At present, the international financial crisis is still spreading, and the impact on the global real economy is likely to further expand. The impact on China's non-ferrous metal industrial companies is even more pronounced. As the global economy enters a recession, copper demand has generally weakened and domestic copper processing companies will intensify their business risks. Therefore, each copper processing company must face business risks and strengthen risk management. Here, we publish this article by Mr. Wang Ming, vice president of Zhejiang Hailiang Group, a large-scale copper processing company in China, aiming to arouse the industry's high alert for the business risks in the new situation.
China is a big producer and consumer of copper. In 2008, the country’s copper production reached 7,485,900 tons, an increase of 19.05% over the same period of last year. It has ranked first in the world for 6 consecutive years, and the total copper consumption in the country reached 7.9033 million tons, making it the largest copper market in the world, creating a history new highs. However, due to the lack of copper resources, China's copper processing industry has long relied on foreign resources, and the development of “outward-oriented and open-type copper processing industries with two ends†should be the basic strategy.
At present, the balance of supply and demand in China's electrolytic copper market is dominated by import factors. Electrolytic copper is a large variety of metals used for futures trading on the Shanghai Futures Exchange, the London Metal Exchange and the New York Mercantile Exchange. Prices of metals are subject to significant fluctuations. Therefore, copper processing companies must have strong operational risk control capabilities. Under the impact of the financial crisis, from the perspective of the relationship between economic cycle and copper demand, the economic recession will have a long negative impact on copper demand. In 2009, uncertainties in the development of the world economy increased, and economic fluctuations affected the development of the world’s copper industry. For the domestic copper processing industry, which is based on private enterprises, large enterprises, and small and medium-sized enterprises, this year may be the most difficult year since the new century. Therefore, facing business risks and strengthening risk management, it becomes every household. The inevitable choice of copper processing companies.
Copper price fluctuation risk control
Electrolytic copper is a futures trading commodity, and international and domestic prices will change every trading day. Since the beginning of 2005, the price of electrolytic copper has risen steadily and has fluctuated sharply. The LME copper price often fluctuates by US$200 per ton per day, or the price fluctuates sharply, or the price falls rapidly, or the price continues to rise. This has brought huge risks and unnecessary losses to copper processing companies. This is one of the important reasons for the withdrawal of many small and medium-sized copper processing companies in the industry in recent years. In 2008, affected by the global financial crisis, the international copper prices fluctuate drastically, skyrocketed and plunged. They often faced half of the market conditions in which half of the seawater was a flame, and experienced the immense weather of the icy fire. In particular, since October last year, the price of copper has drastically dropped to a new low in recent years, resulting in a number of copper processing companies in and out of China tend to be shut down, even if the release of production capacity from start-up is also inhibited, resulting in “outside benefits†to the market.
Due to the rising price of copper, the cost of raw materials for products has accounted for 80% to 90% of the sales price in recent years. For industries with high proportion of raw materials, large price fluctuations, and low gross profit margin, controlling business risks is a very important issue. The copper processing company's product sales adopts the “raw material price + processing fee†pricing model and obtains gross profit through a relatively stable processing fee, and the raw material price is entirely borne by downstream customers. Therefore, in theory, companies will not bear the losses caused by fluctuations in copper prices. From the perspective of pricing mechanisms and profitability models, companies can pass on the risks of high or fluctuating prices of electrolytic copper to downstream customers, but in actual production operations If the company's raw material procurement and product sales cannot be balanced, the company will face the risk of copper price fluctuations. In this regard, domestic copper processing companies should actively take measures to take the initiative to cope with the high volatility of copper prices.
Strictly organize production according to orders, shorten the turnover period of production and operation, and increase the efficiency of asset use.
Sharp fluctuations in copper prices can lead to the risk of inventory depreciation. Therefore, we can implement the profit concept of “only earn processing fees and do not speculate on copper†and strictly implement the “net inventory risk control management method†to control the minimum difference between raw material procurement and product orders. Controlling the risk of taking the price within the range that the enterprise can afford will reduce the company's inventory depreciation risk. Copper price volatility will not have a significant impact on the company's profitability.
