The Zhitong Finance App learned that CICC released a research report saying that recently, prices of tungsten concentrate, tungsten carbide powder, etc. have continued to rise, breaking through the five-year high prices. Leading domestic tool companies such as Huarui Precision and Okeyi have issued price increase letters one after another, conveying cost pressure. In the short term, the manufacturing PMI increased by 1.7 ppt to 50.8% month-on-month in March. Demand for manufacturing rose markedly from March to April, and short-term demand for downstream hard alloy products, CNC tools, etc. grew steadily; in the long run, domestic manufacturing demand for high-end upgrades combined with CNC blades continued to grow. The bank believes that demand for tungsten resources has been rising steadily over a long period of time.

Recommended attention: Chinatungsten Hi-Tech (000657.SZ), leading domestic tool companies Huarui Precision (688059.SH), and Eurocom (688308.SH), which accelerates the integration of mining resources.

CICC's views are as follows:

The supply-side contraction of tungsten ore has led to continued price growth.

1) Supply side: The national tungsten concentrate quota in 2023 is 111,000 tons, and the 2015-2023 CAGR is only 2%. Considering recent trends in tungsten concentrate quotas and strict environmental policies, the bank believes that the long-term supply of tungsten concentrate is not relaxed. 2) Demand side: In the short term, the manufacturing PMI increased by 1.7 ppt to 50.8% month-on-month in March. Demand for manufacturing rose markedly from March to April, and short-term demand for downstream hard alloy products, CNC tools, etc. grew steadily; in the long run, domestic manufacturing demand for high-end upgrades combined with CNC blades continued to grow. The bank believes that demand for tungsten resources has been rising steadily over a long period of time. Looking at supply and demand, the short-term price trend of tungsten resources remains strong. The price of tungsten carbide powder rose from a low of 185 yuan/kg in 2019 to 280 yuan/kg on April 17, 2024, and also hit a record high in the past 5 years.

Domestic tool leaders have raised transmission costs one after another.

In January, Zhuzhou Diamond and Okeyi issued price increase letters one after another. On April 17, 2024, Huarui Precision issued price increase letters, increasing the price of a full range of tool products by 3-10%. Facing the rise in upstream raw material prices, tool companies are choosing to transfer costs. The bank believes that the core reason is: 1) foreign tool brands raised prices at the end of 2023 and early 2024 to provide room for price increases for domestic knives; 2) the competitiveness of domestic tool leaders in product segments continues to be highlighted, and they have certain bargaining power and price transmission ability.

According to sensitivity analysis, a 5% price increase is likely to fully cover the pressure on the cost side.

The bank assumes that the gross margin of the tool remains at 44.8% (1H2023), with direct material costs accounting for 53%, of which the cost of tungsten carbide accounts for about 76% of the direct material cost. Assuming that the price of tungsten carbide powder is +0%/5%/10%/15%/20%, 1) against the background of a 5% increase in tool price, the tool company's gross margin will be +2.6/+0.5/-0.5/-1.6ppt; 2) In the context of a 10% increase in tool price, it can offset the 22% cost pressure of tungsten carbide powder price increase. The bank explained the impact of this round of price increases for tool companies as follows: 1) As of April 17, 2024, the price of tungsten carbide powder increased by about 7% compared to the same period last year. Assuming that the price increase of tool companies increased by 5%, it brought positive profits to the tool company as a whole; 2) The tool companies' raw material tungsten carbide powder inventory cycle was about 2-3 months, and the impact of the increase in tungsten carbide powder prices on tool companies was further reduced.

Risk warning: Price increases are not well transmitted, and manufacturing demand falls short of expectations.