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 The End of the HoneymoonChina's once prosperous nonferrous metal industry has fallen
on hard times as demand and metal prices have dropped BEIJING, China, December 2, 2008 - Beijing Review - Several unfavorable factors have borne down on China's powerful nonferrous metal industry, presenting grim challenges for the sector and appearing to signal the end of the country's booming demand for nonferrous products. During the last three years, surging metal prices, supply shortages and huge returns on investment made the nonferrous industry highly profitable as well as speculative. Now the industry seems to have taken a turn for the worse. Attracted by the prospects of huge profits, an increase of investment in the nonferrous metal sector compelled companies to boost their output capacities, resulting in heavy oversupplies. When China's nonferrous metal suppliers were able to meet or exceed demand, prices plunged sharply. Now the U.S. financial crisis has made the situation even worse: As China's exports have sagged, so has foreign demand for the country's nonferrous metals. Facing below-cost prices and sluggish markets, the country's nonferrous enterprises have had to cut production. Winter Falls "The price is so bad now that we have reduced output by more than 30 percent," said Xiao Qian, Representative of South Africa-based Exxaro Resources Ltd.'s Beijing Office, which is NKZC's major shareholder. The company's reduced production has led to job cuts. Now some employees have left their positions temporarily and are receiving only half their salaries. If zinc prices do not rise by the Chinese Spring Festival on January 25, the company will not be able to restore its production to its previous level and will strive to develop a longer-term solution for its workers, Xiao said. On November 14, Huludao Zinc Industry Co., the country's second biggest zinc producer, said it was cutting its production by 105,000 tons, or 27 percent of its total annual production capacity, because of the sluggish demand for zinc and short supply of zinc concentrate. "In order to reduce costs, zinc producers are trying to force zinc concentrate prices down," Xiao said. "Thus the zinc miners are not willing to produce." Other zinc refineries have also been shutting down, because the industry is quite fragmented, said Qi Lin, Manager of zinc-china.com, a Tianjin-based professional website for the zinc industry. "Now the cost [of production] is higher than the [selling] price," Qi said. "Production means loss; the more products they produce, the more losses they suffer." China is the biggest zinc producer in the world as well as the largest zinc consumer. Galvanized sheets, used in automobiles, consume most of the country's zinc. While galvanized sheet exports have slowed since October 2007, domestic automobile output has dropped sharply since this February, causing deceased demand for zinc, Xiao said. Zinc is not the only metal that is suffering from a sluggish market. China's top aluminum maker, Aluminum Corp. of China Ltd. (Chinalco), the world's third largest producer of aluminum, issued a statement on November 6, saying that it would slash its annual production capacity of 4.11 million tons, or by 38 percent. Between January and September, 22 major aluminum producers in China witnessed a 37-percent decrease year on year. They saw a combined loss of 900 million yuan ($132 million) in September alone, according to figures issued by the China Nonferrous Metal Industry Association. Copper prices also have plunged since July, prompting a 40-percent drop in the country's overall production. Copper prices on the Shanghai Futures Exchange had fallen 47 percent to 33,000 yuan ($4,832) a ton in mid-November. The production scale back would result in a reduction of about 120,000 tons of copper this year, according to a Reuters report. Companies are decreasing their output capacities by about 2 million tons from the normal 4.6 million tons annually, Reuters said. Aluminum prices in China also have been sliding dramatically this year, dropping 22 percent to 13,520 yuan ($1,980) a ton in mid-November on the Shanghai Futures Exchange, compared to the price three months ago. Inner and Outer Dilemmas As the subprime mortgage crisis deepens in the United States and
worldwide, investors are losing confidence in a great majority of
commodities and are withdrawing from the market, said Zhao Wuzhuang,
Chief Economist of the China Institute of Nonferrous Metals Technology
and Economics at the 10th China Mining Expo held in Beijing on November
11-13. He went on to say that as a result, the value of global
commodities such as oil derivatives and nonferrous metals is collapsing
