Crude oil

Crude oil: The last-in, first-out rule leads to anti-seasonal accumulation of inventory in US refineries at the end of the year

Why do American refineries need to be cleared at the end of the year? One reason is the inventory tax in the US Bay refinery area (levied ad valorem, that is, the inventory value is calculated according to the LIFO standard), and the other reason is that the reduction in purchases leads to LIFO liquidation and the increase in refinery profits (in the context of rising oil prices, refineries accumulate a large number of low-cost LIFO layers), but the income tax has also increased (the company may consider that the avoidance of inventory tax is greater than the increase in income tax), so in the years when oil prices are usually rising, the inventory at the end of the refinery can achieve two birds with one stone (increasing profits+ Reduce inventory tax), and the oil price decreased this year, we saw no obvious seasonal destocking in refineries. That is to say, the primary purpose of the company is still to increase the profit on the financial statements, and the drop in oil prices + LIFO can increase profit, it does not need to rely on LIFO liquidation, while LIFO liquidation will cause the release of the high-priced LFO layer in the early stage and reduce the corporate profits. Therefore, the corporate destocking motivation is weaker than in previous years. At the same time, the price of newly purchased crude oil has fallen sharply compared with the beginning of the year. The factor of destocking and tax avoidance has also been weakened. Another effect is that a large amount of low-priced crude oil has been added to the refinery inventory, and the cost of the LIFO layer is further reduced. In the future, the refinery has more room to manipulate profits.

Generally speaking, in the past, US refineries destocked in December at the end of the year and replenishing the inventory in January, while this year was opposite because of the sharp drop in oil prices. A similar situation occurred once in 2014 when oil prices decreased sharply, but this is not a passive accumulation of excess inventory caused by fundamentals, but a refinery's active replenishment of inventories based on the consideration of maximizing their own interests. This will allow U.S. refineries to increase crude oil purchases in the short term and push up recent oil prices, but it will start in January next year, this effect will be significantly weakened, and it is more about a change in the crude oil procurement by refineries.

Strategy: Neutral.

Risk: No

Iron Ore

Iron Ore

The position on I2101 contract decreased by 3.454 and closed at ¥1074 per ton, the position on I2105 contract decreased by 1,717 and closed at ¥999 per ton, the spread of Iron 1-5 contract is 75. the spread of Iron 5-9 contract is 49.5. In terms of spot, the PB powder in Rizhao Port was ¥965 per ton. The price of Karara in Tianjing Port was ¥1045 per ton, no transaction on Karara, the previous discounted warehouse receipt was ¥1048 per ton, the price of MAC warehouse receipt was ¥1090 per ton.

【Important News】

1. Mysteel: Xinchuang Li, Vice President of China Iron and Steel Association and Dean of Metallurgical Planning and Research Institute: From the perspective of the impact of changes in the price of raw materials and fuels on the cost of steel, the price of imported iron ore has risen by 17.5% in the past two months, affected by this, the cost of steel per ton has risen by about 10%, while steel prices rose only 5.5% during the same period. It is estimated that due to the sharp increase in the prices of raw materials and fuels such as iron ore, the profits about 100 yuan per ton of steel in steel companies will be squeezed.

2. Mysteel: On the 11th, Bao steel Resources Luohe Mine Phase I, 5 million tons/year capacity expansion project officially started. The total investment of the project is 700 million yuan, and the construction period is 3 years. After it is completed and put into operation, it will produce 1.563 million tons of concentrated magnetite, 143,800 tons of concentrated hematite, and 586,000 tons of concentrated sulfur.

【Important News】

1 Last week, the total iron ore inventory in 45 ports was 122.03 million tons, which was a drop of 2.43 million tons from the previous month. In terms of volume, the decrease of Brazilian mines was relatively small, while Australian mines was relatively large. In terms of varieties, all varieties dropped. Among them, the amount of coarse powder dropped by about 1 million tons. On the demand side, the average daily molten iron output dropped by 2.47 to 2.4347 million tons; the average daily dredging port dropped by 129,600 tons to 3.06 million tons, which was a significant reduction. The main reason for the reduction was the temporary production restriction in Henan and Shandong, and the annual inspection of some steel plants. The maintenance of blast furnaces increased, and the steel mills’ deliveries decreased; at present, the spot of iron ore spot rose too fast, and the northern steel mills began to lose profit last week. We are concerned about whether the molten iron will continue to decline in the later period. At the same time, the recent policy has more impact and the risk of market price fluctuations may increase. It is suggested that hold the short position on iron ore.

