Summary: Rising bulk commodity prices help improve the profitability of upstream raw-material enterprises and reduce debt risks, but for small, medium and micro enterprises in the midstream and downstream manufacturing sectors, they squeeze profit margins and intensify competition.
Rising bulk commodity prices help improve the profitability of upstream raw-material enterprises and reduce debt risks, but for small, medium and micro enterprises in the midstream and downstream manufacturing sectors, they squeeze profit margins and intensify competition.
At a recent State Council executive meeting, bulk commodity prices were again singled out, with the requirement to "ensure market supply and stable prices, improve and implement response plans for rising prices of important raw materials, reasonably increase domestic production, make scientifically organized releases from reserves, and strengthen coordinated market oversight of key commodities." This sent a strong policy signal that the state will continue to ensure supply and price stability for bulk commodities.
Affected by the rapid economic recovery and multiple internal and external factors, raw material prices have risen sharply and fluctuated at high levels this year. According to the National Bureau of Statistics, PPI rose 9.0% year-on-year in July, 0.2 percentage points more than in June. Among them, producer goods prices rose 12.0%, with the increase expanding by 0.2 percentage points, while consumer goods prices rose 0.3%, the same as the previous month. According to the manufacturing PMI for July, the purchase price index of major raw materials and the ex-factory price index were 62.9% and 53.8% respectively, 1.7 and 2.4 percentage points higher than the previous month. Manufacturing procurement costs generally rose, with the petroleum, coal and other fuel processing; chemical raw materials and chemical products; and ferrous metal smelting and rolling industries all above 70.0%.
The causes of this round of raw material price increases are relatively complex, resulting to a considerable extent from the interweaving and combined effects of supply-demand mismatches, external imported influences, and speculative trading. The impact of rising bulk commodity prices on China has both advantages and disadvantages. On the one hand, they help improve the profitability of upstream raw-material enterprises and reduce debt risks. On the other hand, for small, medium and micro enterprises in the midstream and downstream manufacturing sectors, raw material costs account for a major share of total costs, making them very sensitive to price increases. The resulting rise in operating costs is difficult for enterprises to absorb in a short period, squeezing their profit margins. From the profit performance of industrial enterprises in the first half of the year, upstream mining and raw-material manufacturing enterprises saw notable profit growth, while private and small, medium and micro enterprises in the midstream and downstream recovered relatively slowly. The tug-of-war between upstream and downstream industry chains has intensified.
The Party Central Committee and the State Council attach great importance to the impact of raw material price increases on midstream and downstream industries and small, medium and micro enterprises. The State Council executive meeting has specially studied the issue of excessively rapid rises in bulk commodity prices on multiple occasions, and used monetary policy tools such as cutting the reserve requirement ratio to further strengthen financial support for the real economy, especially small, medium and micro enterprises. In July, relevant departments completed the release of a total of 270,000 tonnes of state reserves of copper, aluminum and zinc in two batches, sending a positive policy signal that the state is ensuring supply and price stability for bulk commodities and stabilizing market price expectations. The targeted releases also provided a window of opportunity for midstream and downstream processing and manufacturing enterprises to replenish inventories, lowering raw material costs for some enterprises.
As the combined measures to ensure supply and price stability continue to take effect, the marked upward trend in PPI has begun to stabilize in recent months. However, looking ahead, with the recovery of the domestic economy and the continued upward trend in international bulk commodity prices, industrial product prices are likely to remain at high levels for some time. This also means that the pressure on midstream and downstream enterprises, especially small, medium and micro enterprises, may be difficult to effectively alleviate in the short term.
To prevent bulk commodity prices from crushing small, medium and micro enterprises, first, it is necessary to continue to remove excessive speculative heat. This means solidly ensuring supply and price stability for bulk commodities, taking multiple measures to strengthen two-way adjustment of supply and demand, and using market-based methods to guide upstream and downstream in the supply chain to stabilize raw material supply and production-marketing coordination. Efforts should continue to intensify coordinated supervision of the futures and spot markets and severely crack down on illegal pricing behavior such as price gouging and hoarding, so as to maintain normal market order. Second, enterprises should be helped to strengthen their vitality. This involves implementing the established tax and fee reduction measures and curbing arbitrary charges. While adhering to not resorting to a flood of strong stimulus, the state should maintain the stability of monetary policy and enhance its effectiveness, further strengthen financial support for the real economy, especially small, medium and micro enterprises, and promote a steady decline in comprehensive financing costs. Third, enterprises themselves should also strengthen their internal capabilities, take active measures to tap potential, reduce costs and improve efficiency to get through immediate difficulties, and turn pressure into motivation to accelerate the pace of innovation and transformation.