along with China's nonferrous metal market. During the recent drops in copper and aluminum prices on the international market, the role of speculators should not be ruled out, Zhao said. In China, when the nonferrous metal market was booming, speculators were not looking on with folded arms. Investors, large or small, state-owned or private, wanted a slice of this big pie. Few of them were committed to real mining, but keen on buying and selling exploitation and mining rights, said Wang Jun, who used to prospect for mining companies. Despite the industry's woes, the reckless expansion of nonferrous metal processing plants and the construction work on such projects also has contributed to its current problem. According to Zeng Shaojin, Vice Director of the China Mining Association, the production capacity of aluminum oxide doubled or even tripled in recent two years, which caused the oversupply and price plunge. "When the prospecting frenzy began to ebb, the fundamental market principle of demand and supply kicked in," Zeng said. "In this sense, the convergence of the international financial crisis and domestic oversupply fueled the current sluggish nonferrous industry." Painful Transformation "We are going through winter," some insiders said at the recent mining expo, half jokingly, half seriously, referring to the fact that the reductions in output that have pushed up metal prices have proved ineffective in stopping the downturn in the domestic market. But the nonferrous metal industry is not dead yet. On October 29, the China Nonferrous Metal Industry Association suggested a six-point package to help aluminum makers out of their predicament. The package includes increasing export tax rebates and state reserves of aluminum ingots, issuing more loans to the aluminum industry, putting in place a bonus mechanism for closing down backward facilities and encouraging electro-metallurgical integration to ensure power supplies. All these measures call for policy support from government. But some doubt whether the government will back them. "I don't think the government will issue these supportive policies," said Zhang Mei, a researcher at the Information Center of the Ministry of Land and Resources. "Taking into consideration the balance and fairness of different industries, supportive policies exclusively for the aluminum industry are not promising." Will the government's 4-trillion-yuan ($586-billion) stimulus package have a positive impact on the nonferrous metal industry? The answer is yes, Zhang said, because nonferrous metals are essential materials for economic development, and the stimulus plan would boost demand for them. But he also said the government would allocate the funds primarily to railway and public housing construction, whose demands for nonferrous metals are limited and indirect. "What's more, the government has indicated that the exports from highly polluting and energy-consuming industries are not on the list of those it encourages and will support in the future," Zhang said. "This makes it even harder for the nonferrous metal industry to ask the government for preferential policies." In July 2007, China cancelled tax rebates of 8-11 percent on exports of rods, bars, extrusions, profiles and wires made of primary aluminum or aluminum alloy because aluminum-related production consumed massive amounts of electricity and had a low output value. "The whole nonferrous metal industry is going through a reshuffle," Xiao of NKZC said. "Those less profitable enterprises might close down. We saw a lot of excellent investment projects at the mining expo, but the right time has not come yet. The market has not reached the bottom." More companies are looking to strengthen their internal management. Yunnan Copper Co. Ltd., the third largest copper maker in China, sent its staff an open letter on October 29, saying that it would control costs by improving management, optimizing its organizational structure and tightening the budget in response to the global financial crisis. It called on employees to repair broken-down machinery and not waste a single screw. The current situation was also an optimal time to set up large nonferrous industrial groups and upgrade the degree of industrial concentration, said Li Su, Chairman of H&J Vanguard Management Consulting Co. Ltd. With some companies undervalued or going under in the current sluggish market, now was a good time for stronger companies to buy or take over weaker ones, Li said. In October, for instance, Chinalco bought a controlling stake in Yunnan Copper, the country's biggest metal acquisition this year. "This demonstrates Chinalco's ambition to be a big fish in China's nonferrous metal industry," Zhang said. Likewise, China Minmetals Corp. acquired a 29.9-percent holding in Shanxi Guanlu Co. "The present difficulty should be observed in two lights," Zeng said, referring to the industry's predicament. "It is a hard time, yes, it is very true. But it also implies opportunities. Speculation was squeezed out, [and] the price has had a rational return to its value, which are all good for the long-term healthy development of China's nonferrous industry." |
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