICC
The supply of industrial products has exceeded the demand headwind
Recently, local production and electricity restrictions have become stricter. Independent electric furnace plants and thread rolling lines in Jiangsu, Guangdong and other places are under control due to their high power consumption. The electrolytic aluminum industry in Guangxi, Yunnan and Ningxia is subject to power and production restrictions, and the resumption and production of electrolytic aluminum have high requirements for stable power supply, which may be difficult to realize under current constraints; The production of stainless steel and ferronickel in Fujian has been affected; However, the zinc smelters in Yunnan and Guangxi were subject to power supply as early as May and July, respectively, with a small month on month reduction. Copper smelting is relatively less affected. The base metal processing end is also greatly affected. In the first half of this year, the output of copper and aluminum products in the nine provinces of the first level early warning accounted for 29% and 27% of the country respectively. Therefore, it is necessary to continue to track the interference of power rationing measures on the demand for replenishment of base metal downstream processing industries.
Copper: the impact of power restriction on downstream demand is greater than that of smelting end
Current power restriction measures have little impact on copper smelters. In addition, for copper smelting, if power restriction is implemented, because refined copper consumes more power, enterprises tend to give priority to producing crude copper rather than refined copper, and then supplement refined copper output when power is restored, so the smelting end is more controllable. Up to now, the impact of power restriction on copper smelting production is relatively small, while the impact of the downstream processing industry is relatively greater, and it also affects the rhythm of the downstream pre festival replenishment. At present, low inventory and shortage of scrap copper still support copper prices, but it is still necessary to observe the changes in domestic refined copper inventory to track the negative feedback effect of power restriction measures on copper fundamentals in the copper processing industry.
Chart 8: China's copper inventory is currently at a low level
Source: SHFE, Research Department of CICC
Table 9: Monthly Output of Domestic Electrolytic Copper
Source: Mymetal, Research Department of CICC
Aluminium: additional measures for power restriction
Among the nine provinces named by the National Development and Reform Commission, the aluminum production capacity accounts for 40% of the country. Yunnan issued the notice of power and production restriction in May, July and September respectively. The latest notice required that the average monthly output of green aluminum enterprises from September to December should not be higher than that of August. Guangxi requires that the output of six alumina enterprises and eight electrolytic aluminum enterprises in September should not exceed 50% and 80% of the average monthly output in the first half of 2021 respectively. As a major power user, electrolytic aluminum is greatly affected by the dual control of energy consumption. In addition, the recovery and production of electrolytic aluminum have high requirements for stable power supply, which is difficult to be realized under the current policy. The power restriction also has a great impact on the downstream aluminum processing industry. The social inventory of electrolytic aluminum accumulates slightly for the second week in a row, and the expected stock reduction in September and October has not yet been realized. It is necessary to continue to pay attention to the inventory changes after the "11th" Festival.
Overseas, the Aluminum Association of India said that the decision of state-owned coal enterprises to significantly reduce the coal supply of non power industries has led to the shortage of coal in their own power plants, which may have an adverse impact in the short term [3].
Figure 10: Domestic aluminum social inventory
Source: SMM, Research Department of CICC
Chart 11: Operating rate of aluminum downstream processing industry
Source: Mymetal, Research Department of CICC
Zinc: the impact of supply on a month on month basis is small
The zinc smelters in Yunnan, Guangxi and Hunan are affected by the power limit, but the overall reduction is small, and the supply side has little change on a month on month basis due to the superposition of dumping and storage expectations. But overseas, the pressure of high electricity prices on smelters may continue to increase in the fourth quarter.
Chart 12: Monthly Zinc Production in China
Source: Mymetal, SMM， Research Department of CICC
Table 13: Stainless steel inventory in domestic mainstream consumer areas
Source: Wind, Research Department of CICC
Nickel: stainless steel plant reduces production, and nickel price is under pressure
In the nickel industry chain, stainless steel is greatly affected. In the middle of September, stainless steel enterprises in Jiangsu, Guangdong, Shandong, Fujian and Guangxi successively stopped production and reduced production, and stainless steel prices hit a record high. Since the production in the first half of the month has not been greatly affected, we expect that the domestic stainless steel production in September will decrease by 15% to 2.3 million tons, and the production of 300 series stainless steel with high nickel content may decrease by 13% to 1.2 million tons month on month. Considering that from January to August this year, the domestic crude stainless steel output has increased by 20% year on year, entering the fourth quarter, the "double limit" measures of the stainless steel industry may be more stringent. The expected reduction of stainless steel production led to the decline of nickel price. However, the price of NPI is still high. Nickel pig iron plants in Jiangsu, Shandong, Fujian and Guangxi are also affected, Mysteel estimates that the output will decrease by 10000 metal tons in September. In addition to the reduction of nickel ore supply and grade in the rainy season in the Philippines, we believe that the price of nickel pig iron still has some support.