The volatility of copper prices finally manifested itself as changes in cost pressures and liquidity requirements. The company's influence on the changes in liquidity demand should be highly valued, ensuring that the operating cash flow and interest guarantee multiples are in a reasonable state, and that they have enough solvency to cope with changes in the company's liquidity requirements caused by the sharp fluctuations in copper prices.
In response to the possible default risk of customers, a strict recovery system for accounts receivable was established to strengthen customer credit rating management. Linking the collection of accounts receivable with the income of business personnel, implementing a rewards and penalties system to optimize the company's customer structure; improving the quality of accounts receivable, effectively avoiding the risk of copper price fluctuations, and ensuring the stability of the company's earnings.
Implement strategies for target market optimization, target customer optimization, and product structure optimization. The main customers are well-known companies in the downstream industry, or well-known international distributors and manufacturers. Optimize the customer structure, and constantly eliminate potential customers to ensure that the company's accounts receivable quality remains good.
Inventory risk control
The sharp fluctuation of copper price will lead to the risk of inventory depreciation. For enterprises with certain stocks, the increase in price directly leads to an increase in gross profit, whereas the gross profit drops sharply, and it is easy to lose money. Based on the pricing model of “copper price + processing feeâ€, Hailiang’s approach is mainly to determine the price of the corresponding raw materials while signing a processing contract with downstream customers. The automatic ratio between the price of such products and the price of raw materials actually locks the company's processing fee profitability. In addition, in order to prevent the copper price from fluctuating to bring losses to the company's inventory, the company implemented the profit concept of “only earning processing fees and not making copper speculation†and formulated the “net inventory risk control management method†and strictly enforced it. The amount of copper metal in the copper price is basically balanced with the amount of ordered copper metal that determines the price of copper. To ensure that there is no natural contraction of the purchase and sales contract, the net inventory with certain fluctuation risk is controlled within the range that the enterprise can bear, and the risk of inventory devaluation is greatly reduced.
After implementing the net inventory risk control system, avoid unnecessary risks and speculative opportunities, let the company focus all its efforts on the main business operations, and it will significantly improve the company’s production and operation efficiency, which is conducive to stable operation and stable development. .
Procurement risk control
The risk control in the procurement process is mainly to prevent suppliers from meeting the rising copper prices and not fulfilling the contract. In procurement, for long-term contracts of six months or one year (known as long-term orders in the industry) suppliers, companies can choose domestic and internationally renowned Taizhou refineries or large trading companies as suppliers. Temporary purchases are based on the established reputation of the company, which is priced first and then paid after delivery.
Sales Chain Risk Control
Sales risk control is the most complex and difficult to control risk. It is particularly prominent in industries that have a high proportion of raw materials, large price fluctuations, and low gross margins. The risk of sales links is mainly reflected in two aspects: First, when the price of copper falls, the customer breaches the contract and fails to perform the contract, which results in the loss of copper price and the scrapped product. Second, the customer has difficulty in operating, can not pay the goods, or has quality, packaging, etc. The problem is that the reason is not to pay the purchase price and cause bad debts.
When the price of copper has plummeted by about 30%, companies face greater risks of default by downstream companies. Under the premise of providing quality products and satisfactory services, the following three measures are mainly used to reduce the risk of default:
Credit classification. Through the investigation of new customers' upstream and downstream companies and loan banks to obtain customer credit status, different grades of customers are given different credits and a margin of about 30% is charged. The significance of the 30% margin is that when the copper price falls by less than 30%, the risk of default by the customer is small.
Export insurance. For some foreign customers who are not fully aware of it and some countries and regions with relatively high credit risk, export credit insurance is carried out at China Export Credit Insurance Corporation. At the same time, product quality liability insurance is insured in areas where the market system and legal system are very standardized, such as in North America. For some high-risk countries, companies try to avoid dealing with them.