(for reference only)

PTA

PTA: The terminals have been reduced slightly again, and TA’s new capacity is expected to be put into production at the end of the month

Fuhua's 4.5 million ton overhaul plan announced. In December we change our expectation from rigid accumulation to destocking slightly. December.

In terms of the unilateral strategy, it is advised to be cautions and hold the long position. For the strategy across the period, arbitrage opportunity is ready. For the risk, TA factory inspection and maintenance progress.

Natural Rubber

Rubber: Supply and demand weakened month-on-month, and rubber prices continued to decline

The spot market prices fell mainly last week. According to Zhuo Chuang's understanding, the stable release of raw materials in Thailand's high-yield season has led to a high callback in purchase prices. From the terminal point of view, the export and delivery of tires have been restricted, domestic demand has weakened, and the superimposed raw material prices continue to put pressure on tire costs. The operation of tire companies is under greater pressure. The recent air pollution control in Shandong has caused some companies to shut down, and the tires industries may be significantly affected. In addition, the overall buying power in the spot market is relatively weak. The quotation of US dollar glue in Qingdao Free Trade Zone fell, and the market was active, but the downstream buying power was general, mostly on-demand buying and selling, and middleman exchanged goods. As of last weekend, the rubber premium for synthetic rubber was 1,800 yuan/ton (-150), and the price difference narrowed slightly last week. In terms of downstream tire operating rate, as of December 13, the operating rate of all-steel tire companies was 73.18% (-2.03%), and that of semi-steel tire companies was 69.32% (-1.93%). Last week, due to the domestic environmental protection inspection, the short-term tire exports are restricted, and the operation rate of construction has declined. The operating rate is expected to decline next week.

Viewpoint: Due to the increasing environmental protection pressure in Shandong, the operating rate of some tires has been suppressed. At the same time, the obstruction of tire exports brought a significant decline in the operating rate of tire factories last week, and the weakening of the demand side, which has increased the pressure on futures prices. At the same time, we see the release of production in Thailand. After the rains in the previous week, the current raw material prices are relatively ideal and the production release is relatively sufficient. However, the shortage of foreign labor in Thailand still affects the large-scale release of production. Therefore, the probability that the price will continue to collapse in the later period is relatively small, but before the price of raw materials stabilizes, it is expected that the rubber price will remain weak.

Strategy: Neutral

Risk: The increase in supply brought about a sharp rebound in inventories, Covid-19 and other impacts, demand continued to weaken, and funds balance was tight.

Copper

Copper

LME copper prices fluctuated and closed at US$7,768.5/ton, down by US$104.5/ton, an decrease of 1.33%, and increased from 1896 lots to 321,000 lots

【Important Information】

1[Chile's state-owned copper company and Radomiro Tomic copper mine union reached a salary agreement] The world's largest copper miner-Chile's state-owned copper company (Codelco) said on Thursday that it had reached a preliminary salary agreement with a union of the Radomiro Tomic copper mine. The 36-month agreement does not affect wages, but includes a final bonus equivalent to approximately US$4,800 per worker.

2. Pfizer obtained the emergency use authorization of its vaccine from the United States on Friday, completing an unprecedented scientific sprint that may eventually help end Covid-19 that killed nearly 300,000 Americans. The U.S. Food and Drug Administration (FDA)'s decision that authorize the use of Pfizer and its partner BioNTech SE vaccine will initiate a complex vaccination campaign that will be launched across the United States in the next few days. The first group of people vaccinated will include medical staff and elderly people who live in nursing facilities for a long time.

【Trading Strategy】

1. Recently, there are many macro-positive factors that support the rise of copper prices. However, copper prices have digested most of the positives. After they rushed to over 59,000, they quickly fell back and may fluctuate sharply in the short term.

2. Arbitrage: Hold the current position

3. Options: Short cross-market options, cu2102-C-60000 and cu2102-P-54000. (For reference only)