Soaring Oil Prices Helped PPI Rise To 1.7%, And Textile Foreign Trade Enterprises Could Not Stand It

Since March, oil prices have soared like a rocket.

First, the organization of Petroleum Exporting Countries (OPEC) constantly used "sources" to manage the market in anticipation during the open-door meetings. Then, the Iranian backed Hussein rebels launched air strikes on Saudi oil towns, aiming at the local oil facilities of Saudi Aramco, the world's largest oil giant.

Stimulated by the double news, Brent crude oil (oil distribution) broke through the $70 mark on March 8, while the US crude oil (American oil) also soared to around $70. Although the subsequent oil distribution and American oil both fell down, a number of major international banks have been bullish on oil prices, and Goldman Sachs believes that it is not a dream for oil distribution to exceed $75 in the second quarter.

This round of soaring oil has also added another fire to the global inflation expectations.

On March 10, China's industrial producer price index (PPI) continued to rise to 1.7% in February, according to economic data released by China's National Bureau of statistics. This is a further sharp upward trend after 11 months of negative growth in January.

If the fire of inflation is burning, what is the impact on domestic enterprises?

Don't worry too much about "imported inflation"

Although many people will feel that inflation is invisible and intangible, Chinese textile export enterprises, which have entered the traditional "gold, silver and four" peak season, have taken the lead to feel the changes.

"Bitter! The price of polyester has gone crazy. " Li Wen (pseudonym), business manager of a foreign trade and home furnishing listed company in Jiangsu Province, said in an interview with time weekly on March 9.

As polyester fiber uses petroleum refined ethylene as raw material, the oil as upstream raw material skyrocketed, leading to downstream Chinese textile export enterprises suffering.

But even so, the textile foreign trade industry can only hold on, dare not increase prices. "Now the orders of foreign trade enterprises are the prices set last year. It is almost impossible to change the prices now." Li Wen further explained that since textile products are seasonal products, samples are usually developed in September of the previous year and sent to customers. Prices are set in December, and then orders are placed in February of the next year and the goods are shipped in June. "Therefore, if we talk about price increase now, the prices in the whole chain will all move, and many customers prefer to cancel orders."

The rise in industrial raw material prices is also reflected in China's PPI data.

But PPI upside is not necessarily a good thing. Zhou Maohua, a macro analyst at the financial market department of Everbright Bank, said in an interview with the times weekly on March 9 that, although the change of PPI indicates that the overall operating conditions of domestic enterprises have improved, more and more enterprises are getting rid of the situation of "price reduction and promotion". However, not all enterprises benefit. Some enterprises with commodity as intermediate input will have higher cost and profit will be eroded.

Such changes have also led many analysts of securities companies to mention "imported inflation" in recent days, that is, the rise of foreign prices drives domestic prices higher. Does China need to worry about "imported inflation"?

In this regard, Zhou Maohua believes that we need to be vigilant, but we need not worry too much. He gave three reasons:

First, with the transformation of China's economic structure, the balance of payments tends to be balanced, and the initiative of domestic monetary policy has been significantly enhanced;

Second, from the perspective of China's inflation structure in recent years, pork and food prices are the main factors causing price fluctuations, but the African swine fever is under control, and the tension between supply and demand of pork continues to ease;

Third, the transmission of domestic PPI to CPI (consumer price index) is not smooth. From the data point of view, China's CPI data in February fell by 0.2% year-on-year, which is inconsistent with the upward trend of PPI. At the same time, China's industrial structure and consumption upgrading are still in the process of rebalancing.

On the whole, although the risk of "imported inflation" is controllable for China at this stage, Zhou Maohua also said that the recent rise in international crude oil and other commodities is bound to further boost China's PPI.

Under the upward pressure of PPI, some even call "stagflation is coming". Ren Zeping, chief economist of Evergrande group, issued a report on March 1 that "China's economic cycle is turning from recovery to overheating and stagflation, inflation expectations are rising, and structural asset prices are bubbling. We may be standing at the cyclical inflection point of broad liquidity.".

Expert: high oil price is difficult to maintain

After analyzing the impact of inflation on China, we return to the storm eye of this round of inflation, "king of commodities" - crude oil.

According to the latest forecast of the International Energy Agency (IEA), global crude oil demand may not catch up with supply until around the third quarter of 2021. And JP Morgan also said earlier that the price of Brent crude oil futures contract was about two quarters higher than the actual price, and it was 4 US dollars higher than the basic price, so the actual crude oil was not easy to sell.

Meanwhile, of the three countries with the most say in global crude oil production (the United States, Saudi Arabia and Russia), the United States under Biden does not seem to welcome high oil prices.

In response, Chen Weidong, former chief researcher of CNOOC Energy Economics Research Institute and President of minde Research Institute, said in an interview with time weekly on the 9th: "for the United States, although high oil prices are beneficial to American shale oil enterprises, they are not conducive to the overall economic recovery and people's livelihood of the United States."

Chen Weidong also pointed out that unlike in the trump era, Biden would not directly call Saudi Crown Prince Salman junior and Russian President Vladimir Putin when he saw high oil prices.

It is worth noting that former U.S. President trump has historically regarded Saudi Arabia as the first country to visit in person after taking office. However, the United States under Biden's leadership has chosen to keep distance from Saudi Arabia. Biden made it clear at the beginning of taking office that the US Saudi relations would be different from the past. He also mentioned the kashuji murder case in 2018, claiming that the United States would hold Saudi Arabia responsible for human rights violations.

As for how the volatile situation in the Middle East will affect the future oil price trend, Chen Weidong believes that maintaining the oil price at 50-60 US dollars / barrel is the most acceptable price for all countries, and it is very unlikely that the oil price will stay at $70 / barrel for a long time. "The United States is resuming peace talks with Iran. Once the talks are concluded, once Iran's inventory for so many years is released, the global crude oil market will certainly be impacted. Even if OPEC + takes control, it is hard to deny that Russia has the possibility of abandoning OPEC + to increase production by itself. "

Coincidentally, many analysts have pointed out that, unless there is a new change, the probability of a further sharp rise in oil prices in the short term seems to have declined.

Judging from the news, Zhang Jingjing, CO chief analyst of Guangfa macro, believes that investors have bought the "expectation" of oil price rising twice in the year, that is, the double benefits of warmer demand and shrinking supply. Secondly, the oil price is no longer sensitive to the destruction of Saudi facilities on March 7, for one thing, the recent attacks did not cause substantial damage to Saudi Arabia's oil production capacity; secondly, the crude oil price has fully reflected the current multiple favorable factors.

According to past experience, the Hussein attack in 2019 caused Saudi Aramco's production capacity to be halved, equivalent to 5% of the global crude oil supply. Both butao oil and American oil soared by 9% on the same day, but the oil price returned to the level before the attack in a few weeks.

In addition, from the perspective of fundamentals, Zhou Maohua believes that it is difficult for oil prices to rise substantially in the future, because some commodity prices have deviated from the real fundamentals.

Chen Weidong also said that "the current high oil price is determined by the subjective factors of various oil producing countries, rather than the objective shortage of global crude oil.". In addition, he pointed out that the cold wave in Texas and the Hussein attack were only short-term factors. "The world's major countries are on the path of carbon neutrality, and the era when oil prices have a profound impact on inflation is over."