Implement responsibility. Each order has a salesman in charge. The salesperson and the company have signed an implementation responsibility agreement. If the subjective cause causes the order to be breached, resulting in losses and bad debts for the company, the salesman or the third-party guarantee will bear the liability for compensation. At the same time, the company implements a high salary incentive policy for salespersons.
China is a big producer and consumer of copper. In 2008, the country’s copper production reached 7,485,900 tons, an increase of 19.05% over the same period of last year. It has ranked first in the world for 6 consecutive years, and the total copper consumption in the country reached 7.9033 million tons, making it the largest copper market in the world, creating a history new highs. However, due to the lack of copper resources, China's copper processing industry has long relied on foreign resources, and the development of “outward-oriented and open-type copper processing industries with two ends†should be the basic strategy.
At present, the balance of supply and demand in China's electrolytic copper market is dominated by import factors. Electrolytic copper is a large variety of metals used for futures trading on the Shanghai Futures Exchange, the London Metal Exchange and the New York Mercantile Exchange. Prices of metals are subject to significant fluctuations. Therefore, copper processing companies must have strong operational risk control capabilities. Under the impact of the financial crisis, from the perspective of the relationship between economic cycle and copper demand, the economic recession will have a long negative impact on copper demand. In 2009, uncertainties in the development of the world economy increased, and economic fluctuations affected the development of the world’s copper industry. For the domestic copper processing industry, which is based on private enterprises, large enterprises, and small and medium-sized enterprises, this year may be the most difficult year since the new century. Therefore, facing business risks and strengthening risk management, it becomes every household. The inevitable choice of copper processing companies.
Copper price fluctuation risk control
Electrolytic copper is a futures trading commodity, and international and domestic prices will change every trading day. Since the beginning of 2005, the price of electrolytic copper has risen steadily and has fluctuated sharply. The LME copper price often fluctuates by US$200 per ton per day, or the price fluctuates sharply, or the price falls rapidly, or the price continues to rise. This has brought huge risks and unnecessary losses to copper processing companies. This is one of the important reasons for the withdrawal of many small and medium-sized copper processing companies in the industry in recent years. In 2008, affected by the global financial crisis, the international copper prices fluctuate drastically, skyrocketed and plunged. They often faced half of the market conditions in which half of the seawater was a flame, and experienced the immense weather of the icy fire. In particular, since October last year, the price of copper has drastically dropped to a new low in recent years, resulting in a number of copper processing companies in and out of China tend to be shut down, even if the release of production capacity from start-up is also inhibited, resulting in “outside benefits†to the market.
Due to the rising price of copper, the cost of raw materials for products has accounted for 80% to 90% of the sales price in recent years. For industries with high proportion of raw materials, large price fluctuations, and low gross profit margin, controlling business risks is a very important issue. The copper processing company's product sales adopts the “raw material price + processing fee†pricing model and obtains gross profit through a relatively stable processing fee, and the raw material price is entirely borne by downstream customers. Therefore, in theory, companies will not bear the losses caused by fluctuations in copper prices. From the perspective of pricing mechanisms and profitability models, companies can pass on the risks of high or fluctuating prices of electrolytic copper to downstream customers, but in actual production operations If the company's raw material procurement and product sales cannot be balanced, the company will face the risk of copper price fluctuations. In this regard, domestic copper processing companies should actively take measures to take the initiative to cope with the high volatility of copper prices.
Strictly organize production according to orders, shorten the turnover period of production and operation, and increase the efficiency of asset use.
Sharp fluctuations in copper prices can lead to the risk of inventory depreciation. Therefore, we can implement the profit concept of “only earn processing fees and do not speculate on copper†and strictly implement the “net inventory risk control management method†to control the minimum difference between raw material procurement and product orders. Controlling the risk of taking the price within the range that the enterprise can afford will reduce the company's inventory depreciation risk. Copper price volatility will not have a significant impact on the company's profitability.