Deformed steel bar: coarse steel horizontal control superposition production limit and power limit
The iron and steel industry was affected by the horizontal control of crude steel in the early stage, and recently, the "double limit" was superimposed. The independent electric furnace plant and thread rolling line and other links were mostly controlled due to their high power consumption. As of September 24, the capacity utilization rate of the rebar rolling line has dropped to 59.4% from about 81% in May this year, of which the short process (electric furnace+billet) has dropped to 31.7%, and the rebar output has dropped to 2.71 million tons, which is the new low since April 2020. The decline in supply was faster than the decline in demand, and inventory reduction also accelerated.
Although it was the peak season, the downstream demand was still weak. This week, steel consumption continued to decline by about 3.4%, including about 5.2% for thread and 2.5% for hot coil. We believe that in the case of weak downstream demand, the price of screw thread has been strong recently, and it is more likely that it is the impulse rise caused by the tightening of production restrictions, which is difficult to maintain. In the past two weeks, the performance of thread futures and spot goods has been differentiated. Affected by production restrictions, the spot goods have surged, but the upward momentum is limited. The futures end has weakened due to the pessimistic expectation of demand, and the spot premium has continued to expand.
Figure 14: Capacity utilization rate of deformed bar
Source: Mysteel, Research Department of CICC
Chart 15: Steel consumption
Source: Mysteel, Research Department of CICC
Agricultural product processing is also affected by "double restrictions"
Some agricultural products processing industries with high energy consumption, such as cotton textile, corn starch, soybean pressing and other industries, have also been affected by the "double restrictions".
Cotton: downward pressure on cotton yarn price increases
Affected by the expected reduction of cotton production in Xinjiang, the cotton opening price is expected to be high. We believe that the favorable window period of cotton prices will remain short before October's rush harvest. However, the demand side is affected by the power restriction measures, and the demand for downstream cotton yarn is significantly weakened. Some high-energy consuming enterprises in the textile printing and dyeing industry cluster have implemented power rationing measures, involving 161 related enterprises [4]. As of September 22, according to the weekly data of the cotton textile information network (TTEB), the startup load of domestic cotton yarn mills was 55.1%, a rapid decrease of 8 percentage points from 63% at the beginning of September. At the same time, the startup rate of downstream cotton fabrics was only 51%, a decline for nine consecutive weeks. At present, it is the peak processing season of the "Double 11" in the textile and clothing industry, and the power supply is limited or the order shipment will be delayed. Looking ahead, we expect that the "double limit" constraint will be difficult to ease in the short term. This year's "golden nine and silver ten" may not be prosperous in the peak season. Short term cotton yarn inventory may continue to accumulate, and there will be greater downward pressure on prices.
Corn and soybean: low operating rate of deep processing
This year, the corn yield in Northeast China has basically become a consensus. With the recovery of Meiwan port, short-term supply is relatively loose. However, constrained by power restriction measures, the operating rate of downstream deep processing enterprises is low. As of September 24, the operating rate of major corn starch enterprises nationwide was 50.52%, 8 percentage points lower than that of the previous month. The soybean crushing industry has also been affected. Taking Tianjin as an example, on September 22, Tianjin Dafu, Jiusan, and Jingliang oil plants issued an emergency notice, and the factory stopped issuing orders because of the power failure on the external lines [5]. As of September 17, the operating rate of major oil plants in China was 48.11%, down 4.62 percentage points month on month. Among them, East China was most seriously affected, with the soybean crushing operating rate of 60.21%, down 17.31 percentage points month on month. Looking ahead, considering that the fourth quarter is about to usher in the peak consumption season, we believe that if the power restriction measures continue for a long time, it may lead to faster de stocking in the oil and grease industry, which is good for the oil and grease prices as a whole.
Table 16: Operating rate of corn starch enterprises
Source: Mysteel, Research Department of CICC
Table 17: Operating rate of soybean crushing enterprises
Source: Mysteel, Research Department of CICC
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