After the RRR reduction, where will commodities go?

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On December 6, the People's Bank of China decided to reduce the reserve requirement ratio of financial institutions by 0.5 percentage points on December 15, 2021, and what impact it had on the commodity market, the CITIC Futures commodity team made the first interpretation.

Each industry theme:

1. Commodity strategy: The "policy base" is consolidated, and the demand is expected to be good

3, black: demand repair to push up the expectation of resumption of production, black positive feedback is expected to continue

4, non-ferrous: the reduction of the RRR makes the trend repeated, but it may be difficult to change the downward momentum of the non-ferrous shock

5, chemical: this round of RRR reduction boost is limited, continue to pay attention to the impact of demand and energy

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This report was jointly written by the Commodity Strategy Group, the Black Building Materials Group, the Nonferrous Metals Group, and the Chemical Industry Group, with the participation of Zeng Ning, Zheng Feifan, Zhu Ziyue, Xin Xiuling, Ren Heng, Jiang Xiuming, Shen Zhaoming, and Hu Jiapeng.

I. Commodity Strategy: The "policy base" is consolidated, and the demand expectation is good to dominate the trend of bulk commodities (Zeng Ning, Zheng Feifan)

On December 6, the People's Bank of China decided to reduce the reserve requirement ratio of financial institutions by 0.5 percentage points on December 15, 2021, releasing a total of about 1.2 trillion yuan of long-term funds. After this reduction, the weighted average reserve requirement ratio of financial institutions is 8.4%. Part of the funds released by the RRR cut may be used to replace the 950 billion MLF due in December, which will significantly reduce the cost of bank funds on the one hand, and better support the real economy. In addition, considering the increasing downward pressure on real estate investment, the RRR cut may help hedge the downward pressure on the domestic economy.

After mid-October, due to the loosening of the logic of the supply side, the logic of commodities gradually turned to the weakness of the demand side. The core reason for the weak demand is mainly due to the tightening of real estate credit. Affected by the tight real estate financing, it can be seen that after the second half of this year, the real estate industry chain is facing the problem of tight funds, and there has been a large decline in the new construction and completion of housing. In addition, restrictions such as the tightening of mortgage loans and second-hand housing loans at the guidance price have led to a sustained decline in real estate sales since July. The downturn in real estate sales has aggravated the capital shortage of housing enterprises, and the drag of real estate investment on the economy has begun to appear. So we can see that the main drag item of economic downward pressure is mainly in real estate, and the downward pressure on real estate investment is mainly in the tightness of funds, if the shortage of funds or tight credit problems are solved, real estate demand is still supported. In addition, after the decline in real estate investment, infrastructure will become an important tool to support the economy, and the development of infrastructure is actually inseparable from the support of wide currency.

We believe that the forward signal of the arrival of the RRR cut or the arrival of wide credit, and the follow-up with the landing of relevant credit relaxation policies, real estate and infrastructure demand will be improved. According to the estimation of the lag credit cycle of entity demand for about half a year, the demand for major industrial products will rebound after the second quarter of next year, and the forward contract will be supported by the expected improvement. At the same time, the improvement in demand will also drive the supply to pick up, and then form a positive feedback, based on the logic of "buying expectations and selling reality", macro expectations will drive commodities to continue to oscillate upwards, mainly conducive to domestic pricing of commodities, such as black building materials closely related to real estate infrastructure, but global pricing commodities such as crude oil, non-ferrous metals are affected by the overseas economic downturn, and the performance will be weaker.

We repeatedly hinted at important points in october that commodities are facing a turnaround, and after mid-November, as coal cost collapse ends and policies show signs of easing, we began to continue to warn of the idea that commodities will bottom out, our November 11 feature report "After the Black Plunge, Enter a Period of Cautious Observation", and the November 12 feature report "Commodities Lows Soar, Will Bottom Out?" " began to put forward the view that long-term demand will gradually improve, and prices will gradually stabilize. The special report on November 25 , "The Bottom of Real Estate Policy Has Emerged, Macro Expectations Drive Commodity Shocks Upwards "November 26 Commodities Monthly Forum" ("CITIC Futures Monthly Commodities Forum (No. 8) Meeting Minutes"), December 1 Special Report "Why Is Black Rising Again?" Can the logic of winter storage on the disk surface be sustained? and other related reports have successively released the logic of macro expectations driving commodity rebound. For the forward market logic, we still maintain the judgment in the strategy annual report "Demand tends to decline, supply constraints ease - commodities 2022 annual strategy report", that is, we are not optimistic about the trend of commodities throughout the year, the overall focus tends to decline, but for the first half of the year, we believe that there is an opportunity for policy relaxation to drive demand to pick up in stages, from the current market point of view, we still maintain the previous view, based on the logic of "buying expectations and selling reality", The improvement of macro expectations will drive commodities to continue to oscillate upwards, and we will continue to track changes in market logic in the later period, and investors are welcome to continue to track our latest views.

Second, energy: reduce the RRR to improve energy demand expectations, short-term boost market sentiment (Zhu Ziyue)

Coal: This RRR cut can enhance the ability of the financial sector to support small and medium-sized enterprises, which is conducive to stable growth in the context of weaker real economy expectations. Since the epidemic in 2020, the contribution rate of manufacturing in GDP growth has begun to pick up, and the state has increased its policy promotion for high-end manufacturing, and the stability of monetary policy has helped maintain the stability of the manufacturing industry, thus effectively hedging the expectation of the decline in electricity consumption and coal consumption. However, since this RRR cut is not exactly the opening of a signal of full easing, the medium- and long-term impact remains to be seen.