The volatility of copper prices finally manifested itself as changes in cost pressures and liquidity requirements. The company's influence on the changes in liquidity demand should be highly valued, ensuring that the operating cash flow and interest guarantee multiples are in a reasonable state, and that they have enough solvency to cope with changes in the company's liquidity requirements caused by the sharp fluctuations in copper prices.
In response to the possible default risk of customers, a strict recovery system for accounts receivable was established to strengthen customer credit rating management. Linking the collection of accounts receivable with the income of business personnel, implementing a rewards and penalties system to optimize the company's customer structure; improving the quality of accounts receivable, effectively avoiding the risk of copper price fluctuations, and ensuring the stability of the company's earnings.
Implement strategies for target market optimization, target customer optimization, and product structure optimization. The main customers are well-known companies in the downstream industry, or well-known international distributors and manufacturers. Optimize the customer structure, and constantly eliminate potential customers to ensure that the company's accounts receivable quality remains good.
Inventory risk control
The sharp fluctuation of copper price will lead to the risk of inventory depreciation. For enterprises with certain stocks, the increase in price directly leads to an increase in gross profit, whereas the gross profit drops sharply, and it is easy to lose money. Based on the pricing model of “copper price + processing feeâ€, Hailiang’s approach is mainly to determine the price of the corresponding raw materials while signing a processing contract with downstream customers. The automatic ratio between the price of such products and the price of raw materials actually locks the company's processing fee profitability. In addition, in order to prevent the copper price from fluctuating to bring losses to the company's inventory, the company implemented the profit concept of “only earning processing fees and not making copper speculation†and formulated the “net inventory risk control management method†and strictly enforced it. The amount of copper metal in the copper price is basically balanced with the amount of ordered copper metal that determines the price of copper. To ensure that there is no natural contraction of the purchase and sales contract, the net inventory with certain fluctuation risk is controlled within the range that the enterprise can bear, and the risk of inventory devaluation is greatly reduced.
After implementing the net inventory risk control system, avoid unnecessary risks and speculative opportunities, let the company focus all its efforts on the main business operations, and it will significantly improve the company’s production and operation efficiency, which is conducive to stable operation and stable development. .
Procurement risk control
The risk control in the procurement process is mainly to prevent suppliers from meeting the rising copper prices and not fulfilling the contract. In procurement, for long-term contracts of six months or one year (known as long-term orders in the industry) suppliers, companies can choose domestic and internationally renowned Taizhou refineries or large trading companies as suppliers. Temporary purchases are based on the established reputation of the company, which is priced first and then paid after delivery.
Sales Chain Risk Control
Sales risk control is the most complex and difficult to control risk. It is particularly prominent in industries that have a high proportion of raw materials, large price fluctuations, and low gross margins. The risk of sales links is mainly reflected in two aspects: First, when the price of copper falls, the customer breaches the contract and fails to perform the contract, which results in the loss of copper price and the scrapped product. Second, the customer has difficulty in operating, can not pay the goods, or has quality, packaging, etc. The problem is that the reason is not to pay the purchase price and cause bad debts.
When the price of copper has plummeted by about 30%, companies face greater risks of default by downstream companies. Under the premise of providing quality products and satisfactory services, the following three measures are mainly used to reduce the risk of default:
Credit classification. Through the investigation of new customers' upstream and downstream companies and loan banks to obtain customer credit status, different grades of customers are given different credits and a margin of about 30% is charged. The significance of the 30% margin is that when the copper price falls by less than 30%, the risk of default by the customer is small.
Export insurance. For some foreign customers who are not fully aware of it and some countries and regions with relatively high credit risk, export credit insurance is carried out at China Export Credit Insurance Corporation. At the same time, product quality liability insurance is insured in areas where the market system and legal system are very standardized, such as in North America. For some high-risk countries, companies try to avoid dealing with them.
Implement responsibility. Each order has a salesman in charge. The salesperson and the company have signed an implementation responsibility agreement. If the subjective cause causes the order to be breached, resulting in losses and bad debts for the company, the salesman or the third-party guarantee will bear the liability for compensation. At the same time, the company implements a high salary incentive policy for salespersons.