Recently, prices of nonferrous metals such as copper, aluminum, lead, and zinc have fallen significantly, drawing close attention from the market. What impacts will this price decline have on companies in the nonferrous metals industry, and how should they respond?
　　Qi Ding, Chief Analyst for the Nonferrous Metals Industry at CICC Research, believes there are four main reasons behind the decline in nonferrous metal prices. First, the current international situation has led to a tight energy supply and soaring energy prices, driving up global inflation and significantly disrupting the recovery of overseas economies following the lifting of pandemic restrictions. Second, in response to high inflation levels, the Federal Reserve has accelerated its interest-rate hikes, not only suppressing metal prices by tightening liquidity but also substantially dampening demand. Third, domestic demand has been affected by recurring COVID-19 outbreaks in China, weakening downstream enterprises’ incentive to replenish inventories at lower prices, putting downward pressure on operating rates and resulting in a situation where peak-season demand fails to materialize. Fourth, the supply shock caused by the Russia-Ukraine conflict has gradually peaked, and as overseas epidemics improve, factors that previously hindered commodity production and logistics are easing. As a result, most commodities have begun to show a clear supply response, further exacerbating the downward pressure on nonferrous metal prices.
　　Experts say that the sharp decline in nonferrous metal prices has broad implications for companies across the upstream, midstream, and downstream segments of the industrial chain. In the upstream mining and beneficiation stage, since costs are relatively rigid, falling prices will lead to a decline in corporate profits and cash flow—especially for companies with high financial leverage, which could even pose a risk of breaking their capital chains. In the midstream smelting stage, during periods of declining prices, companies face the risk of devaluation of their raw material inventories; this risk is particularly acute for firms with large inventories and inadequate hedging and risk-control measures. In the downstream deep-processing stage, the primary impact stems from the risk of falling raw material prices originating from the midstream smelting stage. However, as lower raw material prices put downward pressure on costs and drive down end-product prices, this could help boost the recovery of the downstream industry’s outlook.
　　“For cyclical enterprises, a sharp drop in prices brings both risks and opportunities,” Qi Ding emphasized. If these companies can effectively manage price risks and possess strong operational and financial capabilities, they will not only remain resilient amid significant price declines but also be poised to seize opportunities by expanding production against the trend, capturing market share in downstream sectors, and even pursuing counter-cyclical mergers and acquisitions of undervalued high-quality assets—thereby achieving steady growth despite economic cycles.
　　To address the adverse impacts of falling prices on nonferrous metals industry enterprises, experts recommend that, during periods of significant price volatility, these companies should strengthen their price-risk management and adjust their business strategies accordingly. Qi Ding believes that, first, companies should conduct thorough fundamental research and analyze price trends for the nonferrous metal varieties relevant to their operations, laying a solid foundation for risk control. Second, companies should actively engage in hedging activities: upstream mining and processing enterprises can appropriately increase their hedging ratios, while downstream and midstream enterprises in the nonferrous metals industry must strictly implement full-hedging measures. Third, companies should adjust their inventory and sales strategies by adopting practices such as purchasing materials only as needed based on orders, accelerating inventory turnover, pricing earlier, or signing long-term contracts to mitigate the risk of price declines.
　　According to Gu Fengda, head of the Research and Consulting Department at Guoxin Futures, given the high volatility of non-ferrous metals in the second half of the year, it is advisable for non-ferrous metal companies to strengthen their efforts in developing customized, personalized, and targeted hedging strategies and risk management services, proactively seizing both the opportunities and challenges brought about by market fluctuations in the second half.
　　Gu Fengda suggested that nonferrous metal enterprises should be vigilant about the heightened risk of bidirectional price declines in certain short-term commodities. Processing enterprises should focus primarily on hedging to lock in profits, while paying close attention to risk control and capital management.
　　Regarding specific hedging optimization strategies, Gu Fengda offered some advice to businesses. He pointed out that in the process of hedging, due to factors such as hedging costs and basis risks, it is often difficult to achieve perfect hedging. Moreover, overly mechanical hedging approaches may also cause companies to miss out on opportunities to reap risk-adjusted returns. As a result, many optimized hedging strategies have emerged—ranging from adjusting spot operations based on futures characteristics, leveraging market features or short-term trend changes to enhance hedging effectiveness, to effectively managing inventory and employing cross-hedging techniques. These strategies require futures firms to provide systematic services through their risk management systems.
　　Gu Fengda also emphasized that, given the changing market conditions and varying enterprise needs, companies should conduct thorough stress tests and manage price risks effectively. When encountering significant market shifts, substantial floating losses (or gains) in transactions, or transaction fund payments exceeding the company’s financial capacity, enterprises should promptly establish emergency response mechanisms, proactively respond, timely cut losses, and handle the situation appropriately. In addition, companies should simulate and estimate potential losses arising from unexpected events, develop corresponding contingency plans, and implement necessary procedural improvements. (Economic Daily)