Crude oil: In the short term, the release of liquidity by the People's Bank of China aims to continue to promote banks to give profits to entities, strengthen the transmission from wide money to wide credit, and promote the marginal improvement of demand expectations for Chinese entities, which has boosted market sentiment. However, due to the fact that this RRR cut is not the beginning of a comprehensive easing cycle, it is still necessary to look at the actual effect of wide credit in the medium and long term. In addition, crude oil, as a globally priced commodity, needs to pay more attention to the overall drag on demand from the slowdown in global economic growth next year, as well as the suppression of the financial attributes of commodities by tightening global liquidity.

Third, black: demand repair to push up the expectation of resuming production, black positive feedback is expected to continue (Xin Xiuling, Jiang Xiuming, Ren Heng)

The comprehensive reduction of the RRR came as scheduled, and at the same time, the Politburo meeting emphasized "seeking progress in stability", and the fiscal front and monetary stability were expected to be strengthened; the attitude towards real estate was also positive, and the "policy bottom" of real estate was once again consolidated, and we expected that the construction funds would be marginally alleviated. In the context of weak terminal demand in the fourth quarter, the reduction of crude steel production has greatly exceeded the policy requirements, the supply of crude steel has returned to the market-oriented adjustment that follows demand, and after the weakening of the supply-side impact, demand will dominate the future trend of steel prices. At present, the construction area of the real estate end is large, and the power to rush to work in the completion cycle still exists, and with the easing of the problem of capital shortage, the demand for steel at the real estate end will be marginal repair. At the same time, fiscal cross-cycle adjustment will also support the release of infrastructure demand, the improvement of financing demand will help the transmission of wide money to stable credit, and the bottom of social financing will gradually produce positive support for the real economy. It is expected that steel demand may marginally repair during the traditional peak season in the first half of 2022.

For the raw material side, affected by various production reduction policies and the demand side of the demand side of the unexpected weakening, the molten iron production in the fourth quarter was significantly suppressed, with an average daily molten iron production of 2.03 million tons in October, while in November it was further contracted. Even with a 5% decline in crude steel demand for the full year of 2022, the average daily molten iron production will exceed 2.25 million tonnes, well above current levels. Therefore, we believe that the current supply of molten iron is basically at the bottom level under the double impact of demand and policy. With the marginal repair of terminal demand, the superimposed production reduction intensity exceeding policy requirements, the high profit margin of steel mill steelmaking, and the low inventory of raw materials of steel enterprises, there is a strong expectation of resuming production of steel enterprises in the first half of next year, and the balance of supply and demand of raw materials needs to be reconstructed urgently. The market's early trading terminal demand repair has driven the resumption of steel mill production, the black plate has a phased positive feedback of demand-cost, coal coking steel mines have rebounded, and the raw material performance is stronger under the expectation of resuming production.

Fourth, non-ferrous: the reduction of the RRR makes the trend repeated, but it may be difficult to change the downward momentum of the non-ferrous shock (Shen Lighting)

On the afternoon of December 6, the central bank cut the RRR by 0.5 percentage points, combined with the previous relaxation of financing policies for the real estate industry, which is conducive to improving the downward momentum of real estate in stages, and is helpful to reverse the previous market pessimistic expectations for real estate, which is also of certain significance for alleviating the downward pressure on domestic economic growth. But considering that the RRR cut is largely to hedge against the nearly trillion MLF that will expire in December, it does not release too much additional liquidity to the market; the Fed has begun to tighten liquidity, and in the context of greater inflationary pressures, Fed Chairman Powell and US Treasury Secretary Yellen changed their "inflation temporary" statement in midweek last week, which means that the Fed's liquidity tightening may be further increased. Therefore, we believe that the RRR cut may have a partially tight positive impact on the non-ferrous metals stage, but the main line is that the Fed tightens liquidity, and the news of the RRR cut has been reacted in advance in the intraday on Friday, so the positive impact of the RRR cut on non-ferrous metals should not be expected too high.

In terms of specific varieties, we see that in late October, due to the weakening of real estate demand and the expected pessimistic impact, aluminum ingots and stainless steel once fell sharply, and in the context of the current policy to support real estate, these two varieties may also be more positively affected.

In general, the positive impact of the RRR cut on varieties closely related to real estate may be slightly larger, but it is difficult to change the downward momentum of the overall non-ferrous shock.

V. Chemicals: The current round of RRR reduction is limited, continue to pay attention to the impact of demand and energy (Hu Jiapeng)

The short-term is the emotional impact, the capital level or the first embodiment, followed by the spot level on the trader replenishment more active, the medium and long-term is transmitted to the terminal and downstream entities gradually improved, to really improve the demand. In the short term, after yesterday's close came out of the RRR cut news, the night session has put the mood trade off, the chemical sector is relatively weak, indicating that the funds are not optimistic about the RRR cut to boost expectations, that the support for the spot trade end will be relatively limited. Although the chemical opened higher due to the sharp rise in crude oil in the night session, the sustainability is cautious, and from the perspective of expectations, it is necessary to see whether there will be further macro policy stimulus in the future, and it is possible to see the real improvement of expectations. In the coming period, we believe that whether the transaction policy will bring improvements to the actual terminal demand, especially at the real estate and small and medium-sized enterprise levels, which needs to be observed as the terminal demand changes. Overall, this round of RRR cut short-term support for the chemical industry is relatively limited, the current RRR cut is mainly to hedge short-term risks, it is difficult to say strong support, the chemical itself spot end contradiction is not large, macro guidance is more important, but further policies are needed to improve downstream terminal demand, in order to truly improve expectations, in addition to still pay attention to coal and crude oil on the chemical industry guidance.

This article originated from Zengning Commodity Research