Guojin Securities: Companies that are optimistic about the left side of the cost curve and have a clear production delivery path give the resource products sector a “buy” rating

The Zhitong Finance App learned that Guojin Securities released a research report saying that they are optimistic about resource companies that rely on resource endowments, technology, or energy advantages to stay on the left side of the cost curve for a long time and have a clear production delivery path, as well as varieties with direct pricing for currency demand and low supply flexibility, to give the sector a “buy” investment rating. Focus on the copper and gold resource leaders on the left side of the cost curve, electrolytic aluminum, which has an energy cost advantage, and gold that is directly priced by currency demand.

Guojin Securities's main views are as follows:

The first principle of price formation is always the balance between supply and demand

Commodity prices seem to have many explanatory frameworks: supply and demand gap, cost support, monetary environment, trading sentiment. However, when these factors are broken down layer by layer, it will be discovered that if any force is to continue to influence prices, it is ultimately necessary to change supply and demand, and cannot be circumvented.

Supply-demand balance sheets, cost curves, and complete supply-demand curves, each retaining different dimensions of product research

Balance sheets are good at describing supply, demand, inventory, and internal structure along a timeline, but it is difficult to show high-cost production capacity, inventory release, delayed procurement, and potential demand that will be activated after price changes; the cost curve expands the costs and release thresholds of different suppliers, making marginal supply and price feedback visible, and the complete supply and demand curve further restores demand payment intentions, so that buyers and sellers can enter pricing together. If you want to preserve both the time evolution of the supply and demand balance sheet and the ability to interpret the price of the supply and demand curve, a more ideal research framework is to make the static supply and demand curve dynamic: for each period, the supply curve, demand curve, and balance point at the corresponding point in time are formed separately.

The resource supply curve has material and factor attributes, and the core of the demand curve is the terminal's willingness to pay

Resource endowments determine ore grade, mining methods, processing volume, and basic costs; transportation converts resources from different regions into the landing competitiveness of places of consumption, and its importance changes with unit value, traffic volume, and concentration of demand; energy pays the cost of material transformation, and varieties with high energy consumption and low value, such as electrolytic aluminum, therefore show strong energy properties. True marginal supply can only be identified by disassembling these conditions on a project-by-project basis.

Demand for resource products is usually derived demand. Taking lithium carbonate as an example, how high raw material prices can be accepted directly downstream ultimately depends on whether the cost can be transmitted to terminals such as automobiles, consumer electronics, energy storage projects, etc., as well as whether consumer budgets, corporate profits, and project returns can continue to be absorbed. Since raw material costs are diluted layer by layer by layer by technology, brand, labor, channels, and other components, the demand curve for resource products is usually steep; however, the tolerance threshold for different products, regions, and projects is not the same; only by superimposing these heterogeneous terminals horizontally can the total demand curve be obtained.

Narratives such as common financial attributes and cost support in the market can all be reduced to supply and demand variables

The peculiarity of gold is not that it is separate from supply and demand, but that storage value, safe-haven, and reserves themselves are terminal functions. Real interest rates and fiat credit directly change currency demand, and short-term mineral supply is relatively rigid, so changes in demand can easily be amplified into price changes; although industrial resources are affected by interest rates, dollars, financing, and risk appetite, financial conditions are more of a conductor and amplifier of their own physical supply and demand trends. Costs also don't necessarily affect commodity prices; they only enter the final price when the change in cost crosses the threshold of starting and stopping production of marginal production capacity. The case of iron ore and scrap shows that the supply that receives the most attention or produces the most is not necessarily priced; the actual switch is often the marginal entity that fills the last unit gap.

An important analysis of this article

The shortages reflected in the balance sheet of supply and demand are often not shortages in the true sense of the word. Prices do not necessarily rise more slowly; prices will accelerate after demand breaks through the full supply threshold. The negative feedback response pattern of demand to rising commodity prices is not disappearing in each area of demand in sequence. Interest rate cuts are not sufficient conditions for an indiscriminate rise in industrial resources. Rising costs do not naturally equate to price support. The real linkage mechanism for waste price differences is actually not cost support.

Risk Alerts

Macroeconomics and terminal demand fall short of anticipated risks. There is a risk that supply releases and changes in marginal production capacity will exceed expectations. energy, transportation, exchange rate and geopolitical risks.