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Insight | Time: Mar 27 2020 1:44PM
VSF price not major issue at present
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This month has witnessed a historic financial and commodity market crash amid the novel coronavirus outbreak, especially after the spread globally. The market rout on Wall Street had tripped the circuit breaker that halts trading four times in two weeks and the lower price of crude oil during trading session hit historic low at $20.06/bbl since "9.11" terrorist attack.

The slump in commodities has aroused bearish sentiment of VSF market participants, but in fact, VSF already recorded new lows before Chinese Lunar New Year before crude oil hit second lowest point of the 21st century. Current VSF price is even lower than the point after "9.11" terrorist attack.

Although VSF price has dropped to historic low, some spinners even bid below 9,000yuan/mt. In fact, price is not the major issue on the market at present. If looking forward the next decade, the current price of most commodities may all stay at historic low level. The issue is that pandemic has caused stagnated demand, slower commodity circulation and resistance of contract implementation both at home and abroad. As to VSF, some orders supposed to be fulfilled in Feb have not been fully implemented and there is even no clear progress.

However, manufactures have to keep purchasing raw materials, paying wages and paying for electricity, bank interest, rent and taxes to preserve production. Such expenditures will bring survival crisis to some enterprises without sufficient cash inflow, thus demand will decrease further.

Of course, the government of each country is actively responding to the COVID-19 pandemic. As to monetary policy, the US Federal Reserve announced further interest rate cuts as well as an unlimited quantitative easing and China also cut RRR twice within the year. As to finance, there are subsidies to promote restart of plants, like award to staff and energy price preference. Some spinners in developed areas reflect electricity cost even lower than 0.3yuan/kWh.

In a narrow sense, those measures can alleviate production cost pressure of the companies in the short run. Broadly speaking, they can stabilize employment and avoid further decline of demand caused by rising unemployment rate.

To companies, the purchasing volume and appropriate procurement opportunity shall be taken into account while considering the impact of price adjustment on sales volume. Now feedstock price is generally low and the downward risk that is not totally removed can be adorable by most enterprises, so the procurement risks are mostly from capital occupation. As to sales, the pandemic has led to sharp reduction of demand. Simple price adjustment is unable to boost demand, so it can be regarded as failure of price lever.

Generally speaking, investors with abundant capital can hold stocks for more than one or two years and can consider about increasing stocks of certain products, but to manufactures, the influence of pandemic does not seem to be eliminated in the short run, so how to persevere until demand recovery and enhance financial endurance during the pandemic may be more crucial.
[RISK DISCLAIMER] All opinions, news, analysis, prices or other information contained on this report is provided by analyst of Zhejiang Huarui Information Consulting Co., Ltd (CCFGroup) as general market commentary and does not constitute investment advice. CCFGroup will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.
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